1 February 2010 | By James Swift
3 June 2013
5 August 2013
3 February 2014
6 December 2013
27 February 2014
Known more for flatlands than its peaks and troughs, you must look west to find all the real energy in Canada’s business landscape.
Canada’s reputation for rock-like stability is well deserved. Even in the face of the worst recession in 70 years, Canada’s inherent temperance has proved an effective shield against the worst of the global economic crash.
The country’s financial institutions played safe with risky financial products (the C$32bn (£18.78bn) asset-backed commercial paper market collapsed, but still, that was small beer compared with what happened in the US and UK), leaving the country’s banks in good shape.
Also, Canadian law firms’ penchant for low gearing - 1:1.5 is typical, compared with around 1:5 in the US and UK - and the full-service model meant that, for law firms, the effects of the economic crash were mitigated to the point of feeling like more of an economic bump - an economic fender-bender at most.
“We’re one of those ‘no boom, no bust’ countries,” says Andrew Fleming, senior partner at Ogilvy Renault’s Toronto office. “We didn’t get the boom in 2006-07, but we didn’t fall far during the crash either; and this applies to the legal services industry too.”
When talking about the Canadian market, this sort of response is fairly uniform among lawyers - that is, until you mention Calgary.
“Let me track back on what I just said about ‘no boom, no bust’,” says Fleming. “The exception to this rule is in the west, which tends to fluctuate quite wildly because the energy market fluctuates.”
“Probably the most interesting market in the country in terms of legal growth is Calgary,” says Fasken Martineau Calgary litigation head Alex Kotkas. “And that’s been recognised by almost every firm that has national aspirations.”
Calgary is the largest city in the province of Alberta, Western Canada. It sits upon the largest oil reserves outside the Middle East, meaning that Alberta’s, and Calgary’s, economies’ fortunes rise and fall with the price of a barrel of oil. Lawyers there watch commodity prices pretty closely too, and right now things are looking good at around US$76 (£47) a barrel.
The largest oil resource in the region are the oil sands, or ‘dirty oil’, with an estimated 1.7 trillion barrels, or as one partner states: “Enough to last 100 years.” Oil sands are a thick bitumen deposit, mixed with sand or clay, and water. It is called ‘dirty oil’ because of the laborious and environmentally damaging processes it takes to refine the substance.
The expense of refining the substance into a usable product has meant that it has only recently been considered part of the world’s oil reserves, and a drop below US$50 or US$60 a barrel can cause investors to wince. Consequently, drops in oil prices, such as the one experienced during the downturn, tend to have a disproportionate effect on the region.
“If oil is high then the city booms, if it falls then it crashes - it’s a very simple relationship,” explains Kotkas.
“Our economy is highly correlated to the oil and gas and mining industries; the economy is driven by demand for natural resources, and so the downturn from recession did cause a slowdown because of the drop in commodities prices,” says Brock Gibson, chair of Blake Cassels & Graydon. “But now, since the last half of 2009, there’s been a resurgence in the demand for commodities, so we’re seeing a lot of M&A activity in the mining and oil and gas sectors; we’re seeing strategic acquisitions and international companies coming back looking to do acquisitions.”
“Commodities are riding such a high at the moment and driving the market as a whole and the legal market is riding along with it,” says Christopher Cummings, managing partner at Shearman & Sterling’s Toronto office. “And we’re seeing investment from all over the world into oil and gas and oil sands.”
The surge of activity is such that firms are increasingly prepared to bet on the already crowded Calgary market. On 18 January Ogilvy became the most recent law firm to establish an office in the city.
“The fact that other national firms are opening in Calgary is indicative of the volume of work we’ve seen coming out of there, and we expect to continue to see coming out of there, and it will be interesting to see how they do,” muses Cummings. “We’ve seen investment banks and financial institutions opening up there too - Merrill Lynch and Goldman Sachs just opened up there recently.”
“Ogilvy’s move into Calgary doesn’t come as a surprise to anybody,” says Kotkas. “There’s been a lot of interest in Calgary for many years and a lot of law firms have been looking there for a while, so it’s just a question of when and how they’re going to do it.”
“We’re excited about Calgary at the moment because it’s booming a little more than in the past and we’re continuing to see demand for legal services there,” says Fleming. “And it’s not just oil-related, there are other services, and like most centres the region is trying to improve its technology offerings, so we feel it’s a good time for us to be going into that market.”
Can you dig in?
In spite of the surfeit of work, competitors still expect newcomers to Calgary to find things difficult.
“We’ve been in Calgary 18 years,” says Stikeman Elliott chair Pierre Raymond. “And it’s going to be tough [for firms] just coming through so late. If you want to be successful then you need to get good lawyers, and the good lawyers are already at successful firms there.”
It may be tough, but the rewards of having a foothold in the nation’s largest energy centre are potentially great - and potentially necessary at a time when exploring new markets has become paramount to firms’ strategies in Canada.
As Canada’s oil and gas sector continues to dominate inbound and outbound investment into the country (pension funds there also attract investment, but not on the same scale) and firms look to capitalise on Canada’s world-leader status in the energy industry, establishing client relationships further afield has become a priority for managing partners.
In 2009 Blakes opened an office in Bahrain and Fasken established one in Paris, the latter being part of the firm’s strategy to increase its Africa capabilities. Almost every partner will agree that there has been an across-the-board shift in firms’ international focuses.
“Our priorities are the new markets,” says Raymond. “India, China and sovereign wealth funds [SWFs] - these regional markets and South America. We go out and seek to get closer to the industrialists that will come to Canada to invest.”
State of the States
One reason that new markets have become such a priority is the severity of the downturn in the US, which is Canada’s largest trade partner, with one partner adding that it has been made clear by President Barack Obama that the US bailout programme “came with a ‘buy American’ stamp on it”.
“Many people are concerned that the issues in US are long-term and that the economic opportunities over the next 10 years won’t be what we’ve come to expect,” says McCarthy Tétrault partner David Tennant. “This apprehension about doing business in the US is almost a paradigm shift. For us to be worried about doing business in the US is quite a turnaround.”
But despite the shift, the US remains a significant trade partner for Canada.
“The US is still the most significant determinator for what kind of activity happens in Canada,” says Clay Horner, a corporate partner at Osler Hoskin & Harcourt. “But we’ve been fortunate in that Canada wasn’t as affected by the downturn and the energy business is of interest to people around the world, so there’s been a relative reduction in reliance with regards the US.”
Indeed, since 2009 there have been a number of billion-dollar deals in Canada’s energy sector driven by foreign investors, including Chinese company Sinopec International Petroleum Exploration and Production Corporation’s C$8.3bn acquisition of Addax Petroleum and Abu Dhabi’s International Petroleum Investment Company’s proposed C$2.3bn acquisition of Nova Chemicals.
The result is that Canadian firms looking to position themselves on these deals are looking to UK and US firms to help build relationships with clients.
“The UK and US are more advanced in terms of having made connections already,” says Tennant. “So our observation is that, if a deal has to be done in one of these countries, then we’ll go to US or UK law firms that [the client] has already met. And so Canadian law firms establishing good relations with US or UK law firms that have these connections is key - otherwise it’s like looking for a needle in a haystack.”
This is especially the case with SWFs.
“With sovereign wealth funds it’s much more common that a Canadian firm will have met them through international relationships with UK and US firms,” agrees Horner.
Making your presence felt
And with the Canadian oil sector continuing to attract investment from countries as far away as Korea and China, and Canadian industrialists exporting their expertise across the world, Canadian firms’ burgeoning international profiles are a trend that is likely to continue.
“What we’re seeing is that Alberta has fabulous long-term oil resources in the oil sands, and although there are environmental and political issues we take the view that oil demand is going to go up, not down, in the future,” says Greg Turnbull, managing partner at McCarthy Tétrault. “Maybe even by as much as 20-100 per cent over the next 15 years.”
But even if there was another price crash, lawyers in Calgary are prepared. They have to be - working in an economy linked so closely to commodities has set them apart from their peers in the financial centres such as Toronto and means the region has more in common with cities such as Texas than anywhere else in Canada.
“Canada has a very stable economy and industry,” says Kotkas. “And even though Calgary is more susceptible to boom and bust cycles, the reality is for those of us who’ve been here for some time, we know another boom is coming.”
Only in Canada could boom and bust be made to sound so stable.
The canadian and european free trade agreement
Culturally, politically and economically, Europe and Canada make natural bedfellows. The EU is already Canada’s second-largest trade and investment partner, and with formal relations dating back to 1959 is one of the EU’s oldest.
But talks are underway to establish a free trade agreement that could boost Canada’s GDP by as much as C$12bn (£7.04bn) and bilateral two-way trade by as much as C$38bn.
The free trade deal will cover investments, procurement, services, goods, agriculture and the movement of workers (but only qualified professionals).
There remain some potentially thorny issues though.
“If it does come to pass it’s going to be difficult, but the results will be deep, wide and much greater than the terms of the Nafta [North American Free Trade Agreement] agreement,” says Cliff Sosnow, a partner at Blake Cassels & Graydon. “It will be closer to what the European Commission has with Switzerland.”
A free trade agreement between the two countries has been mooted for many years, but since May 2009 it has been pursued with renewed vigour. There have been two rounds of negotiations so far, with the next in Ottawa on 19 April. Then, after one more round of negotiations in June, a stocktaking will be held when the agreement’s viability will be decided.
“The goal is to complete something in two years,” says Sosnow, “which in the world of trade agreements is lightning speed.”