Alberta, a province once touted as having the “Alberta advantage,” saw some tough times last year — and most law firms in Calgary predict this rough patch will continue for their clients next year. The province is dealing with the triple whammy of low natural gas prices, federal Finance Minister Jim Flaherty’s taxing of income trusts, and the fallout from the recommendations that arose out of the Alberta government’s royalty review.
These are the sorts of things investors don’t like to hear, and the province is now seeing businesses taking their money elsewhere — to Saskatchewan, to British Columbia, and beyond. “Business hates uncertainty,” says David Whelan, managing partner of the Calgary office of Borden Ladner Gervais LLP. “The past year has been tough because there’s been a perfect storm of low [natural] gas prices versus cost, the costs of drilling have gone up significantly over the past two or three years, and the price of gas has come off. People don’t realize that Alberta really is a gas province in terms of what makes the economic engine run.”
Harry Campbell, managing partner of Calgary-based Burnet Duckworth & Palmer LLP, says with oil prices reaching $100 a barrel it’s hard to complain but that, “Alberta’s basically a natural gas jurisdiction, and the natural gas prices aren’t as high as oil prices right now, so the drilling is down.
“The service companies are suffering right now and the natural gas business is kind of in the tank,” he says.
Couple that with the feds’ decision to tax income trusts, and it’s a nightmare for the junior oil companies.
Campbell explains the synergy that existed between junior oil companies, trusts, and major oil companies like this: the juniors would go out and explore reserves, and when those reserves started to produce 10,000 barrels a day, the juniors would then sell that production into a trust, make a nice profit, and start raising money in the capital markets all over again. At the same time, if major oil companies had pools that they didn’t think fit with their portfolio, they would sell to the trusts.
Under the new world order, some of these trusts will remain as trusts, some will turn into corporations, while others will be taken out by private players. It’s easy to see how the junior oil companies lose out in the end. “You take out the trusts, rightly or wrongly, now the junior oils are in the tank because they have no exit strategy to speak of, gas prices are down, and they can’t raise equity because no one’s really interested in the story anymore, because it’s not as complete a story as it was 15 months ago,” says Campbell.
While this is bad for business, Calgary law firms are seeing an increase in the merger and acquisition, bankruptcy and insolvency, tax, banking, and financial work they are doing. “We believe there is uncertainty in the economy in the upcoming year. For that reason, we are ensuring our insolvency and litigation practices are positioned for increased activity,” says Matt Lindsay, managing partner of Fraser Milner Casgrain LLP’s Calgary office.
“I think the income trusts decision has had an impact,” says Ken Mills, managing partner of the Calgary office of Blake Cassels & Graydon LLP. “I think what we’ve seen is a drop, as all firms have, in [initial public offerings] in Calgary, as a result of the income trusts decisions, but we have seen an increase in M&A work and some restructuring. It’s shifted work for the law firms.”
Last year also saw the Alberta Royalty Review — an independent panel of experts appointed by the province to conduct a review of Alberta’s royalty and tax regime, to ensure Albertans are receiving a fair share from energy development through royalties, taxes, and fees.
Again, the results were not what investors wanted to hear. “I don’t think we’ve seen the end of the fallout of the royalty review yet,” says Kenneth Warren, managing partner of the Calgary office of Gowling Lafleur Henderson LLP. “We’ll know better when the rules are finalized and have come into force, but there are segments in the industry that are significantly affected by the royalty review. The bigger players, the large oil and gas companies that have considerable flexibility as to where they invest, some of them have already announced that they are taking their money elsewhere.”
He says, once more, it’s the smaller, junior players, which have always been a big part of the Alberta oil and gas industry, that don’t have the option to pull up stakes and go elsewhere. “Their environment has changed significantly and there may be a lot of mergers and acquisitions in the next year, as some of those players just can’t make a go of it and have to look for another way to exit.”
Despite this economic downturn in certain segments of the energy industry, the oil sands continue to be a bright spot for Alberta business — and for Calgary law firms, as the oil sands cut across many practice areas. “Anything within the oil sands has been busy. There’s lots of activity going on in the oil sands, which involves construction — general corporate-commercial — that may involve securities, capital markets,” says Whelan.
Warren agrees and notes that oil sands are going to continue to be big work for Gowlings in 2008. “They’re multi-billion-dollar projects, and there’s going to be a lot of legal work and business work involved in completing the development of the oils sands, no question about it,” he says. “Unconventional oil and gas, we’ll see more work in coal-bed methane and we’re doing a lot more work in the wind-power area.
“With the oil sands development you will see new focus on environmental issues, including a lot of focus on water rights. As a finite resource out here, the oil sands have huge water demands, but there’s only so much to go around. I think that’s going to be a bigger and bigger issue.”
Good help wanted
In Calgary, as in any major city, finding and retaining top talent can be challenging. But quite apart from a city like Toronto, where associates leave one firm to join another (sometimes in the same office tower), the majority of associates who leave Calgary firms are going in-house. The lure of becoming corporate counsel is hard to resist, especially once stock options end up in the mix.
“Our biggest problem with our associates is that we get top people — they’re young, they’re aggressive, they’re entrepreneurial — and our clients are hiring them away,” says Greg Turnbull, managing partner of the Calgary office of McCarthy Tétrault LLP. “It’s a win-win situation because it’s great to have our associates join our clients in-house, but we hate to lose them. We article them, we hire them, we train them, and then boom, our clients then take the benefit. If you’ve got good people, they’re getting approached all the time.”
John Cordeau, managing partner at Bennett Jones LLP, says recruiting talent for the firm has never been an issue. “You can always use more good people but we were lucky; for the last six years we’ve been among the best employers in Canada [in a ranking of the ‘‘50 Best Employers in Canada’’ by consulting firm Hewitt Associates and Report on Business magazine.] “We have some people who have left for clients of ours, so it’s probably enhanced us. There’s a raft of Bennett Jones lawyers who have gone with clients, and one of our core values is that we are a place to graduate from.”
A recent Conference Board of Canada study ranked Calgary as the best Canadian city to live in. While the study was based primarily on economic health, it also noted that the city ranks high in education, near the top in health care, middle of the pack in environment, and surprisingly high in housing-affordability.
So what is like to work in Calgary, a city where the work, social, and charitable lines are blurred?
“Calgary is more easygoing from a practice point of view. People have done 50 deals together, so they know each other very well; they know what the other side expects,” says Campbell. “On the commercial side, it’s not so adversarial where lawyers fight over every comma until they bleed to death.”
“To use a play on words, it’s a very energetic town,” says Mills. “There’s a real sense that if you’re interested and enthusiastic and bring a skill set, there are few limits to what you can accomplish. It’s very much a meritocracy, as opposed to a situation where there’s some form of ‘who you know.’ It’s really a city that provides great opportunities to people starting out in their careers, because it really does reward and encourage people based on what they bring to the table.”
