In conversation: Marco Lorefice, Senior Oil and Gas and International Arbitration Lawyer, Edison SpA

Marco Lorefice shares his experiences of running pioneering price review arbitrations in the oil and gas sector, and how the legal department has proved pivotal to the company’s bottom line.

GC: Could you tell me about Edison and about your role?

Marco Lorefice (ML): Edison is the oldest European energy company. It’s named after Thomas Edison – a Milanese engineer met him at the end of the 19th century, and set up the first electric energy company in Italy after his name.

Today, Edison is part of the EDF Group, and is the second largest gas company in Italy, behind Eni and Enel.

I’ve been working for the company for 20 years, and over the last seven or eight years I’ve mainly been working in litigation, arbitration and some M&A operations. On arbitration in particular, Edison has a track record – we have been through a number of arbitrations in relation to price reviews (a major topic in the industry over the last decade), and we have been extremely successful in all of them. Today, Edison is a company with one of the most profitable gas production portfolios in the country. The role of myself and the legal department has been key to achieving that result.

GC: What’s the structure of the legal team?

ML: The legal team structure is divided in two. There is one area focused on legal matters, and another focused on corporate affairs and corporate governance across all the companies. Edison is a relatively small group, but it’s divided into several companies.

GC: Can you tell me a little bit about the price review arbitrations that Edison has taken part in?

ML: In the oil and gas industry, price review was the key issue in the period between 2005 and 2015. It’s still ongoing, albeit less so, but there was an incredible number of applications for price review throughout Europe.

The issue was about long-term take-or-pay contracts [whereby the company commits to either accepting the product from the seller for a contracted price, or paying a certain amount]. The logic is: I enter into a supply contract for 25 years on a price, which may be fixed, or may be indexed to the price of some other commodity. So you say: ‘I will buy your gas, provided that, every three years, we check if the price is still in the money.’ If it’s not in the money, I will need to lower the price, or if it’s too much in the money, the seller will need to increase the price.

But then a phenomenon took place for the very first time, called ‘decoupling’. Throughout Europe, the price of gas was indexed to the price of oil – oil prices would go up and down, and gas prices would follow. But around ten years ago, the oil prices started to skyrocket and the gas market price did not follow. The end result was that the price for the purchase of gas was huge, but the price to lease Edison gas went down, so we were losing billions every year.

Our company decided to negotiate a new price to lower the losses – we took the attitude not to close any negotiations unless the contract would have restored margins for Edison. But no one was willing to accept the principle. We thought it was our right to have a contract in the money at least every three years, so we started a number of arbitrations against everyone, and we won all these cases – against Eni for the Libyan Gas, against RasGas for the Qatari LNG, against Gazprom for the Russian gas, Sonatrach for the Algerian gas, and others.

That was a success story, and it was about the determination to push one principle. We wanted to restore a margin – we are not interested in keeping contracts with very high capital intensity; why would you pay your seller one billion a year for making losses?

In the business sector, and also in the legal market, Edison has been… I wouldn’t say a pioneer, but it has been very strong in pushing this cause. Over the last ten years, we have played a pivotal role in the life of the company.

GC: Can you describe the effect that these successful arbitrations have had on the rest of the market? Did other companies follow your example?

ML: The number of price reviews caused by decoupling from the beginning of this century has been incredible. Law firms have made fortunes with the price reviews. We started to use take-or-pay contracts in the 70s, so we’re talking about almost 50 years of take-or-pay contracts. There were no arbitrations, no litigations for a long time, and then suddenly all of them started litigating against each other, and I think that the vast majority of the arbitrations that have been pending between sellers and buyers relate to that issue.

Most companies followed, but not everybody. The difference was that not everybody decided to keep their strength and their position until the very end – they decided during the proceedings to accept an offer. But all offers that kept the contract in the red were not good, in my opinion. Some others decided to push through the arbitration until the very end, but then had bad surprises. I think that was not bad luck. The company and the legal department bears responsibility if an arbitration does not end where you thought it should, because it is the legal department that retains the law firms. It is the legal department that subscribes to a strategy proposed by consultants. Some strategies did not work properly, and some companies might have had a bad case. But there were three waves of arbitrations, and it should have been very difficult to lose in the first wave, in my opinion.

To me, the merit for a good result – and the blame for a bad result – is always with the legal department, in arbitration.

GC: Was there anything unique that you and your team did that other legal departments did not?

ML: I’ve never seen anyone doing what we did. When we started the first wave, in two months we started five arbitrations. Not one, not two, not three, not four, but five.

When I appointed the law firms and the other consultants, I used to say, ‘This is not your case, this is our case. The team has lawyers, consultants and market specialists, but there is only one chief, and that is me. Don’t try to overleap our decision – await the full instructions.’

The lesson learnt is that you must have discipline within the group, and you must control everything. Every single document filed by our staff during the arbitration, every single page, had to be discussed and endorsed by ourselves. In the end, there was perfect integration between the law firms and the legal department, as if the counsel working on the case were part of our legal department. The law firm integrating with the legal department, and not vice versa. If there had been a lawyer who decided to go on their own, they would have not been able to work with us. I’ve seen, on the other hand, in many companies, in-house lawyers not really in control. That is the difference.

GC: Do you see any trends on the horizon that would affect your work in the oil and gas industry?

ML: Over the years, in arbitration and litigation, I’ve seen a big change – many new law firms dedicated exclusively to litigation. Partners of magic circle firms, who were fed up with not being able to take on a client because another department or office wrote a letter, have set up law firms. Conflicts of interest have become unmanageable, so many new law firms have been set up.

I think some of the issues that give grounds for a conflict are manipulated. Conflicts between litigation and M&A or other corporate departments are generally the biggest – there is a war. You go to a law firm and say ‘Can you represent me in this case?’ They say, ‘Yes, of course, I am sure there are no conflicts’. And then three days later, they say, ‘We have run the conflict check and there is a conflict, so my counterparty has told me no.’ In my opinion, law firms are refusing a mandate because of a decision by other partners that they don’t want to go against a potential big client.

In terms of M&A projects, this is not a lawyer’s market any more – this is a client’s market. We have appointed some very well-known law firms and, with zero difficulties, I have implemented a strategy of fixing the price: saying ‘This is the starting price, make me an offer.’ And the one who imposes the fewest conditions, the one whose offer is closest to my threshold, is awarded the deal. Some are still reluctant. But I recently did a big M&A operation and I spent 50% of what I would have spent usually. Some law firms prefer making zero rather than making 50%. Good on them. But for us, this is the new trend in business.