Competition for a shrinking pool of global assets is pushing buyers to take more legal risks, says James Cuclis, a Hong Kong-based partner with Vinson & Elkins LLP. Cuclis spoke via videoconference on international M&A legal issues in a program hosted by the law firm.

Factors driven by high commodity prices include the trend of countries like Venezuela and Russia to consolidate control over energy resources, the enhanced commercial viability of liquid natural gas (LNG) that provides new outlets for “stranded” gas, and the emergence of new energy buyers from China, India, the Middle East and Russia.

“The net effect of these trends is that there is a seller’s market in the international energy industry. Many of these new buyers are willing to take significantly more legal risks in these transactions than traditional energy buyers,” says Cuclis.

He cites the example of a Chinese company buying Canada-based PetroKazakhstan two years ago. During the auction process, the Kazakh government made negative comments critical to the process, stating that the government had the right to approve the transaction and possibly participate in the sale.

“As you can imagine, these statements from the government had a chilling impact on the potential bidders because most buyers aren’t interested in acquiring assets in a country where the host government objects to the sale. The position of the Kazakh government increased the legal risk for the buyers.”

The China-based producer paid more than $4 billion. A few months after the deal closed, the buyer announced part of the deal had been sold to the Kazakhstan state oil company.

“The Chinese were willing to take these legal risks in a $4-billion transaction on the assumption that they later would be able to work things out with the Kazakh government. And that’s exactly what happened.”

These new energy buyers are willing to invest in higher-risk markets, such as Sudan, Iran and certain areas of Latin America, says Cuclis. “Their willingness to take more legal risks means we’ll probably see an increase in disputes in the future on some of these transactions.”

Some international buyers now seek the host government’s consent even when not required by law. “Many buyers are reluctant to make significant investment without confirming that the government is okay with the sale,” he says.

Because of increased legal risk, international arbitration has become the default dispute-resolution mechanism of choice. English law is most commonly chosen as the governing law in contracts because of the perception that it is a neutral law.

However, when Cuclis attempted to insert the default clause into the contract of an Argentine buyer he represented, it responded after a pause, “We don’t consider England to be a neutral jurisdiction.”

He concluded, “Obviously, the Falkland Islands war had not receded from their memory.”