Being a resource-rich state has its rewards and its curses. During the 10 years of the resources boom to 2013, Western Australia was the envy of the nation.

The state’s economy grew by 62 per cent, compared with Victoria (30 per cent) and NSW (23 per cent).

Since then, the resources boom has become a bitter pill for WA. Mining investment in the state has declined steadily since the close of 2013, with the value of planned projects falling by billions and resource-related jobs experiencing heavy culls.

Despite commentators proclaiming that the boom is over, the state’s treasurer, Mike Nahan, remained optimistic when he released his Budget in May 2014. He predicted that WA’s economic growth would recover by 2015/2016, after a decline from 3.75 per cent in 2013/2014 to 2.75 per cent in 2014/2015.
But hopes of an upturn were dealt a crushing blow in recent months when oil prices began to nose-dive.

In January, oil prices fell below US$50 a barrel – a decline of more than 50 per cent from the June 2014 peak – while iron ore prices hit five-year lows. Commodity prices have since recovered slightly, but not until after energy producers slashed millions, if not billions, from capital expenditure plans.

Royal Dutch Shell, for example, has stalled plans to expand its US$54 billion ($69.46 billion) Gorgon liquefied natural gas (LNG) venture in WA and formally ‘cancelled’ its US$20 billion-plus LNG project in Queensland, in addition to further spending cuts over the next three years. Woodside Petroleum, Santos and Senex Energy have also announced cutbacks.

Reluctantly, the WA government revised its economic growth forecasts from a $175 million surplus for the financial year to June to a deficit of $1.3 billion.

Rebalancing act.

As Australia’s two-speed economy undergoes a major transformation, with WA moving into the slow lane, Perth-based energy and resources practices are under pressure to supplement work that would have come out of major exploration projects now on hold.

Stuart Barrymore, a senior energy and resources partner at Herbert Smith Freehills, admits he is concerned about the spending cuts in the resources sector. However, he adds that a range of legal work has arisen from the challenging conditions.

“Clients at the bigger end of town have pruned their costs, but equally they’re finding they have to deal with the changed circumstances on a daily basis,” he said. “We are talking to all our clients who are looking at their asset portfolio very carefully and what they have to spend on it.”

Contract variations and litigation are two examples of the kind of work that is propping up HSF’s energy and resources practice in Perth. Many matters relate to contractors that were hired for exploration projects that are now in doubt.

Mr Barrymore, whose practice focuses on upstream oil and gas work, LNG contracts and project structures, says his clients want to be “crystal clear” about their legal position as they terminate or renegotiate employment agreements that were put in place before oil prices declined.

“The big companies simply cannot afford to continue to operate under the terms and conditions they agreed to a few years ago,” he says.

Chevron is reportedly cutting around 770 jobs from the Gorgon LNG project in light of the falling oil price price. Oil and gas giants BP and Apache also announced redundancies in January.

These employment matters will almost certainly compound WA’s climbing unemployment rate, which currently sits at 6.1 per cent.

In WA, the last time when the unemployment figure surpassed 6 per cent was in November 2003, when it reached 6.3 per cent.

Mr Barrymore says most oil and gas companies would have decided how they would resource projects when the oil price was close to $100 last October.

“It has been a massive shock,” he says. “We’ve seen periods of volatility in commodity prices, but I don’t think we’ve seen a change in price as rapid as we’ve seen with the oil price – the velocity has been remarkable.”

Problems of their own

As HSF helps clients cope with weak commodity prices, smaller firms are also peddling their corporate services to compensate for the slowdown in their energy and resources practices.

Roger Steinepreis, chairman of partners at Perth firm Steinepreis Paganin, admits that a number of his clients, specifically small mining exploration companies, are finding it difficult to raise funds for new projects.

He was quick to add, however, that this this does not mean the firm’s seven partners and 30 lawyers are sitting idle.

“If one’s down the other is likely to be up,” says Mr Steinepreis, when asked about how the halt in resources investment is impacting his firm’s two main practice areas: energy and resources, and corporate. “While our mining and resources practice has been quiet from a workflow perspective, 2014 was a strong year for our corporate arm.”
Most of the firm’s corporate work relates to M&A and asset divestments, due diligence, structuring and restructuring issues.

Mr Steinepreis stresses that the firm’s size is not a reflection of its share of corporate work in the WA market.

In 2014, Steinepreis Paganin worked on 40 capital raisings worth $449 million and 11 M&A deals worth $128 million. The firm’s clients include Wolf Minerals and TFS Corporation Ltd, a sandalwood grower that the firm assisted in a $67 million capital raising this year.

Mr Steinepreis says he expects the firm to continue to work on similar equity capital market deals involving small to mid-market companies in 2015, but the funds raised may not necessarily be used for mining projects.

He singles out technology projects as the kind of investment alternative his clients are considering as they wait for commodity prices to improve.

Weathering the storm

HWL Ebsworth is another firm that claims corporate work is allowing it to weather instability in the resources sector. The national firm launched in WA on 1 July 2013 by acquiring Downings Legal, a full-service firm that had been in Perth for more than 100 years.

Mitch Artus, a former partner of Downings who now heads HWL in Perth, says much of the revenue brought in by the firm’s energy and resources practice revolves around the mid-to-large service industry.

Mr Artus himself specialises in drafting and negotiating supply and service agreements, and infrastructure agreements relating to large offshore development projects.

While his clients will undoubtedly be impacted by the decline in commodity prices, he claims that overall, HWL is faring better than many of its competitors in Perth because less than 20 per cent of its revenue relies on energy and resources transactions.

In addition to energy and resources, HWL also has established property, litigation, insurance and commercial practices in Perth.

Mr Artus claims the spread of practice areas ensures the firm is not vulnerable to downturns in the energy and resources sector.

“We are in a good situation for the resource slowdown … it has a spin-off effect that is certainly significant, but our other areas are going very strong,” he says.
To back up his claim that HWL is performing well in Perth, Mr Artus says he plans to grow headcount by another 20 per cent in 2015.

However, he admits that the recruitment of lawyers will not be driven by new opportunities in the Perth legal services market.

“I can’t see the total pie of legal services growing … it will be a year of consolidation, with growth [for law firms] predominantly coming out of market share,” he says.

Mr Artus is confident HWL will manage to snatch pieces of work from its competitors and increase its market share, justifying the hire of additional lawyers.

He claims that HWL’s competitive rates could sway cash-strapped resources clients, who are increasingly scrutinising the value their law firms provide, to switch firms.

Silver lining

While the WA economy’s immediate future looks bleak, there is an upside – commodity price falls are likely to positively impact other industries in Australia.

Richard Heaney, a professor of finance at the University of Western Australia, claims low oil and gas prices will probably increase profits for Australia’s primary industries, which depend on petrol, diesel and fertilisers.

He adds that the fall in iron ore prices may also eventually lead to cheaper steel, which impacts the cost to farmers of fencing, he wrote in a column published by The Conversation.

“The oil and gas price falls will have a direct impact on fuel costs across the entire economy – consumers are already enjoying cheaper fuel – and the other impact will be decreasing costs on a wide range of products and services,” he wrote.

Mr Heaney also claims the devaluation of the Australian dollar with the fall in commodity prices will benefit exporters, including miners; and low interest rates will decrease the cost of investment, which also benefits the resources giants.

He may be right, but Mr Heaney’s comments will provide little comfort to energy and resources lawyers in WA, who are under pressure to squeeze fees out of clients that have been hammered by falling commodity prices.