Analysis on Bracewell & Giuliani and the shale gas market: The fracking truth

US energy law specialist Bracewell & Giuliani’s desire for a pole position in UK shale is fuelling a boost of its City operations

Things can move fast in the energy sector. In 2011 shale gas drilling at three exploratory wells near Blackpool sparked a couple of minor earthquakes and a moratorium on exploration in the UK. On 13 December last year the Government ended that ban and kick-started a potential shale gas revolution here.

A month later Houston-based Bracewell & Giuliani announced the expansion of its London office with the hire of two energy lawyers, including Simmons & Simmons partner Julian Nichol.

The two events are not entirely unconnected.

Giuliani

When asked by The Lawyer what would be the focus of Bracewell’s reborn City office, firm-wide managing partner Mark Evans simply says, “energy, energy, energy”, adding that the availability of shale gas is, “obviously one of the reasons we want to be here”.

Shale gas has revolutionised the US energy market. Local conditions in the UK suggest it is unlikely to have quite the same impact here. Nonetheless the Government’s move is already creating unprecedented interest and expectations.

At Bracewell, the firm’s Middle East and Africa nexus is more likely to provide energy-related projects for its nascent London office to chew on in the short term, with the UK’s infant shale gas industry unlikely to be a major focus initially.

Further down the track, however, Bracewell will be hoping the UK shale gas market follows a similar trajectory to that of the US’. If it does, expect other US energy specialists such as Baker Botts, Vinson & Elkins and Akin Gump Strauss Hauer & Feld to target the market aggressively.

With US companies streets ahead in terms of fracking know-how, they could be the ones to clean up if the expected boom in shale-related projects comes to pass. And there are already signs that America’s top energy-focused law firms are interpreting December’s announcement as the firing of a starting gun.

Rudy gesture

Giuliani

If a signal the shale gas revolution was about to reach the shores of the UK were needed it came in January this year, when name partner at Bracewell & Giuliani, former New York mayor Rudy Giuliani, visited London to lend his considerable political weight to his firm’s revitalised City strategy.

In an exclusive video interview with The Lawyer editor Catrin Griffiths published today, Giuliani outlines in detail the rationale for his firm’s decision to ramp up in the City.

As he says, the Houston firm has had a presence in London since 1979, but this has always been relatively small, with total lawyer count rarely exceeding 10.

“Now we have the ambition to grow,” the former New York mayor insists, highlighting Africa and Middle East-based energy projects funnelled through the firm’s office in Dubai as the firm’s most likely source of instructions.

Evans, who, like Giuliani, was in London in January as his firm began its recruitment campaign, says it was the success of his firm’s New York office along with the importance of English law that convinced them of the need for a larger UK office.

Bracewell launched in New York in March 2005 with three lawyers when Giuliani joined. There are now around 100 lawyers specialising in five core areas: white-collar crime, energy and energy finance, bankruptcy, private equity on the distressed side, broker dealer fund formation and litigation to support all these areas. Evans and his partners are hoping the London office will take a leaf out of New York’s book.

Nichol, the lawyer chosen to kick-start the new strategy at the London outfit, is scheduled to start later this year.

“Julian is incredibly dynamic, in his mid-40s, and has fire in his belly,” says Evans.

Bracewell has also hired Herbert Smith Freehills (HSF) senior associate Alastair Young, who has joined as a partner.

Evans describes Young as “totally client-driven”, adding more pertinently that the general counsel of one of HSF’s clients told Evans and his partners that they needed to hire Young as “this is the guy we count on”. Herbies might want to watch out.

Nichol is taking over from current London managing partner and capital markets specialist Adam Mozel, a former Cleary Gottlieb Steen & Hamilton and Allen & Overy lawyer who is leaving Bracewell.

Giuliani

During Mozel’s period running Bracewell’s London office, the firm’s capital markets practice was based on dealflow from its Kazakhstan office, which has now closed.

UK-based projects and energy work including M&A and finance will now form the core of the revitalised office (Bracewell, while relatively unknown in the UK, has previously made it into the top 25 firms worldwide for M&A by value, with deals such as representing Kinder Morgan on its 2011 $38bn (£25bn) takeover of El Paso).

You can add to that list the early-doors opportunities in the UK’s shale gas industry.

The British Geological Survey estimate of total UK shale gas resources is 200bn cubic metres, but this is widely expected to be revised upwards within weeks – a revision that could further act as a catalyst for the industry in the UK. Some sources have claimed the actual level of resource could exceed 60tr cubic metres.

In the US a glut of shale resources has led to a plummeting gas price. By 2020 the US is expected to become a net exporter of gas, an astonishing reversal of a trend for scarce resources that only a decade ago had American policymakers fearing the impact once the wells ran dry.

Burning issue

The big issue in US energy circles is what to do with all its extra gas. Indeed, a hot environmental issue is the burning off of uneconomically viable gas.

Liquefied natural gas import terminals such as Cheniere Energy’s Sabine Pass in Cameron Parish, Louisiana are being converted into export-capable hubs. The glut is so rich that, as an article in last week’s Financial Times revealed, there are increasing fears about the impact on US foreign policy.

Giuliani

As the paper reported, shale-related developments in the US have kick-started a debate about the country’s long-term commitment to security in the Gulf.

“At an oil industry conference in London last week,” stated the FT, “Christof Rühl, chief economist at BP, raised the prospect of a US president ‘15 years from now, seeing a problem in the Middle East and saying: ‘That’s no skin off my nose. I need very little oil [ . . . ] I get it from Canada and Mexico’.”

The UK Government would dearly love to have this problem. So far, however, there is only one site where hydraulic fracturing – better known as fracking – is taking place in the UK. Australian shale gas company Cuadrilla Resources is the operator of the sites near Blackpool in the Upper Bowland Shale. And the law firm advising Cuadrilla on its UK operations is hardly a household name.

Five-partner London firm Peachey & Co has been advising Cuadrilla, which has no in-house legal resource in the UK, from the outset. Former Slaughter and May lawyer Hubert Ashton, now a partner at Peachey, admits the past few months of exploratory digging, questions in the House and earthquakes have been “interesting”.

A resource for generations

Ashton says the potential size of the UK shale gas market was already generating significant interest last year as numerous parties waited for the Government to give fracking the green light, which it has now done.

“It could be immense,” says Ashton of the market. “It’s potentially a huge source and clearly will last a long time – it will far outlive your and my lifetime.”

In an article on the Scientific American website on 25 February it was claimed that while shale gas was not a panacea, “for now, it is certain that Europe, China and others are keen on securing additional gas supply.

“The best help the US can provide in meeting this demand is not necessarily the lion’s share of its gas output, but instead the export of technology, expertise and professionalism of its industry and policy apparatus, which can be easily translated into market opportunities for US companies”.

To that list should be added legal expertise. If and when the UK shale gas industry takes off, it is likely to be US companies looking to capitalise on the market opportunities. In turn, that is likely to correspond with new instructions for their lawyers.

Firm foundation

Bracewell’s 2012 financial results show the impact of the US ‘shale gale’ on the firm. Total revenue was up by around 20 per cent to $325m. The firm’s net income rose by 49.1 per cent, while average profit per partner jumped by 42 per cent, to $1.45m.

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As Evans admits, the financials were both “phenomenal” and powered mainly by the shale gas revolution in the US, adding the claim that his was one of the few Houston firms not to have cut to headcount last year.

Now, the plan in the UK is to grow headcount significantly, as Giuliani reveals in our video interview. He tackles the potentially controversial question of fracking in the UK head on, saying, “all life is a gamble and all business propositions are a gamble”.

He also reveals the extent of his firm’s ambition for London, saying that “we feel good about it for several reasons”, citing the previous growth of New York and his firm’s credentials as one of the world’s top energy-focused players.

“The idea now is to put our attention to growing the London office to the level it should be so we can participate in a lot of these energy deals, particularly in Africa and the Middle East,” says Giuliani. “With our office in Dubai we already do a lot of work in the Middle East and we want to do more in Africa.”

As for the UK, Giuliani agrees London has been a graveyard for numerous US firms but confirms growth will be inextricably tied to the energy market.

“We’re encouraged by our experience in New York,” the former mayor of that city says. “Twenty per cent succeed, 80 per cent fail. We’re one of the ones that succeeded greatly and grew our practice internationally as a result of being in New York. We think London is similar to New York in that regard and we’ll build it on basically the same principle – we’re only going to do what we do as well or better than anybody else, what we call our world-class proposition. We’re not going to do everything.”

One area in which Giuliani says Bracewell will differ from most of its competitors is the scoping out of security for energy projects.

“Few firms have the security expertise we have,” says Giuliani. “Not only am I part of Bracewell & Giuliani, but I also run Giuliani Partners – a worldwide security company. Its expertise is in giving advice for sensitive projects. How do you keep your facilities safe? American companies have been facing for the past 20 years what your companies are now going to face. We have a team as good as any and maybe even more diversified in covering a lot of needs other firms aren’t aware of, particularly security.”

Earlier this year in an interview with The Lawyer, Giuliani said of shale gas, “some people talk about the energy crisis and how this might be the end of days, but fracking may be the beginning of much bigger days”.

In his video interview he puts this into context of his firm: “We’ve been involved in fracking from the time it started. I know it’s big now but my firm was there at the very beginning.”

If a new energy boom kicks off in the UK, it may just be that history repeats itself.

The Russian angle

Weil Gotshal & Manges arbitration partner Juliet Blanch knows a thing or two about the geopolitical impact a significant change in the price for natural gas can have.

Blanch recently favourably settled a landmark dispute over the price of natural gas for Poland’s largest natural gas supplier Polskie Górnictwo Naftowe i Gazownictwo (better known as PGNiG and pronounced ‘pig nig’) against the might of Russian energy giant Gazprom (advised by Jones Day Paris partner Michael Bühler).

The dispute centred on the impact of the plummeting gas price, driven down by the glut of shale and the fact that historically it has been index-linked to the market price of oil. Long-term buyers of gas have begun acting on provisions in their contract that allow a renegotiation of the gas price in certain circumstances. PGNiG, and many other national gas companies, argued that the precipitous drop in the gas price was enough to trigger a renegotiation.

PGNiG’s dispute was scheduled to go to arbitration in January 2013 but settled in November, with the Polish company successfully revising the price of the gas it buys. The new pricing formula in the contract, which has ten years to run, is expected to save PGNiG around $750m a year. More disputes look certain, with Gazprom having set aside $4.7bn in anticipation.

“The case clearly demonstrates that the emergence of shale gas has permanently severed the link between oil and gas prices,” says Blanch.

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The US competition

Although UK shale gale is in its infancy and doubts remain as to whether the cost of extraction will prohibit the domestic industry replicating that in the US, most big energy-related law firms are already eyeing the market, well aware their clients will be doing the same.

Internationally, the smart money says the winners in the global shale market are likely to be the Houston energy-focused firms and New York corporate giants. Closer to home the UK’s leading firms will certainly snare a share of the market, particularly in areas such as corporate and finance, real estate, environmental law and planning.

The Yanks are coming

Indeed, the lawyer advising on the only UK fracking operations so far – operated by Cuadrilla – says US firms are currently conspicuous by their absence.

“I was at the House of Commons at a meeting after the December announcement,” says Hubert Ashton, a partner at Cuadrilla’s law firm Peachey & Co. “There were a couple of other UK law firms there but I didn’t see any US firms. However, competition is healthy and I’m sure they’ll come.”

K&L Gates differs from most pure energy firms targeting London in that it has a large full-service office in the City.

It also differs in that its activity in the market, if it follows its stateside path, is less likely to be through fundraisings or M&A and more through regulatory and environmental matters, real estate or litigation. While the firm has advised on the sell-side of several US shale deals, its full-service approach – coupled with the pure luck of being a Pittsburgh-based firm that sits smack bang in the middle of one of the US’ richest shale deposits, the Marcellus Shale – means it is likely to be involved more at the nitty-gritty end of UK shale.

Michael Zanic, the Pittsburgh-based leader of K&L Gates’ energy, infrastructure and resources group, says all the major energy players are eyeing shale-relate opportunities around the world, including the UK.

“Pakistan has now approved its policy on shale gas,” says Zanic. “Poland, the UK, Australia, Brazil – all are looking to see the extent to which they can replicate what has happened in the US.”

As Zanic says, not every location will provide a bonanza, but simply getting the gas to the point of extraction is likely to generate masses of work for lawyers, as will building the infrastructure to move it.

Another firm watching developments in the UK closely is Houston-based Vinson & Elkins. One of V&E’s long-standing clients is energy and power-focused private equity firm Riverstone, one of the backers of Cuadrilla.

Back home, V&E is one of the market leaders and has been particularly active in many shale gas plays, with recent deals including acting (alongside Wachtell Lipton Rosen & Katz) for CNX Gas in its $3.36bn (£2.2bn) 2011 acquisition by Noble Energy in the Marcellus Shale; Pioneer Natural Resources in its $1.7bn acquisition by Sinochem Petroleum USA; and the $1.15bn acquisition of the Eagle Ford Shale acreage joint venture of Pioneer Natural Resources and Newpek by Reliance Eagleford Upstream.

London-based partner Keith Hughes, who has more than 35 years’ experience advising on international transactions in the energy sector, describes shale in the US as “a game-changer”.

Baker Botts’ lawyers in the US have been involved in more than 90 shale-related projects and transactions worth around $45bn, including in the Bakken Shale in the Williston Basin in North Dakota and Montana, the Eagle Ford Shale, and Marcellus Shale assets in Pennsylvania, West Virginia and New York.

The firm’s new London office head Steve Wardlaw confirms his firm is not involved in anything shale-related in the UK but is “gearing up” in anticipation of a growing market. The office has around 40 lawyers but Wardlaw is aiming to double that in the next couple of years.

Part of this gearing up will include knowledge-sharing around the network. Hugh Tucker, the head of the global projects department in Houston and firmwide head of the oil and gas section at Baker Botts, was recently invited over to a Beijing shale conference on the basis of his reputation and experience.

As Wardlaw says: “We’re in the middle of a knowledge transfer from Hugh to [partner] Hamish McArdle.”

In other words, McArdle, who before qualifying as a solicitor worked in an environmental role with British Gas, is currently immersing himself in all things shale as he gears up to play the Hugh Tucker role in Europe.

“We have a head start because we are able to say we’ve done shale-related projects before,” says Wardlaw. “Does it make your lead unassailable? Probably not. If you can do one and at least get something on your CV you can make up ground. So if we don’t tool up we risk losing ground to UK firms.”

Akin Gump Strauss Hauer & Feld has recently been involved in deals worth in excess of $8bn relating to Eagle Ford and Marcellus shale assets and is working with clients on shale deals in Ukraine, Turkey, Argentina, Brazil and Poland. London office energy partner Marc Hammerson expects an upturn in activity in the UK shale market. But he suggests it is unlikely to have quite the same revolutionary impact as it has had in the US.

“Developments in US shale gas follow a tradition of onshore production in less densely populated areas,” says Hammerson. “The UK does not have comparable land mass. Nor does it have a history of onshore production. However, shale may change this. UK onshore petroleum production makes up about 1 per cent of the country’s output – the rest is offshore.”

As Hammerson points out, two key factors are likely to change these proportions: the decline in North Sea production and the fracking technology used on onshore resources.

“The last time there was a concerted effort to develop onshore petroleum here was 80 years ago,” adds Hammerson. “We aren’t used to land-based production. Shale gas may change this. Ofgem predicts a 25 per cent fall in domestic gas production by 2020. This will affect consumer energy prices. Politicians are increasingly looking at the pricing impact of shale gas on the US energy market and seeing whether it can be repeated here.”

Perhaps it will, at least in their dreams.