Turning up the heat on the energy market

As confidence returns to the energy and utilities sector, Claire Smith weighs up the pros and cons of going in-house or private practice.

When Herbert Smith opened an office in Moscow last month to focus on energy and natural resources, it signalled a new optimism in a sector which had been rocked by economic crises in Asia and the Confederation of Independent States.

“Internationally there is a lot more confidence than there was a year ago,” says Michael Doble, head of the energy practice at Denton Hall.

“Asia is mending and there is new private sector development in the Middle East. It's an active period which we expect to continue,” he adds.

While upsets in economies have hit new project work hard, some firms see it fuelling restructuring work in the utilities.

“Our Hong Kong office has seen a surprising amount of business despite the recession,” says Robert Lane, a partner in the energy, projects and construction department at Cameron McKenna.

“Restructuring seems to be something which continues during economic crisis because that's when people are most keen to reduce their costs and increase efficiency,” he says.

With project work and private sector development now hotting up in India and Africa as well, there is plenty to keep the energy experts in business.

“The sector is expanding,” says Roger Davies, a partner in the corporate finance department at Allen & Overy who specialises in energy. “There is a lot of work out there.”

And it is not just the developing markets providing the work.

Directives from the EC to open up national electricity and gas monopolies to competition, often through privatisation, are offering opportunities in an area where UK lawyers have an advantage.

“There are many opportunities in Europe that were not there five years ago,” says Philip Hurst, a partner in the corporate department at Ashurst Morris Crisp who specialises in mining and natural resources.

“The UK is by far the most advanced on this because we first worked on competition and privatisation programmes when Margaret Thatcher was prime minister,” he says.

But despite 10 years' more experience of privatisation and restructuring, UK lawyers are still facing stiff competition from US firms when it comes to projects, especially in South America.

“US firms are good at the big project work which is typical of the energy sector,” says Mark Saunders, who became a senior partner in the energy and projects department at the London office of US firm Dewey Ballantine on 1 May after leaving Nabarro Nathanson.

Cameron McKenna is so far the only UK company to set up on the west coast, with an office in San Francisco. In 1997, Camerons won a considerable contract advising on electricity deregulation in California.

“The US firms are generally stronger in South America,” says Lane. “But we have a lot of experience in restructuring. It's one of our strengths and we tend to play on it.”

While falling oil and mineral prices have hit exploration and development work in Europe, rationalisation programmes among the big energy companies are providing plenty of merger and acquisition work.

The emergence of a small number of very large players, led by BP-Amoco and Exxon Mobil, is a trend which looks set to continue as the firms try desperately to cut costs.

Last week TotalFina launched a hostile takeover bid for Elf Acquitaine in an attempt to create the world number four. Elf's rejection of the bid prompted speculation that it may seek a deal with Shell.

“The companies are trying to get the oil at a lower cost base,” says Saunders. “And as they move into hostile areas like Russia there is a feeling that they need to be big.”

“There is enormous logic for rationalisation in the oil sector,” adds Davies. “I imagine it will continue.”

The pressures to reduce overheads have also meant changes for the in-house legal functions in companies. There is no shortage of in-house talent in the energy sector, with strong teams doing a large proportion of the work.

But financial difficulties for companies have led to significant restructuring in the legal departments. Companies are keen to reduce their reliance on private practice lawyers while at the same time cutting staff across the board.

“It seems to be working two ways,” says Geoff Hewitt, formerly director and legal manager at Saga Petroleum UK before taking up a post last month as a lawyer in the energy practice at Morgan Cole.

“There is a tendency for companies to try to reduce costs by using in-house teams, but at the same time the legal departments themselves have not been excluded from the staff cuts,” he says.

The result has been strong teams, and a number of high-profile moves by in-house lawyers into the relative stability of private practice.

“The major oil and gas companies have very strong legal departments,” says Adrian Clough, a partner in the projects and energy group at Herbert Smith. “Shell do the vast majority of work in-house, and all the companies now tend to only use outside firms when they have very big projects or need different expertise.”

“If the BP-Amoco legal team were a law firm it would be one of the best energy practices in the world,” says Saunders. “They are as good lawyers as you will find anywhere.”

According to Ted Lean, senior vice-president and general counsel at Eastern Electricity, its strong in-house team means it now only needs to go to private practice for specialised work and when it is overloaded.

“Our requirement for outside lawyers has gone down by about 40 per cent in the last three years for competition and regulatory matters,” he says. “We have developed a strong in-house function in that area.”

It is a view echoed by Richard Wiseman, legal director at Shell UK. He says it now uses its own team for everything except litigation and major acquisitions and disposals. “If we're very busy and we can't field the numbers we go outside,” he says.

This expertise means in-house lawyers are attractive to private practice energy departments, and a number are making the move out of the unstable energy companies. Last month's high-profile shift of Hewitt to Morgan Cole, and John Southworth's departure as European head of legal at Marathon Oil and Gas for a job at Nabarro Nathanson may be symptomatic of this.

Hewitt says: “I felt I was spending too much time in management and not enough on legal work, and because Saga had financial problems I knew they wouldn't be expanding.

“My time in-house has given me a business background which is attractive to clients, and as a result it is attractive to Morgan Cole.”

With a lot of new work on the horizon for the energy practices, there is plenty of opportunities to move into private practice.

“We are recruiting at the moment,” says Doble at Denton Hall. “And we are always interested in recruiting from in-house because there is a lot of expertise there.

“Our energy practice is in a very active period at the moment,” he says. “And we expect it to continue.”