In-house interview: Duncan Holland, Cairn Energy

Edinburgh-headquartered firm Shepherd & Wedderburn has long considered local oil exploration and development company Cairn Energy, which is listed on the FTSE 250 index, to be a trophy client.

Having advised the business as a start-up in the 1980s, the firm has maintained a close relationship as one of the company’s key corporate advisers ever since, with many of the firm’s junior lawyers undertaking secondments there.

It was during just such a placement that Cairn’s current legal head Duncan Holland became properly acquainted with the company, having helped Shepherd & Wedderburn chairman Paul Hally do work for the client when he was starting out at the firm.

“That was late 2004, early 2005, and I’ve been here ever since,” says Holland. “It was an exciting time in Cairn’s development – it had just made a huge discovery, grown at an exponential rate and ended up in the FTSE 100.”

Expensive arbitration

In those days the company’s focus was largely on India and neighbouring Bangladesh and Nepal, with Cairn’s 2004 Mangala discovery in the Indian state of Rajasthan being one of the largest in the country’s history.

Cairn has since exited the Indian business via a 2007 IPO on the Bombay Stock Exchange and National Stock Exchange of India, with the focus now on the North Sea, Norway and Senegal, where the company is currently exploring two finds it made in 2014.

However, for Holland and his four-strong team, much of the focus is on a $1bn (£704.5m) arbitration with the Indian government that spun out of the Indian IPO.

“When we floated the business we gradually sold down our holding,” Holland explains. “We were about to sell our last 10 per cent when the government introduced retrospective taxation and froze our shareholding.

“That was worth about $1bn but now it’s only worth $250m [because of the falling oil price] and we’re looking to recover that from the Indian ­government.”

Battling disputes

India’s controversial retrospective tax rules were introduced after Vodafone bought India’s Hutchison Essar Telecom via a Dutch subsidiary in 2007, avoiding an Indian capital-gains tax bill in the process.

While the country’s Supreme Court ruled in 2012 that the Indian Income Tax Department had no jurisdiction to levy taxes on that transaction, the country subsequently altered its tax laws to ensure it could charge tax on any deal involving an Indian company.

“The industry is going through a difficult time because of the oil price, which is resulting in a lot of disputes”

As a consequence of the change, the government is seeking $1.6bn in taxes relating to the transfer of Cairn’s Indian assets to Cairn India in the lead up to the flotation.

The arbitration is going ahead this year, with Shearman & Sterling running the process
on behalf of Cairn along with Indian firm S&R Associates and Blackstone Chambers’ Harish Salve SA.

“We ran a tender in 2014 and Shearman & Sterling were very impressive,” says Holland on his reasons for instructing the firm. “We went to six or seven top-quality firms, but Shearman straight away picked up on what we saw as the key points in the case.

“We aren’t international arbitrators but we have worked in India for decades so we know how things will play out and we know the nuances.”

Holland says that disputes such as the Indian one are rare for the company, but he notes that the tanking oil price is leading more and more businesses to be contentious, with litigation being one of the main areas he will turn to external advisers for.

“We’ve not had a lot of disputes but the industry is going through a difficult time because of the oil price, which is resulting in a lot of disputes,” he says. “People are looking at ways of getting out of contracts or are trying to stop people getting out of contracts. In the last year we’ve had three or four that we’ve gone to external advisers on.”

In addition to Shearman, Holland will turn to CMS for litigation as well as oil and gas work, while Shepherd & Wedderburn remains a key corporate adviser. That said, he notes that the team handles as much it can internally.

“We try to do everything regarding oil and gas in-house,” he says. “There might occasionally be a deal that is so high value that we need external advisers but generally if we’re buying or selling assets we do that in-house.

“If we have a big corporate deal we would use external advisers – that’s something we do once or twice a year but if an external firm is doing it day in, day out, then they’re far better placed to handle it.”

If the price is right

Although the legal team is small at just five people, Holland says it is very involved in business matters, something that is helped by the fact it sits next to both the CEO – former Shepherd & Wedderburn lawyer Simon Thomson – and finance director James Smith.

As a result he is keenly aware of the main drivers of the business, with the oil price being one of them. Everything Cairn does is coloured by movements in the oil price and the company, like the rest of the industry, was forced to lay off staff last year after the price plummeted from over $100 a barrel to around $30.

That said, Holland says the fact that Cairn is busy exploring rather than producing at the moment means the lower price is actually working in its favour.

“The oil price is not so bad for us at the moment because we’re not producing any oil,” he says. “We made a big discovery in Senegal in 2014 but it might be 2020-21 before we are producing there.

“The cost of oil has come down but the cost of rigs and drilling has also come down. We’re spending a lot of money trying to get that onstream but we’re spending when it’s a low-cost environment.

“Hopefully by the time we’ve done that the oil price will have gone up again,” he adds.