For some First Nations peoples, this Canada Day was one to really celebrate. The country’s energy and corporate lawyers may have had to work a little harder at it.
A day earlier, it emerged that the Federal Court of Appeal had quashed the permit issued by the federal cabinet for the Northern Gateway project. The grounds? The former Conservative government had failed in its duty to consult affected Aboriginal communities.
Make no mistake, it’s a ruling that has some very smart law-firm strategists concerned. Most of Canada’s historic old firms were built to service a resource economy, and their energy practices remain a strong focus. That means a certain number of large energy-transportation projects are needed for the firms to prosper. “They certainly create a lot of work,” says Anne Drost, an energy practitioner at Blake, Cassels & Graydon LLP in Montréal.
It starts with energy lawyers but can also involve regulatory lawyers, litigators, real estate, environmental, tax, Aboriginal, corporate and corporate finance lawyers as well. “I don’t think the importance can be underestimated,” says Shawn Denstedt, an energy lawyer and co-chair of Osler Hoskin & Harcourt LLP.
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“One, just the nature of the projects themselves generates significant legal work, whether it’s the regulatory process, or the financing, joint-venture agreements, participation agreements, the issuance of bonds to finance the project, ongoing negotiations with Aboriginal groups and the government and others.
“The disappearance of those kinds of projects would be a material hit to law firms that act for those major products – including the loss of the construction and development that flows out of that. It would be a huge hit.”
Denstedt believes there is a second, “more insidious hit.” That one is to Canada’s reputation among foreign investors. “When we go to Beijing and Tokyo and Seoul to talk to clients and law firms there, even now they’re expressing a lack of confidence in Canada’s regulatory process, which some of this political infighting has caused.
“The knock-on effect is there’s less interest in Canada, less capital comes to Canada. It will simply move on elsewhere.”
Asked if he worries about all this, Denstedt, one of those at the epicentre of law-firm management, says yes. “If people aren’t investing here, they’re not buying companies here. They’re not making investments in Canadian companies and Canadian assets, so that corporate piece of work dries up [too]. Look at the impact of state-owned enterprises to the changes in the foreign investment review regime. There’s been a material pullback.”
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Erik Richer La Flèche, a partner at Stikeman Elliott LLP in Montréal, is extremely pessimistic about more large pipeline or transmissions deals getting done. He says the protracted length of approvals combined with increasing regulatory uncertainty means new projects aren’t even getting started.
“Regulatory process is but one element of a project-development cycle. Many natural-resources projects and large infrastructure projects take eight to 10 years. So if you lengthen any component, you are, in effect, going beyond a decade before commissioning.”
Gregory Turnbull, a partner at McCarthy Tétrault LLP in Calgary, agrees that “there are greater challenges than ever” and says it’s not just oil and gas. “It’s also mining companies — any resource project is getting more difficult to get approvals for,” Turnbull says. “That’s happening across the country.
“There are fewer brand-new mandates in that area because the risks for them is too high for a major project, so what’s happening is a reshuffling of the deck. Big companies are buying existing assets or projects that are already up and running, instead of building the project.”
What that means for corporate law firms is fewer IPOs — and less work for junior associates who do prospectus drafting and other public markets work. And that’s bad news for law firms when many large energy companies are greatly expanding their in-house legal departments to do the repetitive legal work more inexpensively themselves. “In the time I’ve been practising, in-house departments have gone from two or three to 40, 50 or 60 lawyers and doing the work themselves,” says Turnbull.
His concern is that many law firms are shrinking in order to remain profitable. “I think we’re at the point at which the market’s hyper-competitive and, with the number of projects decreasing, the attractiveness to foreign investors is decreasing, and we’re making new projects more difficult.
“There’s pressure on the [law firm] business, there’s pressure on the margins, and some of that is reflected by the lower employment. The answer now is to keep looking at your costs, keep looking at your business model, keep looking at your efficiency in delivering your service model.”
On a more positive note, he says, while there are fewer large energy deals, those that do get started are larger than before and “will have many more zeros attached to them.”
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There may be another lifeline: technology. Prime Minister Justin Trudeau has been trying to nudge Canada from a resource-based economy to a high-tech one.
Denstedt of Osler, who is based in Calgary, says his firm sees how intertwined technology has become to many of its clients’ businesses, even in energy, “so we’re trying to position ourselves to take advantage of the technology sector and how it’s changing how all industries function.
“What we’re seeing in energy is a mid- to low-price environment in the near to mid-future, so companies are trying to find technologies to extract costs from the equation so their profitability will increase.”
Asked whether Calgary-based Bennett Jones LLP, one of the last of the oil patch independents, is considering a similar move in technology, John Mercury, lead director of the partnership board, says they’re “looking hard” at that.
“We’re a big firm and we need to be judicious in the types of business lines that we invest in,” he says. “There are probably some firms that are into that deeper than we are.”
In the meantime, he says, the day-to-day needs of energy companies and service providers, and mergers and acquisitions resulting from consolidation in the sector, is spinning off plenty of energy work.
Bennett Jones, for example, represented Oklahoma City-based Devon Energy Corp. in its $1.4-billion deal to sell its 50-per-cent interest in the Access Pipeline to a company backed by the Canada Pension Plan Investment Board.
But the fact that big new energy projects are becoming nearly impossible, combined with an increasing number of large energy companies taking legal work in-house, is something Mercury acknowledges he thinks about. “I do indeed. We take that quite seriously. But we’re advocates for our clients and, as Canadians, independent of our business, we’d like to see this country prosper.
“So are we concerned? Yes, but we have a resilient business. Would we like to see these kinds of projects move forward? That’s indisputable.”
