In-House Advisor: Resource Projects

Cuttlefish. Not the cuddliest critters. But these cephalopods are among nature's most amazing animals: Remarkably intelligent, they can change colour and skin texture incredibly quickly and vividly. Some can turn themselves into an oscillating light show to hypnotize and gobble down stupefied prey. And others, without so much as lifting one of their eight arms or two tentacles in protest, can stop a big energy project in its tracks. 

That was not the kind of risk management foreseen by the legal minds working on one North Sea oil development. Nevertheless, an environmentally sensitive cuttlefish migration through a drilling zone wrapped legal suckers around the project and cost developers millions in delays. 

That's just one example of the countless and sometimes unexpected risks that can bubble up in the planning and execution of any major resource project. 

A decade or so ago many North American resource companies, especially in the energy sector, began pumping up their legal departments to reduce external legal costs and help arm themselves against business risk. Yet today it's the rare in-house legal team that can handle anything that might be dubbed a “mega” project (generally defined as one costing more than a billion dollars). 

“Given the sizes of the projects that are coming in to in-house counsel and the complexity of them these days, there is not an in-house counsel in Western Canada that is set up or has the capacity to address any major projects and keep it internal,” suggests Michael Thackray, Co-chair, Business Law, Oil and Gas, at McMillan LLP in Calgary. 

“The world has changed such that where maybe 15 years ago a major project would come in and in-house departments would have a fighting chance of doing it all themselves.” Now, he says, “it's almost a given that when a material project lands on an in-house counsel's desk, he or she would be looking to retain outside counsel to assist on the multi-disciplinary features of the project.” 

BIG AND BIGGER 

External firms no doubt have an interest in encouraging the idea that companies need them to bolster an in-house team saddled with negotiating the long and winding legal paths of a major resource project. But there's a trend these days to supersize projects to capture economies of scale. 

Take a look at Alberta's Inventory of Major Projects (IMAP), which lists completed, current and upcoming projects across various sectors in that province. Currently topping the heap of proposed energy projects is Teck Coal Ltd.'s $14.5-billion Frontier Oil Sands Mine project. Currently awaiting company approval (expected by 2016), it would be the largest single-phase oil-sands mine ever built. Following closely behind as Canada's second-largest-ever oil-sands investment is the “Fort Hills” Oil Sands Mine, a $13.5-billion joint venture by Suncor Energy Inc., Total SA and Teck Cominco. Site preparation started in 2014. 

Compare those to previous projects now nearing completion, projects that would have been conceived five or more years ago. They're small by comparison. At the top of IMAP's list is the second and final phase of Imperial Oil's $8.9 billion Kearl Lake Oil Sands project, which will soon come on stream. Next down is Imperial's $2 billion Nabiye Oil Sands project, also expected to be operational in 2015. For GCs facing the gargantuan legal work involved in such projects, how they find external help, manage it, monitor it and parse it out makes a huge difference to a project's success. 

Boiled down to its simplest essence, an external firm's role during a mega-project is to “make in-house counsel's life easier,” says Loyola Keough, a partner with Bennett Jones LLP in Calgary. “We understand that in-house counsel and their company is going to be facing significant risk; commercial risks, regulatory risks, environmental risks, First Nation risks. Big projects have significant consequences for companies and there are lots of uncertainties on how they will deal with these risks, try to manage them and mitigate them.” 

Some companies, especially the major oil companies and pipeline companies that must often deal with environmental issues, will have in-house expertise in specialized areas such as regulatory and environmental law. But, notes Keough, a regulatory lawyer who often works with utility, pipeline, oil and gas and LNG companies, the sheer volume of legal work a major project provides can tax even those in-house departments. Then even they must look for help. 

NICE TO KNOW YOU 

That's a process in-house counsel should be thinking about long before a big project is slapped on their desk. It begins soon after a lawyer has stepped into his or her shoes as GC at a company, suggests Vancouver partner Robert Shouldice, who chairs Borden Ladner Gervais LLP's governing body. Shouldice works often on large domestic and international infrastructure projects. He says soon after GCs are hired at a company, they should build up two or three trusted advisor relationships with external counsel at significant firms: “People he or she can easily pick up the phone with and in a very comfortable, confidential and relaxed way have exploratory discussions about the planned transaction and compare thoughts on what the key strategies are for managing those risks. Then talk about, on a candid, open basis, the staffing from the legal side on that transaction.” 

Typically, such relationships evolve from lawyers with external firms the previous GC has dealt with. But not always. A prior relationship may not work for a successor, suggests Shouldice, “because of course part of the trusted advisor relationship is based on chemistry and personality fit.” And, he adds, “A good trusted advisor, in that kind of relationship, shouldn't be selling [themselves] at all. They will be giving the general counsel objective, prudent and disciplined advice on how to staff the file. They won't be overselling their law firm or their colleagues. Any external counsel that does that, I think, won't end up being a trusted advisor for very long.” 

GET SETTLED 

There's another critical – though not easy – element general counsel must attempt early on in their role of project development as they ponder which external firm to work with: Encourage management to settle their design and finalize just what the project will be. They must “have a clear idea on what the scope of a project is,” advises Martin Ignasiak, who practises environmental, regulatory and Aboriginal law at Osler, Hoskin & Harcourt LLP. The Calgary lawyer knows of what he speaks; he's regulatory counsel for such major projects as the Canadian division of Total SA's recently shelved – then expanded just five months later – $11-billion Joslyn North Mine Oil Sands project in Alberta. Among other major resource projects across Canada he is providing counsel on regulatory law and Aboriginal relations to such projects as Imperial Oil's $12.9-billion Kearl Oil Sands Project. 

“The people working on the project design,” says Ignasiak, “have to realize that at a certain point they have to stop revisiting aspects of the project and settle on what the project is going to be.” 

Ignasiak has seen it often enough: A project goes through the lengthy and costly regulatory review process, then the leadership makes a change to some aspect of the development. Even a relatively minor change can have big ripple effects on the legal side, says Ignasiak. “It can really result in the regulatory process being a) shut down or b) being significantly lengthened.” 

THE BEAUTY CONTEST 

It's no doubt tempting for general counsel, faced with a major project, especially a “bet-the-company” kind, to go with external firms they've dealt with before. It often happens, though more so with intermediate projects. But, with today's crop of Canadian mega-projects, three little letters have become a prevalent thorn for law firms as in-house counsel shop for legal services: RFP. Request for Proposals. The “beauty contest,” as some lawyers call it. 

Often the RFPs ask four or five external firms for an estimate on the cost of their legal services and possible alternate billing methods. And in Calgary's oil and gas industry, Thackray says, traditional hourly billing still holds sway. Sometimes those RFPs are frustratingly vague on details about what work will be necessary and how it might be divided up between internal and external legal resources. 

Lawyers hate that question, says Thackray, while acknowledging legal expenses can be astronomical on major projects. “But we are also business people and appreciate we are going to have to come up with something more sophisticated than the hourly billing rates. We prefer the client put a number on the table before we put a number on the table.” However, he adds, when a law firm has an established relationship with a resource company, they can sometimes work out a price and a billing scheme together in a more informal process. 

INTERROGATION TIME 

For in-house counsel, selecting external help – whether through an RFP or not – needs to be about much more than obtaining the lowest possible rates. “It's all about expertise, expertise, expertise” on the external side, says Thackray. “If you have – depending on the nature of the project – someone who has done 20 of them, that person is going to be front and centre. Because internal counsel don't want external counsel to be reinventing the wheel all the time. If you are building an offshore LNG facility in India and your external firm has got somebody who has done that, then that's who you lead with.” 

Once GCs have whittled things down to a couple of candidate firms, they need to both objectively assess their own in-house strengths and peer closely at what expertise, personalities and support those external firms can offer. Though things are changing, says Bennett Jones partner Vivek Warrier, who works with Keough in the Calgary office, in-house counsel “by necessity, tend to be generalists. Except for the largest firms, it's usually not practical, for instance, to maintain in-house regulatory counsel when they may only be needed for a year or two when the regulatory approval process on a big project reaches its zenith.” 

What external firms can offer are highly expert specialists who can rotate in and out of collaborative in-house/external teams as needed. General counsels need, says Warrier, “multidisciplinary representation of every area of the law they might be encountering.” That could include procurement, construction law, regulatory, tax, commercial structuring and operational agreements, just to name a few. 

Keough and Warrier have seen their firm held under the hot interrogation lamp as in-house counsel prepping for a massive project have tried to suss out Bennett Jones. “We have gotten into some pretty detailed assessments of our capabilities with these players,” says Keough. “I have had situations where we have taken over to them four or five people from regulatory alone. A junior partner, a senior partner, a senior associate, even a junior associate. You take a team of people, even from my specialized discipline, and you combine with other groups,” from the firm. 

“Then,” continues Keough, “in-house will bring a group of people and ask us questions. These aren't five-minute interviews. They are two-hour vetting sessions where they bounce everything they have on their minds off us.” And that's the smart way to do it, both Keough and Warrier say. 

MAKING TEAMWORK WORK 

Hiring the right expertise alone is not enough to ensure smooth sailing through the legal waters of a major project launch. Communication, coordination and chemistry are just some of the critical factors in making a blended team of internal and external counsel run efficiently. 

Different lawyers with experience on mega-projects have different takes on how to do that. Among the earliest decisions to be made are how to carve up the pie of legal work. That can be thorny. Here's where egos can rear their heads and trigger turf battles – “the real-estate talk,” Thackray calls it. 

“General counsel,” says BLG's Shouldice, “can be challenged by people in their own departments who have their own biases, loyalties, maybe their own friendships or have aspirations to direct work externally in ways the general counsel might not prefer.” 

In-house lawyers may want to do some elements of the work themselves – perhaps to enhance their own status, perhaps merely for fear of something going wrong – when in reality they haven't got the specialized training or time to do it properly. That's why, says Shouldice, it's important GCs “be very assertive about their leadership and have policies and protocols in place for the engagement of external counsel.” 

There's a tug for work from the other side as well, of course. “Maybe I am looking at this through rose-coloured glasses, but I don't think it's a fee-generated thing,” says Thackray. He says often the attitude at external firms is “I don't know these in-house lawyers from Adam. I don't know if they're competent. I prefer, when my neck is on the line, to utilize people I know well over the last 20 years.” That can be folly, he says. “Initially there is a bit of get-to-know-you time. But after that, it's over and done with and inside and outside counsel integrate and you go into team mode.” 

SPECIAL BLEND 

In terms of best practices, there's no hard rule on how to blend internal and external teams. So-called soft secondments, where external teams are temporarily absorbed into in-house working groups, are one common approach (though the external teams still generally work from their own offices). “What we find best,” says Keough, “is when our team is well integrated with their team. You are not really treated like an external counsel. I think that's what companies like best. And I think that's how we get to add the most value — when we are allowed to be a member of the integrated team, and not just an external counsel that is consulted on piecemeal basis when a specific issue arises.” 

Whatever the blend, it's critical a high level of trust be established between the two camps so they quickly evolve into one camp. “Every circumstance will be different as to how you get to that comfortableness and trust,” says Thackray. “In one of the cases I was involved in – it was kind of elementary schoolish – but we went around the table and said ‘Hi, My name is Mike. This is my area of expertise.' And the next guy; ‘Hi, I'm Andrew. I do oil and gas litigation.' We started that way and it seemed to work fine.” 

Some companies do dinner parties together early on, or attend sporting or cultural events. Breaking the ice, melting whatever professional chill might exist between lawyers, is important. “Ultimately the key is overall communication and coordination,” says Warrier. As part of that, GCs need to carefully explain their company's decision tree to the external law firm involved. 

Thackray, who sees some advantages to having in-house counsel integrated into an external firm rather than the other way around, says knowing a company's appetite for risk and what paths decision-making on various aspects of the project will take, are essential for external counsel. “You get an entrée into the client that you need desperately as you work through these projects in terms of the decision-making process, culture and concepts.” In his experience, protocols for decision-making vary at the senior E&P companies he's dealt with. 

FINDING THE FLOW 

General counsel has another important task: Organizing the flow of legal work that takes place over the lengthy timelines of a major development. Regulatory work, for instance, needs to mesh with construction plans and time-lines. A commercial decision made at some stage should be taken in light of what the tax lawyers might be doing. The legal team leads on each work team need to talk and understand all the variables they each face in a comprehensive manner. 

As well, from a cost perspective, it's important a senior partner who bills out at $800/hour not be doing the work a fourth-year associate could and should be doing. 

At Bennett Jones, Keough has seen a growing use of planning tools similar to a Gantt chart, a type of bar chart developed about a century ago to manage project schedules. Usually an engineering tool, Gantt charts illustrate the start and finish dates of critical elements in a project and their chronological dependency on other activities. Keough, joking that perhaps he spends too much time with engineers, has used them to ensure all the different legal facets of a project are coordinated. 

On one in-house team he's currently working with, he mentioned the Gantt concept to the GC. “He got so enamoured with it he came up with this quite excellent proposal that had all the disciplines on it and the timelines. I found it quite humorous. I expected some engineer to develop something like this. But the general counsel, over a weekend, said, hey, I think this could work. So the next week we had this very well-organized stream of tasks for various legal disciplines. It actually seems to be working pretty well.” 

Thackray, on the other hand, believes a more organic hierarchical structure and a more flexible form of scheduling legal tasks is better. “The reality of these projects is it doesn't matter what the initial timeline or project management sheet that's prepared is; the only guarantee is that's going to be wrong. There are going to be bumps in the road and changes.” 

You may start with a strictly organized hierarchy and time charts, he says, but with the in-house and external lawyers in the combined project team dealing with everyone from economists to hydrologists to biologists, and those people dealing with other consultants and management, the reporting levels flatten and spread out. 

In the end, says Loyola Keough, what general counsel really want, and what an external firm aspires to deliver, “are no surprises. We don't want them surprised we introduced someone new to the file. Or surprised we did a piece of work that in-house counsel wasn't aware of. That doesn't help the relationship.” 

IN HOUSE INSIGHT: A CALL FOR HELP 

You can't do it alone. When you're the GC at a resource company that is about to plunge into a major development, you need to carefully pick the external firm that will bolster your bench strength. Here are some tips to make the legal team tick. 

EXPLAIN THE DECISION TREE: Unless you've used them before, external team members won't know how decisions are made at your company. They need to, advises Michael Thackray at McMillan LL . “It helps you read the company better. Sometimes there are processes or decisions that happened months before a project, which may be relevant to outside counsel.” 

NOT BY THE NUMBERS: When scoping out law firms, either informally or through an RFP, don't put a proposed fee on the table, as much as external is pleading with you to do so, says Thackray. Leaving external firms to make an offer increases the competition. 

HIRE ONE FIRM: Whether it's a domestic project or an international one, hire just one firm that can do the job, suggests Vivek Warrier at Bennett Jones. “It's much easier, I would suggest, to handle all the issues you might confront, as opposed to having to deal with multiple firms and lawyers, and all the complications that might bring.” 

TUNE INTO GLOBAL: Give your external firm an idea of where a particular project is positioned in company strategy, says Warrier. If a project is first – or a fifth tire kicker – on a list of development priorities, it helps external counsel to know this and what that means for cost control, timing and internal dynamics. 

THE BACKUP PLAN: As general counsel you expect the lawyers on the external team to be available 24/7. As Martin Ignasiak at Osler says, they always keep other firm lawyers up to date on a file. “If I'm on another hearing … and another client needs assistance on something that comes up unexpectedly, there's always someone they can rely on at our firm to help them out in a timely way.” 

THE TRUSTED ADVISOR: Well before a big project lands on their desk, general counsel at resource firms should develop several trusted advisor relationships, says Robert Shouldice at BLG. When that assignment comes, he or she can have comfortable confidential discussions to find the right external help to manage the legal risks.