The Global Issue
Oil in the Blood

To be lord of the oil patch is a prize worth fighting for. As the Magic Circle makes inroads, Texas energy firms like Vinson & Elkins and Baker Botts tout their historical ties to the oil industry and defend their turf.

The American Lawyer

By Michael D. Goldhaber

October 01, 2008

In previous careers, Vinson & Elkins lawyers were roustabouts and roughnecks--petroleum engineers, land men, and oil tanker dispatchers. They anchored pipelines to the Persian Gulf bed and the Atlantic Ocean floor, to the Alaskan tundra and the West Texas plains. Their families were entrenched in this world, too. Litigator Paula Hinton toured a wellhead factory on her first date with the man who became her husband. Regulatory expert Kathleen Lake grew up napping in her family's Oldsmobile station wagon while her father and grandfather, geologists, checked hydrocarbon cores in the dust of South Texas. Carbon trading guru Larry Nettles has six close family members now or formerly in the energy business. "This is the type of 'in the blood' relationship that simply does not exist in New York or London," he says.

"Oil in the blood" is a metaphor that pops up a lot in Houston, especially at the two leading deal firms, V&E and Baker Botts. But some folks in London are skeptical, including the general counsel of BP p.l.c., who controls as many billable hours as any oil man on the planet. "Those [law firms] that say they have oil in their veins need to be clear about the distinctive contribution they can make on a particular matter, separate from in-house counsel or other outside firms," says BP GC Rupert Bondy.

Expensive oil may be bad news for the guy filling up at the corner pump, but it powers a strong countercyclical practice at the largest global firms. To the Texas outfits that kept the faith through the long price slump that began in 1987, it presents both an opportunity and a challenge. "We're not dancing to a new tune because oil's suddenly at $130 [a barrel]," said Baker managing partner Walt Smith in June. "Last time we did a strategic review, oil was probably at $20. Even then, our basic strategy was to be the premier firm for energy in the world." The Texans' challenge is to persuade people like BP's Bondy-and his counterparts at the newly ascendant national oil companies-to pick lawyers with historical ties to the industry.

To be lord of the oil patch is a prize worth fighting for today. The share of all M&A attributed to the energy, mining, and utility sectors rose from 10 percent in the first half of 2007 to 30 percent in the first half of 2008, according to Mergermarket Ltd. Much of that is due to mining [See Metal Heads], but energy M&A maintained a high level of activity under difficult credit conditions. And even the volatile price of oil has not deterred M&A, partly because traders can now buy hedging derivatives, and partly because people in the field agree that oil and gas values will only drop so far. "People have bought into the concept that prices are up and will stay up," says Michael Dillard of Akin Gump Strauss Hauer & Feld.

But as strong as energy M&A has been, project finance is where the action really happens. According to Infrastructure Journal, the value of oil and gas project financings closed in the first half of 2008 was $143 billion-20 percent more than during the entire busy year of 2007. "We used to think a megaproject meant $1 billion," says Eric Silverman, the head of projects at Milbank, Tweed, Hadley & McCloy. "We're now clearly in the realm of $10 billion-plus."

Since the last oil boom, London has emerged as an energy center to rival Houston. It's a big switch from the seventies, when Linklaters used to send lawyers to Texas to train at Fulbright & Jaworski. Thanks to the discovery of North Sea oil, London lawyers built their own expertise. And thanks to a fear of U.S. courts, English law became the new global standard for energy contracts. "Texas law now only exists for Texas transactions," says Tom Moore, a London partner at Dewey & LeBoeuf. "The U.S. legal system has lost the battle. It's no longer an international standard in energy deals."

Even if English law is now the lingua franca of oil and gas, it's often still spoken with a Texas twang. David Asmus, head of oil and gas at Baker Botts, states flatly: "Baker Botts and V&E do more of this stuff than Clifford Chance, etc., do. We do the biggest energy deals in the world." Last year that may have been true, but current league tables suggest otherwise.

In terms of deal flow, V&E routinely sets the pace in global oil and gas M&A, averaging a deal a week throughout 2006 and 2007, according to Thomson. Measured by deal value, Baker Botts took pride of place in 2007 oil and gas M&A, with $45 billion in deals. Most memorably, Baker helped create the world's top offshore oil rig supplier in the $17 billion merger of Transocean Inc. with GlobalSantaFe Corporation. (Skadden, Arps, Slate, Meagher & Flom represented GlobalSantaFe.)

In the first half of 2008, V&E's deal pace slackened to one deal every ten days. This was still well ahead of rivals-especially in the United States. But while the total value of oil and gas M&A held steady, the action shifted overseas. Thomson's top ten charts for oil M&A legal advisers in 2007 and early 2008 are mirror images of each other. Eight of the top ten spots were taken by U.S. firms in 2007, compared to only two of the top ten spots in the first half of this year. By value, Baker Botts's mantle has been taken by Linklaters, with $24 billion in announced deals. Notably, Linklaters advised The Goldman Sachs Group, Inc., on the $14 billion hostile bid by Britain's BG Group plc for Australia's Origin Energy Limited, coveted for its coal bed methane reserves.

When it comes to project finance, the Texans' boast is even harder to defend. The Texans perennially trail a strong pack of U.S. firms including Latham & Watkins, Skadden, Shearman & Sterling, Chadbourne & Parke, and Milbank. And even those firms are eating the dust of White & Case and the Magic Circle. According to Infrastructure Journal, Allen & Overy worked on oil and gas projects worth a staggering $34 billion over the 18 months ending in June. It was followed by Clifford Chance, W&C, and Linklaters, which each tallied at least $20 billion of deals. (Freshfields Bruckhaus Deringer is no longer in the mix, having dismantled its projects department.)

To be sure, the Texans help to create some of the most complex hydrocarbon projects. The staffing of BP's Baku-Tbilisi-Ceyhan pipeline in the Caucasus, earlier this decade, is instructive. In that deal, the BP-led consortium relied on Sullivan & Cromwell for the finance and Baker Botts for the development-the nitty-gritty works of assessing local laws, negotiating treaties and agreements, and arranging for construction and transportation. "There is a basic distinction between project development and project finance," remarks Baker Botts projects head Stuart Schaffer. "A lot of times you'll hear a firm call itself an energy firm when really they're a big-time finance firm."

Still, the numbers don't lie, and even the lender-side lawyers in London get a pretty good bead on the oil industry after their third or fourth megadeal. "The Magic Circle has more reach and penetration," remarks David Slade of A&O in New York. "That's why you're seeing what you're seeing."

The Texans know they have some global catch-up to do. Last year Baker Botts opened in Beijing, and hired a pair of projects laterals in Dubai, from Denton Wilde Sapte and Shearman. In February, Baker took four laterals from White & Case in Moscow. V&E has opened six offices in the last five years, including Abu Dhabi last year. This year it's shifting seven partners to New York, in a bet on the future of energy private equity. Vinson has also moved three senior lawyers to the Persian Gulf (where it lost a partner to Latham), and added two lateral partners from Linklaters, in London and Hong Kong. But with 74 percent and 67 percent of their lawyers in Texas, respectively, V&E and Baker still have a long way to go.

As the geography of their global expansion suggests, energy law firms see national oil companies as the wave of the future. The so-called NOCs control about 80 percent of the world's oil reserves; and, as recent entrants to the dealmaking game, they need outside legal help. Indeed, the contrast in staffing is stark. Giant NOC PetroChina Company Limited, with its parent China National Petroleum Corporation, has only 55 in-house lawyers. Yet Royal Dutch Shell plc has 750-even though PetroChina has about double the market capitalization.

With private equity on the sidelines this year, the bidding on big-ticket oil deals has been left to oil companies. Reserve-rich NOCs are using their cash to diversify globally, while the NOCs of oil-importing nations are desperate to acquire assets. A pair of $5 billion deals this year exemplify the trends. Abu Dhabi National Energy Company, represented by Latham, bought Calgary's PrimeWest Energy Trust ["Riding the Bull Market," August]. And, in the largest of China's African adventures, Dewey helped CNPC buy oil fields in Niger.

A trio of free-spending NOCs are also responsible for much of the world's project activity. It should come as no surprise that these companies-Saudi Arabian Oil Co. (Aramco), OAO Gazprom, and Qatar Petroleum-are among the world's very largest holders of hydrocarbon reserves.

Last year White & Case advised Qatar Petroleum and Shell on the final stage of liquefied gas projects with a combined value of $30 billion. Aramco (working with various partners, but always with W&C) has either closed or announced four vast refinery and petrochemical projects since 2006, with a collective price tag of $50 billion. To the north, Gazprom and its partners have even bigger eyes. The first phase of a $20 billion Gazprom LNG project on Russia's Sakhalin Island closed in June, with Linklaters as project counsel. And Russia's giant has retained Chadbourne for its planned $30 billion development of Shtokman, a massive new Arctic gas field.

A few firms are obviously well-positioned to benefit from the NOC bonanza. W&C works with the national companies of Saudi Arabia, Qatar, Nigeria, and Indonesia; Shearman with Abu Dhabi, Algeria, and Kazakhstan; Thompson & Knight with Kuwait, Angola, South Africa, and, especially, Brazil. Cleary advises most of the Latin American NOCs, and handled the 2005 OAO Rosneft Oil Company IPO.

The Magic Circle firms benefit from the NOC trends largely by representing Western oil majors or banks in their sometimes-perilous collaborations in Russia or the Persian Gulf. Yet Linklaters devotes just four partners to NOC relations. "Our traditional clients are the energy majors, and they still remain our key clients," says energy cohead Jeremy Gewirtz. "But any credible energy practice today must have good relations with the NOCs."

When it comes to NOC diplomacy, the Texas firms like their position, too. Baker Botts works closely with Qatar Petroleum and handles disputes for Gazprom and Rosneft. It also benefits from the NOC boom through its dominance of the oil services niche. V&E has a strong relationship with Abu Dhabi National Oil Company, and with all four major Chinese NOCs (which also favor Dewey and Herbert Smith). "It's a completely different landscape in terms of who the clients are," observes Marcia Backus, cohead of corporate at Vinson.

With the energy sector now representing about 15 percent of the S&P 500 (up from 5 percent in 2000), the oil patch is too vast to be covered just by a handful of law firms. Whoever tops the league tables, all the firms with energy experience are busy and grateful. In industry lingo, Vinson partner Stephen Davis likens the Texas firms to "very large crude carriers." The tides may turn, the seas may swell, but the ships keep cruising along.

E-mail: michael.goldhaber@incisivemedia.com.