Shell: taking the power back
4 November 2013 | By Hannah Gannagé-Stewart
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Shell legal director Peter Rees is switching litigation control away from external counsel to a unified global team of in-housers
Royal Dutch Shell is no stranger to legal challenges. With a top line of $467bn (£290bn), operations in around 70 nations and estimated production levels of oil and gas equivalent to 3 million barrels a day, Shell’s exposure to risk is wide-ranging. Little wonder then that CEO Peter Voser sought not only an accomplished litigator to head Shell’s legal function but a strategist – someone with the vision and influence to get hundreds of lawyers in numerous jurisdictions pulling in the same direction.
That was precisely what Peter Rees QC set about doing when he joined Shell as legal director and an executive committee member of the FTSE 100 company in January 2011.
The opportunity at Shell came up while he was a partner at US firm Debevoise & Plimpton.
“I was happy at Debevoise – my career was going well and I had no ambition to go in-house, and then the headhunter rang about Shell and said they were looking for someone and asked if I’d be interested,” Rees recalls. “I said yes on the basis of thinking they’d never pick me anyway.”
But Rees admits he never pictured himself working for Debevoise either. He started his career at Norton Rose – now Norton Rose Fulbright – where he became the firm’s head of dispute resolution and a member of the executive committee before moving to Debevoise in 2006.
At Norton Rose he campaigned for the firm to make it compulsory that all litigators should have higher rights of audience, a rule he imposed and which led to Norton Rose being the only law firm certified by the SRA to offer higher rights advocacy training.
“I never thought I’d join a US firm but they needed a trial lawyer and I ended up arguing cases on everything from aeronautical disputes in the Commercial Court to family cases,” he says, adding “I’d never have made QC without Debevoise,” which he did in 2009.
When Shell confounded his expectations and offered him the job he was forced to rethink his preconceptions about leaving private practice.
“I looked at what the job offered and realised it was the best job in legal,” he says. “You’re involved right at the top of the world’s largest company by revenue.”
Rees is an accomplished litigator and advocate but unlike some others with the skills to make those claims, he is also a born leader. He exudes clarity of thought and purpose, has a calm but determined disposition towards progressive change and is instantly likeable.
“What you see is what you get with me, and that works well at Shell,” Rees says, explaining what gave him the edge over the competition when it came to landing one of the world’s top in-house jobs. “When I asked my predecessor what they were looking for, he said they needed someone with soft skills as well as legal skills.”
Despite the business trading since 1907, when it was formed of a merger between Royal Dutch Petroleum and UK-based Shell Transport & Trading, when Rees joined, the
oil and gas giant had only been unified under a single capital structure for five and a half years.
Prior to May 2005 Shell was comprised of a global network of subsidiaries, all with varying degrees of managerial Autonomy. Gradually, as the group drew together as a single entity, the businesses were globalised under central leadership but the legal function remained disparate, with regional in-house lawyers running their own relationships with external counsel and no fully centralised control being exercised.
“The priority was to have a legal organisation that was the right size and focused on the right things to support the business,” Rees explains. “I had no idea whether there was scope for reduction when I started. I felt the team and budget looked about right, but like a true lawyer I wanted evidence.”
Rees initiated a zero-based cost analysis which enabled him to think about how he might design Shell’s legal structure from scratch if he could. After about four months he came to the conclusion that 95 per cent of what they were doing was right, but there was a need for some reorganisation.
Rees’ predecessor Beat Hess had begun reducing legal spend by shrinking the panel to just five firms – a process that, Rees says, was run mainly by Shell’s procurement team.
“I felt the right level of local advice was missing,” he says. “There are benefits to working with one supplier, but it removes choice.”
Rees decided to establish a panel that could provide Shell with advice at the right price but be more local, ensuring it covered specific areas of work in particular jurisdictions.
“I got the records of legal spend for the last three years and worked out what we were spending where, and then checked it with all the regional heads,” he says. Once he had that and the broader cost analysis at his disposal, he says it became obvious that any further reduction in spend would be “cutting to the bone”.
Meanwhile, Rees was tasked with drawing together an annual report to the board on litigation spend, which accounts for the majority of Shell’s legal budget. This was no easy task while the legal function was still operating along pre-unification lines.
The litigation practice was centralised in the US where, in common only with Nigeria, the company had a high concentration of in-house litigators. Elsewhere in the world, contentious disputes were dealt with by external counsel, and because the lawyers instructing them were not litigators they struggled to understand the nuances of the process and keep a tight rein on spend.
Rees’ response to this was two-fold – reorganise reporting lines globally and reclaim control from external counsel by bringing litigation in-house in a big way.
He used the business structure already governing the rest of the business as a template for the new reporting lines. All those employed in departments related to the search for and recovery of crude oil and gas, or ‘upstream’ activities, reported to a head of upstream. All those on the refining, marketing and supply side of the business, or ‘downstream’, reported to a head of downstream.
Today, the company’s legal structure reflects the global nature of the business. Lawyers are not appointed by regional office but by business line – except in upstream which is split between Americas and international – and there is much greater mobility between areas of the business as a result. Lawyers no longer hit a glass ceiling at the top of the chain regionally – there are always opportunities in other countries and further up the company hierarchy.
“The ‘pro’ is that everyone in that line of business knows what’s happening and can share learning more easily,” Rees says. “The ‘con’ is that there was a risk of creating silos,
so we were anxious to ensure there is cross-fertilisation between business groups. We use IT and practice area networks to communicate and encourage conversations between upstream and downstream lawyers.”
Reporting directly to him now, Rees has a general counsel for upstream international, downstream, IP, projects and technology, trade and shipping, corporate (who is also company secretary), upstream Americas, litigation and a chief ethics and compliance officer. Reporting to them is a global network of around 750 lawyers and more than 200 support staff.
Before Rees joined there was no dedicated litigation group or general counsel so he appointed the company’s former general counsel for projects and technology Brad Nielson to establish a global litigation team (see box, below).
Rees made sure jobs were advertised in-house first but lawyers who applied had to be doing a minimum of 10 per cent litigation. The rest of the roles were recruited from outside. The company now has a global litigation team of about 80 lawyers in 15 countries.
Explaining the emphasis on litigation, Rees says: “If you look at most corporations these days, litigation and compliance is the biggest risk. No corporation will go down because of a failed M&A deal.”
It is for that reason, he adds, that there is a trend among big corporations to appoint litigators.
An extension to that thinking is the position of lawyers, and indeed litigators, on the boards of major corporations. Rees firmly believes his role on the executive committee has allowed him to gain a far better understanding of how a company such as Shell operates. Strategically speaking, it also makes him far
better placed to prevent and deflect legal challenges.
“It’s like having three jobs in one,” he says. “On the one hand it’s like running a big law firm, which is the one I was prepared for, having been on the management team at Norton Rose. But at Shell, you’re also on the executive committee and then, thirdly, you’re a senior legal adviser to the board and have to understand what they need to be appraised of.”
That oversight and enhanced grasp of how the company works has helped Rees control expenditure. In total, internal and external legal spend has reduced by a third over the past six years. This has been achieved, in part, by slashing spend on outside counsel by 50 per cent in that period. In 2007, 55 per cent of the company’s total legal spend was on external counsel – this is now down to 35 per cent.
The extensive panel that Rees has been establishing this year is a work-in-progress. Hess’s micro-panel was always going to be up for review
after three years but Rees says there is no time limit on his panel.
“We will assess the way the relationships work and see who we end up using most,” he explains. Then he adds with honesty: “The aim is that the panel will shrink according to who we work with best.”
The revamped panel consists of more than 150 firms, with Baker & McKenzie, CMS Cameron McKenna and Rees’s former firm Debevoise among those newly appointed. Eleven firms have been revealed as having been successful in at least three jurisdictions, including legacy panel members Allen & Overy, Clifford Chance and Simmons & Simmons. Dentons, Holman Fenwick & Willan, King & Spalding, Linklaters and Norton Rose Fulbright also secured places.
At the time of the panel shake-up being announced, Rees commented: “We will no longer have a global panel of firms that will act for us. Globally, it will be much more a
series of relationships with firms that have capabilities in the jurisdictions we are working in.”
The statement was, arguably, a less than subtle nod towards his intention to shift the power away from external counsel and back into the hands of his own team.
Price, he says is not the only factor he is interested in with his panel. Related to price, he explains, is predictability. Rees wants to be quoted a price at which the job can be done, not one that will prove to be a moving target.
“The biggest waste of legal fees is when the firm does things they haven’t been instructed to do,” he says.
Full team ahead
Teamwork, therefore, is essential for working well with Shell.
Rees is adamant on this point.
“We’re not going to hand work over,” he asserts. “We say ‘this is our deal and our case – you have to work with us’.”
According to Rees the average PQE at Shell is 19 years. With that level of experience under their belts Shell’s lawyers outrank most partners so it is crucial that external counsel have a thorough understanding of the business and its needs.
“The big mistake most firms make is being on transmit rather than receive,” he explains, admitting that he gained a different perspective himself once he joined Shell. “The big learning curve for me was that I’d been incredibly naive in pitches – I was telling them things they already knew.”
Although he says he is continually learning it is clear that Rees is as acutely aware of the commercial risks as the legal ones facing Shell.
Reflecting on the restructuring he has already undertaken in the past two years, he says: “If you started again you’d never split the legal structure.”
It sounds a little wistful in its calm delivery, but Rees has been quite deliberate in encouraging cross-fertilisation across business streams, gradually blurring expertise between upstream and downstream lawyers to build a more flexible and well-rounded legal team.
He recently instigated a top-level reshuffle, appointing former secretary to Shell’s executive committee and assistant to the chief executive officer Michael Coates as head of the UK’s downstream legal team and associate general counsel of manufacturing and marketing for North West Europe. Coates took over from incumbent Bob Henderson who has moved to the US to become associate general counsel, upstream Americas – integrated gas/new business.
But it’s not all over. Rees hints that his legal strategy is very much unfinished business.
“The business is getting more integrated, so having knowledge of both upstream and downstream is valuable,” he says.
The results of that zero-based cost analysis it seems are still in his mind’s eye and his ambition to rebuild the legal function from scratch is gradually, almost imperceptibly, being met by a measured and incremental strategy of longer term change.
Beat Hess’s micro-panel
Allen & Overy
Cravat Swaine & Moore
Simmons & Simmons
Slaughter and May
Who supplies the world’s energy?
National oil companies, owned by governments, control more than 90 per cent of the world’s oil reserves. Shell is the nineteenth-largest oil and gas company in the world and supplies a mere 2.5 per cent of the planet’s oil and gas.
Added together, BP, Chevron, Conoco, Exxon, Shell and Total still just supply 12 per cent of the world’s oil and gas.
Integrating the litigation function
In April 2011 Brad Nielson was appointed to establish and lead a new global litigation team, which launched in May 2012. To ensure it was aligned with the structure of the business and avoid having a top-heavy hierarchy Nielson sub-divided the group into global litigation international and global litigation Americas.
Legacy Fulbright & Jaworski partner Richard Hill was appointed associate general counsel for the international sub-group, covering disputes in Europe and the CIS, the Middle East, North Africa and the Asia Pacific region, while Houston-based associate general counsel Lynda Irvine took control of the Americas.
Associate general counsel for strategy and co-ordination, Kimberly Phillips, is also part of Nielson’s team. She worked alongside Peter Rees in the latest external panel review as the litigation group is the largest user of external counsel. The group now consists of a total of 135 staff, including about 75 lawyers, in 15 countries.
Nielson says that there four categories of contentious dispute that arise regularly across the oil and gas industry. Perhaps unsurprisingly, the disruption caused by environmental non-governmental organisations sits firmly at the top of that list, followed closely by the enforcement of foreign judgments and then the sweep of US-style litigation such as class actions, long-winded discovery processes and punitive damages, and finally the use of bilateral investment treaties to enforce contractual rights in more challenging jurisdictions.
The ongoing Chevron v Donziger case – in which Chevron is in court in New York trying to secure a judicial order rendering an Ecuadorian judgment unenforceable – is a good example of the sort of foreign enforcement issues that can arise.
As well as reacting to disputes, Nielson says the department is proactive in mitigating the risk of litigation.
“As a result of having litigators working across all departments, we’re now able to take their learning across the whole business,” he says. “Previously it might only have been the group that was involved in the dispute that would have been able to learn from it.”
This learning is disseminated in a variety of ways. On the one hand, Nielson explains that the litigation team takes greater ownership of disputes than would have been the case before the dedicated team was set up.
“Upstream and downstream teams support themselves, but
we cut across them all. One fundamental benefit of this is
that, rather than have litigators working with the business lawyers, we work directly with the business.
“The dispute comes from the business lawyer to the litigation team, who then takes ownership of it and feeds back to the business lawyers once it’s resolved”.
The integration of the litigation group into the broader business has enabled Shell to better assess the value of pursuing a given piece of litigation. The business objectives of doing so are now far more critical in that process than they were under the less joined-up, reactive system.