23 February 2012 at 17:22 BST

Extracting value

Choosing a law firm is like choosing a garage, says Shell's new legal director - and that's meant to be a complement to both lawyers and motor mechanics. It's all about the service, he tells Jonathan Ames

Peter Rees

The oil industry is never far away from legal action. The very nature of pumping liquid gold from deep and remote crevices of the earth involves just about every area of legal activity – not least because it is highly dangerous and occasionally disastrous.
But spills and drilling explosions apart, the very core principles of the extracting industries are often the subject of dispute. For example, only a few weeks ago, Royal Dutch Shell was mired in a legal challenge in Iraq as it attempted to cut a $17-billion deal over flared gas capture with that country’s still relatively young new government.
While the state-run South Gas Company was keen to shake hands on the 25-year joint venture, the local Basra Provincial Council was reported to be unhappy that it had allegedly been carved out of discussions around the deal.
Navigating the detail of obscure jurisdictional laws in countries that until recently were war zones will not be the lot of every general counsel, but for Peter Rees it is likely to be common practice. Mr Rees took over in the top slot at Shell at the beginning of this year after spending the 32 previous years in private practice at two leading UK and US global law firms – Norton Rose and Debevoise & Plimpton respectively.
He has taken over a legal department that itself would in numerical terms qualify as a sizeable global player if it were a law firm. There are more than 700 lawyers and IP specialist practitioners working in nearly 50 Shell offices around the world. And that figure has increased by about 100 since the global financial crisis struck as the company instituted a cost-cutting regime that saw significant amounts of legal work brought in house.

How do you approach obtaining external legal advice – does a large panel keep the firms on board keen and hungry, or is a smaller group more efficient? And has your view of panels changed since the onset of the financial crisis?

We have a small panel for certain types of global legal work, which was put in place 18 months ago. For more local work we use a number of different firms with whom we have particular relationships. Shell is fortunate in that most firms are keen and hungry to do our work so I would not find a large panel necessary for that.
I am much more a believer in getting the right individual for particular work and my experience in private practice has reinforced the fact that there are some particularly good lawyers at firms who would always want to use and there may be other individuals who would not make it onto your A team.
The financial crisis has not altered my view of panels or the use of external lawyers generally. I look for quality and predictability in budgeting.

How do you go about finding ‘the right individual’ at what can at times be an amorphous mass of global law firms?

It’s a combination of knowledge and experience of working with them – and a little bit of luck.
I don’t view it as much different from finding a hotel chain or garage you like. For example, unless one is a petrol head, then most people are not able to judge a garage on the basis of the quality of work the mechanics do. All you can do is judge it on the basis that when you take your car in it works at a certain level and when it comes out it is still working, although slightly better.
That the garage has done the job on time; that it has done it at the price quoted; and whether they’ve given you a courtesy car and a nice cup of coffee while you were waiting; whether they were generally polite and helpful; those are the factors that will make big impact on you. If those elements are there you’ll say it’s a really good garage. But that is not an assessment of the quality of work they have done; it is all based on service.
When looking at the large law firms, the service is what distinguishes them. And that comes down to two individuals. The first is the client relationship partner – that person has to be somebody you trust absolutely to be honest and clear with you. If the firm hasn’t got the expertise to deal with an issue, you’d expect that person to say, ‘Terribly sorry, but we don’t do carbon credits, but I can suggest somebody in another firm who does’. Or equally ‘Yes, we do carbon credits, but frankly our best guy is currently up to his ears in another transaction. So if you want this doing within the next two weeks, we can give you the B team, if you want the B team’. To which our response is generally, no thanks.
Secondly, you have to have a good relationship with the person who is actually doing the work.
If you get good service at those levels -- and so far as you can tell they’ve got the technical bit right as well -- then you are likely to go back to that firm. If you are constantly shopping around for the best deals and swapping and changing the firms you use, then that can be a significant problem in terms of forming a good relationship.

Has the harsh economic climate encouraged you to move more work in house to reduce external expenditure – and therefore resulted in an increase in your legal department staff numbers? Or have you cut staff overhead and increased external spend?

We have had a focus, since well before my arrival, on bringing more transactional work in-house and reducing external spend in that area. In many of the types of specialised oil and gas transactions that we are involved in, my legal team has way more expertise and experience than outside counsel, so there is little or nothing that the outside law firms can bring to the table for that work.
For example, on the recent Wheatstone LNG project, which involved Chevron, Apache, Shell and Kuwait – Chevron used Mallesons, Apache used Freehills, Kuwait used Minter Ellison [all major Australia-based law firms] -- and Shell for its $1.6 billion did it all in house.
Doing the work internally has driven efficiencies and learning of its own and has not meant that we have had to take on large numbers of lawyers to deal with the work. We have just done it better and more efficiently with the more or less the same size of legal team.

What is more important for general counsel at multi-national corporations in relation to outside law firm advice – predictable billing rates and structures or quality of legal service and access to expert partners? Indeed, does there have to be a trade-off – can GCs receive both from their external advisers?

Quality of advice and service and predictability and accuracy in budgeting are all requirements and are not mutually exclusive. I don’t see why there should be a trade off between these areas.

Regarding billing structures, there is increasing talk in the US and UK that the billable hour is on the way out with the global financial crisis effectively sounding its death knell. Is that your experience? Do you prefer to work with alternative billing structures?

Having spent 32 years in private practice and seen the negative impact on quality, energy and willingness to go the extra mile of alternative billing structures – especially where there has been a miscalculation as to what the transaction or dispute involved – I am not a fan of trying to be too clever with billing structures.
The chargeable hour -- and detailed breakdown -- still gives the knowledgeable client the greatest transparency as to what has actually gone on in the law firm and how that has led to the bill in question, who has spent what time and what they have been doing. It allows the greatest opportunity to challenge inefficient working or working beyond the mandate. It helps law firms set budgets more accurately (if they are willing to devote the time to doing so) and still enables there to be the requisite amount of risk sharing.
The billable hour for large scale transactions or disputes will be around for a long time to come. It will just be better project-managed by in-house and external counsel.
I have an advantage in coming brand new to in-house life after 32 years in private practice -- I’ve seen pretty much everything tried over the years.
If you are dealing with simple, straight-forward issues – for example, applying for permits or regular land conveyancing – it is perfectly possible to apply some form of fixed fee. But when involved with much more complex issues – whether that be large scale disputes, large transactions or major projects – trying to do anything else becomes difficult.
You can set a cap, but that is always hedged around with all sorts of qualifications and therefore in many respects creates a false expectation. Almost inevitably a complex transaction will have difficulties at some stage, so the qualifications that surround the cap will go.
Caps create false expectations because if, for example, a general counsel has been told a matter is going to cost $1.5 million, he’s probably told his finance director it’s going to cost $1.5 million, he’s not explained in detail the hedges around the cap. There’s been assumption that certain things won’t happen – but ultimately, most of those things do end up happening. And then you have to renegotiate the cap and that’s always done in the context of general counsel saying to the law firm, ‘You told me you would do it for this price’, and the law firm saying, ‘We told you we would do this for this price, and now we are having to do this plus some more’.

Have you been pressing your external advisers to reduce fees generally as a result of the economic downturn? If so, how have they reacted? Do you find that law firms try to adopt the view that the one sector that remains relatively healthy and wealthy in the crisis is the energy business and therefore they try to hold the line on fees with you and your ‘big oil’ counterparts?

The fees for our panel firms were fixed 18 months ago so pressing for reductions has not been an issue there. In other areas we are always looking to obtain value for money but, as we all know, you pay for quality and quality and predictability are far more important to me than cheap.

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