IJ Interview: Eduardo C.

Leite, Chairman, Baker & McKenzie

Gaurav Sharma 04/12/2011 Doha, Qatar (IJ Online) The 20th World Petroleum Congress convenes at a time in the worlds economic history which may be described as challenging and exciting in equal measure. Multiple issues are likely to be thrown-up; especially how the price of crude oil and natural gas, the economic climate, an increase in the consumption of oil by developing economies and a dip in developed ones, is likely to impact investment in oil & gas projects as well as the hunt for low-carbon alternatives and renewable energy. The worlds largest law firm by revenue Baker & McKenzie has stepped in as the official legal firm and carbon offset partner of the Congress. Infrastructure Journals Gaurav Sharma met Eduardo C. Leite, Chairman of Baker & McKenzies Executive Committee, on the sidelines of the Congress to discuss pressing issues from an oil & gas project market standpoint.

Eduardo de Cerqueira Leite is Chairman of Baker & McKenzies Executive Committee. A partner since 1986 and an accomplished energy, infrastructure projects, and M&A lawyer, Leite served on Baker & McKenzies Executive Committee from 1999 to 2003, and he chaired

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the Firms Policy Committee in 2005. Prior to being elected Chairman, Leite was the managing partner of the four offices in Brazil, a position he held for seven years. From 1999 to 2003, he was Chairman of the Latin American Regional Council. Currently, Leite is the executive vice president of the China-Brazil Business Council, a member of the Rocky Mountain Mineral Law Foundation and member of the Grupo de Lderes Empresariais - LIDE. Leite has spent several years working in Baker & McKenzies Chicago and Miami offices since joining the Firm in 1979. He has also led the Firms Global Energy, Mining & Infrastructure Industry Group. His practice focuses on energy issues, M&A, power and renewables, as well as project finance. He has worked on almost all Brazilian privatisations either for the Brazilian government (BNDES) or for private investors. Additionally, some of his representative clients include Petrobrs, AES, Reliant and Vale (formerly CVRD). Infrastructure Journal: Given the often clichd turn phrase attributed to the

development mode of oil projects i.e. a high-risk, high reward model, in this macroclimate how do project developers uncertainty into opportunity, especially in non-traditional markets and jurisdictions? Eduardo C. Leite: This can be done by investing in innovation and R&D and making technological advances a core element of strategy; divesting peripheral assets to focus on core assets; entering into acquisitions and alliances to gain new capabilities and access new growth opportunities; and finding new channels for sale and pushing the boundaries of the company outward. IJ: Furthermore, what role do legal advisers play in the context of risk mitigation in the present economic climate? ECL: In many countries, the role of government is expanding. Legal advisers can offer the regulatory expertise needed to navigate the expanding governments' energy policies and regulations, which are often uncertain in the current economic climate. Additionally, taxes are expanding along with the expanding governments, and global banking and finance reforms can impact the ability of companies to obtain and raise money. Legal advisers can advise companies and help mitigate any risks. Lawyers can also help companies manage the health, safety and environmental risks of oil and gas projects. Legal advisers often have high level contacts among industry participants so can facilitate relationships, which is especially advantageous in light of the increasing number of global alliances being formed. IJ: If we go back three decades, the integrated model of upstream, midstream and downstream assets encompassing refining and marketing (R&M) ends was the preferred mantra of the oil & gas business. Fast forward to 2011, and most major

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oil & gas companies are looking to divest R&M infrastructure assets. In your opinion, is the integrated model dead? ECL: We saw Marathon Oil Corp split off its refining business and know that ConocoPhillips is planning to do the same. By spinning off R&M infrastructure assets a company can focus on producing oil and gas, particularly in the more innovative areas of offshore oil exploration and unconventional oil and gas production. However, we are not seeing all of the majors spin off their R&M divisions. Many still have a need for refining expertise and processing plants due to the increasing development of liquefied natural gas, natural gas liquids and high-sulphur heavy crudes. So, I wouldn't call the integrated model dead, although we are seeing changes to it. IJ: At the turn of the millennium, ultra-deepwater drilling and Canadian oil sands projects were dubbed unconventional. Yet, as we near the end of 2011, the speed, nature and scale of projects coming to the market be they equity, corporate or project financed merits the question are unconventional projects no longer unconventional but rather mainstream at this Congress? ECL: They are not "mainstream" yet because we are still awaiting the large scale implementation of many of the so-called "unconventional" projects meaningfully. For example, although the pre-salt oil fields in Brazil have been found and the technology to pump the oil exists, production on a large scale remains to be seen. The development of the Canadian oil sands projects is being held up by the delayed approval of the Keystone XL pipeline. These projects probably will not be deemed "mainstream" until they are consistently implemented on a large scale. IJ: BPs Macondo incident in the Gulf of Mexico was not an ultra-deepwater drilling exercise in a technical/geological sense. Yet not just the US, but Brazil, Norway and UK among others beefed up their legal, administrative and monitoring frameworks for offshore in wake of the spill. Post-Macondo, do you agree, that not just governments but project sponsors, legal advisers and financiers are wiser to contingency assessment? ECL: Project sponsors and financiers are more likely to analyse and require contingency provisions when diligencing their deals, and legal advisers are likely going to more consistently recommend enhanced contingency plans. Competition between operators is likely to drop as smaller companies abandon offshore drilling operations given the potential for liability. The operators that remain are likely to revisit their contingency scenarios and make them more robust. This will involve more investments in R&D to improve containment and response technology. provisions? Furthermore, whats changed as per your critical

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What has changed is the new regulatory measures that are emphasising more stringent offshore drilling regulations. Additionally, there are more rigorous permitting processes and more time is spent negotiating the allocation of liability in contracts between operator, contractors and other involved parties; liability insurance requirements have increased; and the increased insurance and regulatory costs have made offshore drilling more expensive. IJ: Our research suggests, oil & gas asset acquisition and M&A activity has pickedup. Infrastructure Journal believes corporate financed asset acquisition in the sector is back to pre-(global financial) crisis levels and rising. Investors have been heading well beyond the traditional markets of US, UK, EU and Canada. What are the pitfalls that should be avoided and how important is local due diligence before a hypothetical asset acquisition foray? ECL: In terms of the pitfalls, they include: not thinking through all of the permutations to energy policies in target jurisdictions (since such policies are frequently changing) to ensure that the business model can succeed under different scenarios; not ensuring regulatory requirements are being met in jurisdictions, for example, in some countries, only minority stakes in energy companies can be acquired; and not pleasing boards and shareholders. It is very important for local due diligence before a hypothetical asset acquisition. Companies must consider local environmental, health, safety, real property, tax and employment and labor laws, and make sure all required local permits are obtained. Additionally, companies should ensure IP protection and compliance with Foreign Corrupt Practices Act and other antibribery laws. IJ: A recent editorial in The American Lawyer opined that it was hard to see a clear connection between globalisation and increased profits for law firms. Baker & McKenzies legal union preferred common method in often seems Is to involve structure a tie-up likely with semiindependent national law firms joining in a loose Swiss Verein structure; a form of Switzerland. this to continue? Additionally, whats the business philosophy behind adopting such a structure? ECL: Clients will have the last word on how their law firms organise and operate their businesses. The Swiss Verein is the form of our legal structure. It is not to be confused with our operating system. We have a robust and highly collaborative operating system with clear policies and processes in place to ensure that we work effectively and efficiently across borders and practices on our clients' behalf. We also have cultivated a unique culture of friendship that is like that of no other law firm. We nurture this culture through our annual firm meetings and world-class talent management. As a result, our partners worldwide know and trust one another, making it easy for them to collaborate on the largest and most complex international matters.

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Our clients are speaking loudly and clearly - saying through both their words and their actions that our legal structure is essentially irrelevant as long as our advice and service are superb. IJ: Cross-jurisdictional legal work is strictly regulated, especially in developing markets. Yet cross-border law firms are better suited to the demands of the energy business. There have been positive moves by many countries towards relaxation of restrictions on multi-jurisdictional work; but two key markets Brazil (which appears to be going backwards) and India (which continues to ban foreign lawyers on its turf from advising even on the law of their own countries) should be of concern. Starting with Brazil, a booming market for energy projects, the So Paulo chapter of the national bar association (OAB-SP) said in February that formal alliances between foreign-trained and local lawyers were against its rules. Now, the Federal bar association of Brazil has also stepped in. If it agrees, all formal local-foreign legal alliances may have to be dissolved. Do you feel that while Brazil is opening up to foreign direct investment, its wise to stir this up especially as foreign law firms have enjoyed healthy local partnerships in the country since 2007? What is your take on the issue? ECL: The demands of globalisation are changing the nature of the legal advice and service that clients need and want. So it is understandable that regulators and bar associations would carefully consider the issues that such changes raise. We are confident that at the end of the day Brazilian authorities will act in the best interests of those who buy sophisticated legal services as well as those who serve them. IJ: Moving to India, while no one has a crystal ball, not least given the unpredictability of Indian politics, do you and your peers in the international legal fraternity see a thaw in the stance of the Indian government? ECL: We have offices in 18 of the 20 largest economies in the world. With recent approval of the US-South Korea Free Trade Agreement by both nations, the door has opened for us in the 19th of these major economies. We are hopeful that India will follow suit. That said, we have been assisting Indian clients with their business interests for more than 40 years, and we are stepping out our efforts in this market within the confines of current bar and regulatory rules. At the forefront of this advice is our India Focus Group, a multijurisdictional team consisting of about 200 lawyers, who have the experience and fluent knowledge to navigate legal complexities across practices on India related matters. We leverage this wealth of Indiarelated experience and work closely with Indias most highly regarded law firms to bring the right team to every transaction, regardless of location.

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In recent years, we have advised Indian companies on global strategies regarding mergers & acquisitions, joint ventures, structured financings, project development, real estate investment and international arbitration or dispute resolution. Our advice covers international aspects of these transactions. We do not advise on Indian laws due to regulatory restrictions in India. IJ: It would be fair to say that the natural gas market structure is generally not yet unbundled in Europe. So an independent company might be able to develop natural gas projects, but might not be able to get the gas to market as easily as its peers can in the United States. The speed and scale of US shale bonanza would not have been possible without independent upstarts. This begs the question, is the US market and its existing legal framework more tailored to independent, mid-cap project developers by comparison to other jurisdictions in the developed world? ECL: Other markets seem to be opening up for independents and midcaps. But this is largely jurisdiction-dependent. For example, an Eastern European country looking to decrease its dependence on Russia might promote infrastructure development via independent upstarts more readily than in other jurisdictions. IJ: On a recent visit to Texas, Infrastructure Journal observed how gas import terminals were in the process of being remodelled into export terminals in wake of new shale plays. There is a noticeable pick-up in activity in Alberta, Canada. How do you see the market for oil & gas infrastructure investment in North America as a whole over the next five years? ECL: I think it will rise dramatically as exploration continues in the new resource plays and companies take steps to get their production to market. This likewise will increase the demand for materials and labour in the infrastructure area, with a positive impact on jobs and the economy. The demand for legal expertise in this area will also see an uptick. IJ: Finally, do shale plays throw-up a different sort of challenge for legal professionals? ECL: Yes, the shale plays have implicated a number of unique legal issues. To name just a few, the proximity of many of these plays to major cities has raised issues concerning operations in urban areas and brought new challenges to traditional legal doctrines regarding the dominance of the mineral estate. Concerns over the environmental impact of hydraulic fracturing have heightened the awareness of potential environmental liabilities and the need to mitigate such risks. The proximity of many of these plays to conventional production has also created a wealth of complicated issues pertaining to the interaction and cooperation between owners of the

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conventional production and those parties who are conducting the shale exploration. New regulations are being proposed, debated, or enacted almost constantly.

This interview was first published by Infrastructure Journal on December 4th, 2011.

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