Fundamentals of International EnergyTransactions

Fundamentals of International EnergyTransactions

Shay Kuperman

January 24, 2008

©1999-2008 Vinson & Elkins LLP

Shay Kuperman

January 24, 2008

©1999-2008 Vinson & Elkins LLP

Going GlobalGoing Global

• Access To Markets• Access To Resources• Favorable Regulatory Environment• Diversification

Going Global - RisksGoing Global - Risks

• Political Risk• Applicable Laws And Government Requirements• Enforceability And Dispute Resolution• Exit Strategy

Going Global – Other IssuesGoing Global – Other Issues

• Deal Structure• Tax Considerations• Practical Concerns

– Travel– Time zones– Local expertise– Employees– Cultural issues

• Insurance

Energy TransactionsEnergy Transactions

• Energy Industry segments– Upstream – Exploration and Production of Oil and Natural

Gas– Midstream – Natural Gas Transportation, Storage,

Processing, Wholesale Marketing, LNG– Downstream – Crude Oil Refining and Marketing,

Petrochemical Manufacturing– Power – Electric Power Generation and Marketing, Fuel

Procurement and Sales– Local Distribution of Electricity and Natural Gas– Oil and Gas Services

V&E’s Legal Services to the Energy IndustryV&E’s Legal Services to the Energy Industry

• Exploration and Production• Mergers, Acquisitions, and Dispositions• Joint Ventures• Project Development and Finance• Product Development• Financings

– Initial Public Offerings– Publicly Traded Debt, Rule 144a Offerings– Bank Financings

• Private Equity• Sovereign Wealth Funds• Tax Based Transactions

Going Global – V&E’s Worldwide PracticeGoing Global – V&E’s Worldwide Practice

Countries in which Vinson & Elkins L.L.P. lawyers have or have had engagements are shaded

The most recent Petroleum Economist score card ranked Vinson & Elkins as the world’s leading energy law firm

Case Study – International E&P TransactionCase Study – International E&P Transaction

• Basic Oil & Gas Agreements– Mineral Deed, Assignment, Conveyance– Oil, Gas and Mineral Lease– Concession Agreement, License, Production Sharing Contract– Participation Agreement– Operating Agreement– Farmout Agreement– Purchase and Sale Agreement– Memorandum of Understanding, Protocol, Letter of Intent, Heads

of Agreement– Gas Sales Agreement, Feedstock Supply Agreement– Transportation Agreement– Division Order– Engineering, Procurement and Construction (“EPC”) Contract– Terminal Use Agreement– Financing Agreements

International E&P Transaction – Special IssuesInternational E&P Transaction – Special Issues

• Tax Issues• Deal Structure

International E&P Transaction – Special IssuesInternational E&P Transaction – Special Issues

• Applicable Law And Government Regulations– Host Country Law– Commercial Law– Regulatory Schemes– Foreign Investment and Repatriation Rules– Currency Exchange and Controls– Relevant U.S. Law

• Foreign Corrupt Practices Act• Antitrust• Securities Laws

– Available Treaties

Tax Issues – Local Country TaxesOverviewTax Issues – Local Country TaxesOverview

• Tax Systems, in General – Tax imposed based upon residency (taxable presence)– Tax imposed based upon source (withholding taxes on cross

border payments, VAT or GST imposed on local transactions)

Taxable Presence in CountryTaxable Presence in Country

• Tax Effect of Forming a Local Company– Local companies are likely to be (automatically) treated as

having a taxable presence in country– Forming a local company may be required to contract

with/partner with a government/governmental entity

Acquisition and Divestitures –Tax ConsiderationsAcquisition and Divestitures –Tax Considerations

• Three Tax Systems Potentially Relevant• For an acquisition/disposition of an existing project,

there are potentially three tax systems that must be rationalized in determining the appropriate structure:– The tax system where the seller is resident– The tax system where the buyer is resident– The tax system where the project is located

Tax Planning Strategies/IssuesTax Planning Strategies/Issues

• Treaty-Based Holding Companies - May Be Used To Reduce Withholding Taxes: – A holding company may be organized in a jurisdiction with a

favorable tax treaty with the jurisdiction in which a project is located

– Dividends from a project company may normally be subject to withholding tax (but not if paid to the treaty-based holding company)

– The holding company’s jurisdiction may impose little or no tax on dividends/gains from sale of an interest in the project company, and may not impose withholding tax on dividends to owners of holding company

LocalCo

ForeignOwner

10% withholding tax30% withholding tax No tax: participation

exemption

0% withholding tax

TreatyHold Co

ForeignOwner

LocalCo

Treaty Holding Companies

Withholding tax burden reduced to 10%

Tax Planning Strategies/IssuesTax Planning Strategies/Issues

Tax Planning Strategies/IssuesTax Planning Strategies/Issues

• Using Tax-Haven Holding Companies– May permit collection/reinvestment of funds earned outside of

a person’s home jurisdiction without tax in the home jurisdiction

Tax Haven Companies

Tax Haven

Project Co1

Project Co2

Project Co3

Owner

reinvestment earnings

Tax Planning Strategies/IssuesTax Planning Strategies/Issues

Deal StructureDeal Structure

• Asset Purchase• Stock Purchase• Merger

Some of the Factors in Determining the Form of AcquisitionSome of the Factors in Determining the Form of Acquisition

• Will Purchaser assume or be subject to all of Target’s liabilities or only specific ones?

• Can Target’s assets be transferred to Purchaser without third party approvals?

• Are the shares of Target widely held?• Many tax and accounting issues, including whether

Purchaser will obtain a new cost basis in Target’s assets or Purchaser will take a carryover basis.

Purchaser’s GoalsPurchaser’s Goals

• Get what it paid for• Be able to get compensation if it does not get what it

paid for• Have an out from closing if assumptions prove to be

incorrect • Minimize obligations to take harmful steps to get the

deal done• Certainty of the deal

Seller’s GoalsSeller’s Goals

• Obtain maximum value• Minimize residual risks• Certainty of the deal

The Acquisition Agreement - OverviewThe Acquisition Agreement - Overview

• Parties• Recitals• Definitions• Sale and Closing• Seller’s Representations and Warranties• Purchaser’s Representations and Warranties• Covenants• Conditions• Termination• Post-Closing Remedies

The Acquisition Agreement –Choice of Law and EnforceabilityThe Acquisition Agreement –Choice of Law and Enforceability

• Choice of Law– Does the chosen law resolve common commercial questions

in a familiar way?– Does the chosen law respect the parties’ allocations of rights,

obligations and risks?

• Interpretation of Contracts– Civil versus common law systems– Commercial terms that don’t always mean what they should– Problems of applicable law that override contractual terms

• Arbitration• Enforcement of Awards

Common Drafting PitfallsCommon Drafting Pitfalls

• Use of Understood but Undefined Terms• Use of Undefined or Subjective Triggers• Indemnities• Post-closing Price Adjustments• Choice (or non-Choice) of Applicable Law• Remedies Clauses that are non-Exclusive or non-

Specific• Dispute Resolution Clauses• Confidentiality Clauses

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