It’s been many moons since Canada saw an oil sands deal so when Suncor Energy announced it was buying an additional 10 per cent stake in the Fort Hills oil sands project from its partner Total SA, there was some cheering in the oil patch.
But make no mistake, it was muted.
With oil and gas companies eliminating 35,000 Alberta jobs so far this year in a bid to slash costs, the tight klatch of law firms that do their legal work are asking themselves whether they can escape unscathed.
“People are taking a very sober look at the market,” says John Mercury, co-head of private equity at Bennett Jones LLP, one of the oldest Calgary independents. “Your fortunes are tied to those of your clients. There’s obviously some cost-cutting out of the private sector, we’d be naïve not to be watching the marketplace closely.”
Not very long ago, some of Canada’s best-known national firms were tripping over themselves to get a foothold in the Calgary market or build up the small presence they had into transactional powerhouses.
New rivalries sparked talent wars that sent compensation for top Canadian energy lawyers into the stratosphere.
With oil enjoying a 15-year run, the strategy looked like a very good bet. But with oil prices plunging, the competition for talent morphed into a competition for a diminishing amount to work.
Some firms could be forgiven for privately asking what they got themselves into — and how they can ride it out.
The Calgary offices of some big name firms with excellent lawyers are very quiet right now, says a senior lawyer who asked not to be identified.
None have implemented wholesale cuts.
In fact, most of the cutting so far has been on the in-house side, says Mercury, with some energy giants building large and sophisticated legal departments during the boom.
“You’ve got a massive legal in-house market in Calgary, the large oil and gas companies have internalized the function. Frankly, some of them are downsizing more quickly than the law firms that I know of.”
At the top firms with deep longstanding senior relationships, he says, the demand for services has not waned significantly.
“But what you’re seeing is a bifurcation of the market. A lot of the players came to town attracted by the oil prices and paid for talent. I think they’re probably feeling the larger brunt of this downturn than the more diversified firms that have a broader client base.”
It’s not just oil hovering around US$45 a barrel that has law firms concerned.
Opponents of pipelines have been very successful at building support for their position. Alberta’s new NDP government is in the process of conducting a royalty review that could result in higher payments, and a climate review that could lead to higher carbon costs and tighter environmental controls.
A change of government in the coming federal election could signal a whole new environmental regime.
The uncertainty has companies and potential investors sitting on their hands, causing the deal climate to dry up.
Grant Zawalsky, the managing partner of Burnet Duckworth & Palmer LLP says he believes most firms, especially some of the newer entrants, are just battening down the hatches and trying to ride it out.
“There have been a few people added here or there because they’re good lawyers, and it’s a good opportunity, but I don’t think any of those firms are actually looking to grow their practice groups other than a one off whereas before, they had head hunters that were approaching people across the board.
“Those days are over — for now. There are lots of junior oil sands companies that have been publicly marketed, or softly marketed, for a long time and no transactions have occurred.”
Brock Gibson, the Calgary-based chairman of Blake Cassels & Graydon LLP, says law firms are making bets on the strategic practice areas they think will be successful in the current environment.
“In our case, for example, we’ve beefed up in regulatory and First Nations capability with some new hires. And I know there have been moves in a variety of places in the last month as firms adjust and try to position themselves for the types of work they see going forward.
“I think the rush to get platform in here has probably slowed or stopped, but various firms are continuing to position their existing platforms.”
Zawalsky says some firms have already started softly trimming their ranks. “We’re already seeing fewer students being hired, and law firms aren’t as aggressive in addressing their attrition.
“But if this kind of [oil and gas] pricing continues, the law firms and the legal industry overall will also have to contract. We’re here to serve out clients and to the extent they’re not active,” law firms are bound to be affected.
The senior lawyer who spoke on condition he not be named said the coming round of performance reviews could be used to cut body count, with management faster to weed out underperforming associates than they might otherwise be. That allows them to reduce numbers without calling it layoffs.
Lower-producing partners may even be culled, he says – typically done through a downward reallocation of points – if conditions in the oil patch remain difficult through the first half of next year.
Ironically, if oil prices fell further it could trigger a round of insolvency and restructuring work and even consolidating mergers and acquisitions. But prices have remained just high enough that most clients can hang on by cutting costs.
“We are all looking and watching the market carefully to make sure we’re prudent – prudent on our own costs and prudent on driving efficient value for our clients – and we’re strategic in terms of focusing on clients and areas that are going to have higher levels of activity in this market,” says Brock Gibson of Blakes.
“If the Calgary market contracts significantly people will have to adjust – and if people can’t adjust there will be some challenges. But it’s hard to predict.”