On 1 May, 2024 law firms Allen & Overy and Shearman & Sterling completed their merger to become what they describe as “the first fully integrated global elite firm.” Infralogic’s Jonathan Carmody sat down with the three Co-Leaders of the firm’s Energy, Natural Resources and Infrastructure (ENRI) group, Kent Rowey, Cynthia Urda Kassis, and David Lee to learn more about how the partners will be leveraging their newly combined resources to tackle the energy and infrastructure opportunities. 

Following the two firms’ merger, A&O Shearman’s Energy, Natural Resources and Infrastructure (ENRI) group now consists of 71 partners worldwide, with more than 300 lawyers spread across the network across the firm’s 47 offices in 29 countries, New York- and Los Angeles-based Partner Kent Rowey told Infralogic.

“A&O Shearman’s energy and infrastructure team is a truly global department offering full top-to-bottom service across all practice areas and jurisdictions. It’s one of only a few law firms that can handle these sectors anywhere in the world and provide a holistic service for transactions, with capabilities in project contracts, joint ventures, M&A and equity and debt investment throughout the capital structure. We are also proud to have an extensive IFI, export credit agency and government side practice in these sectors,” he said.

The newly combined firm closed 64 deals across all regions and sectors, worth over USD 50bn, in the first half of the year, according to Infralogic’s 1H24 Rankings report.

Energy transition, a global priority

With the energy transition dominating the zeitgeist, the firm is finding opportunities to collaborate with clients across the energy transition chain, New York-based Partner Cynthia Urda Kassis said. The firm’s focus covers renewables, carbon capture, hydrogen and ammonia, metals and mining, oil and gas, processing, refining, and the downstream sector, as well as the battery chain, storage, the EV chain, OEMs, and tech companies.

In the US, the 2022 Inflation Reduction Act (IRA) has created many incentives for wind, solar and offshore wind and the firm is confident that the market will remain strong globally, the partners agreed.

“In the US, there are increasing opportunities for investors of all types to take advantage of the tax credits available under the IRA given the potential to directly transfer tax credits,” Rowey said. “This doesn’t mean that tax equity partnerships will be less active but it creates an important additional pool of liquidity for energy transition deals and an opportunity for infrastructure funds.”

Developing these projects requires the integration of infrastructure and energy project development skillsets and investment strategies. Partnerships between corporates and industrial companies and private capital are key. These will likely also require some government involvement, whether by concessions, financial subsidies or regulatory oversight, Rowey continued. “We support all of these players with top legal services and market knowledge,” he said.

“All of our offices have some energy transition work going on and it is starting to touch on every product area, from financing to litigation,” said London-based Partner David Lee.

The European offshore wind market has been “exciting, depressing, at times a sellers’ market, and (at other times) a buyers’ market,” Lee said. “Currently it is a developers’ market with lots going on.”

Energy price volatility has led to some market dislocation, but increased demand for materials, construction expertise and support vessels also has played a role.

“Regardless, there’s a huge capital requirement to build the projects, particularly as most developed nations are now running, or about to start their own auctions” of land and/or offtakes, Lee said. “We estimate that there are 70 GW in operation globally and the theory is that to meet climate change targets we will need 2,000 GW of offshore generation capacity.”

As a sign of how the industry has grown with a combination of public incentives and private investment, he pointed to the 2017 privatization of the UK’s Green Investment Bank and then the growth of that business globally, which in part led to the establishment of Macquarie’s offshore wind development and investment platform Corio.

In the UK, some exciting energy-related projects include the Sizewell C 3.2 GW Nuclear Power Plant project, which EDF is developing in partnership with China General Nuclear Power, and X-Links, a Morocco-to-the-UK sub-sea cable transmission project that the firm is advising on, according to Lee.

“Electrification and the growth of the electricity networks will keep us busy across the board,” he added.

And it is not just electrons that excite A&O Shearman, but the growth of molecules needed to power the transition as well.

“Five years ago, the firm had three hydrogen mandates, now we have hundreds,” Lee said. Car manufacturers are seeking to use green steel to make cars, with H² Green Steel a great example of a project that facilitates this, he added.

Gigafactories opt for project financing

Another relatively new sector that will contribute to the global energy transition is the dawn of gigafactories, facilities where components and products associated with electrification and decarbonization technologies are produced. These facilities could provide opportunities for project finance and, further down the line, infrastructure equity investors, according to the partners.

“Currently, some gigafactories are being project financed and there is an expectation that we will continue to see many be financed this way,” Lee said.

“Not all the infrastructure funds are interested in doing complex large-scale greenfield finance – funds such as CIP and InfraRed have made great successes of being in a space that other funds do not play in and there will be a premium for those investors that invest in facilities pre-completion,” Lee added, pointing to a number of projects where the firm is participating in the gigafactory space, including some with Swedish battery manufacturer NorthVolt.

“Gigafactories, as well as smaller facilities, provide an interesting opportunity,” Urda Kassis said.

“In the first instance, people are looking to government incentive lenders,” Urda Kassis said. “The 2022 CHIPS and Science Act (CHIPS Act) and analogous arrangements with Canada are important sources of funding for these facilities in North America as some banks still are not comfortable with the financeability of those facilities yet.”

In the USA, the firm places a prominent focus on new technology deals receiving incentives under the IRA. A&O Shearman is working with the US Commerce Department on structuring the subsidized financing available for chip factories in the USA under the CHIPS Act and the IRA, the partners said.

The US Department of Energy or other agencies can provide massive loans for projects and the firm is seeing more funds and private capital coming into the space in North America, Urda Kassis added. Original equipment manufacturers (OEMs) like auto manufacturers and the aerospace industry are playing in the area, and the firm is looking at deals with funding structures that run the whole rainbow down from equity to hybrid to traditional debt.

Energy transition is not a battle for supremacy, Lee said. “There is no benefit to the world if Europe gets to net zero, but the US and Asia do not, and vice versa.”

Bridging the digital divide

In the digital infrastructure world, most of the action that A&O Shearman is seeing is around data centers, Rowey said. “There’s still some fiber-to-the-home activity but it hasn’t taken off in North America like it has in Europe. Separately, there has been a lot of consolidation in the towers market in recent years.”

Building a data center is one thing but looking for and developing a renewable energy source of power, perhaps using distributed generation, co-located generation or connecting to a nearby wind farm or solar array to power the facility means there’s huge power constraints to work around.

“Generative AI and large language models will see strong growth and more green power required,” Lee added. “There are some lessons to be learned from the broader infrastructure market and investors need to be able to anticipate long-, medium- and short-term plays.”

“With the growth of AI, the industry’s power needs have outpaced supply and we’re seeing a bottleneck dynamic, although this can present huge opportunities for investors,” Rowey said.

Transportation opportunities fewer, but new dynamics arising

A&O Shearman is very active in most transportation and public-private infrastructure projects in North America and Rowey highlighted the work of fellow New York-based Partner Paul Epstein, who represents the US Department of Transportation on the TIFIA and RRIF programs, as well as infrastructure funds in this sector.

In the aviation sector, the firm has recently worked for clients on the recent JFK New Terminal One, JFK microgrid, Newark Consolidated Rent-A-Car (Conrac), and Reno Conrac projects.

“There are opportunities for new investments in landside passenger terminals, more Conracs and transit systems around airports in the Americas,” Rowey said.

Surface transportation in the USA is quieter at the moment, however.

“There was hope a few years ago that there’d be more opportunities, but the sector has really slowed down for private investment in surface transportation. There are still opportunities in the aviation, ports, and logistics sectors though,” Rowey added. “We’re still expecting more trades in the container terminal market, especially in the Northeast.”

In addition to TIFIA, the firm does a lot of WIFIA deals, and has worked on the Bayonne, Middletown, and Pritchard water deals. The partners said they’re seeing a lot of activity in the area of water concessions, stormwater management, and lateral water transportation, as well as utility leases.

In Europe, Lee said that the transportation sector has not been massively busy, but he did point to the Czech Republic, which is running the D35 Motorway tender, and some highway stakes they have seen changing hands [for example, in Ireland and the UK], but, once a staple of infrastructure investing, activity in the sector is now dwarfed by what is going on in other parts of the infrastructure space.

“10 years ago, there were a lot of roads and rolling stock businesses changing hands,” Lee said. “The airport stakes tend to trade on an individual basis, Gatwick, originally bought at the start of the infra investor market by GIP has traded recently, as has Edinburgh, with Newcastle, Aberdeen, Glasgow and Southampton airports rumored to be up for sale soon… although transport is less of a growth sector for A&O Shearman in Europe.”

Still plenty of room for growth in LatAm

Long an active player in the Latin American region, bringing A&O and Shearman together has made for an even more powerful group, according to Urda Kassis.

“All the industries that use the project finance product are active there,” she said. “Natural resources is a major focus alongside energy and the energy transition, and there are opportunities, especially in battery storage facilities and wind farms in Chile and Brazil, where offshore wind is also now a possibility. There is also activity in the data center market as well as transport and other infrastructure.”

Urda Kassis highlighted the USD 130m Sal de Vida lithium project in Argentina. “That was certainly a very interesting project given the number of first in kind achievements it represents,” she said. “We expect more to follow.”

A&O Shearman lawyers are working on a wide range of projects in the region across sectors and Urda Kassis said that the combination of the two firms has both deepened and broadened their relationships.

While A&O Shearman hopes there will be a more favorable environment for private investment in Mexico under the new administration of Claudia Sheinbaum, they expect a series of incremental changes that expand opportunities rather than sudden, drastic change, Urda Kassis said.

Naturally, the Latin American energy transition is different from that of North America, Europe, or Asia, Urda Kassis said.

“The renewables sector is quite mature in many of the countries in the region with significant first, second, third and more generations of development in some countries moving into portfolio structures, asset trading and the like,” she said, noting that some other types of energy transition projects such as battery storage, green ammonia and the likes are just emerging.