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Fundamentals of International Energy Transactions Shay Kuperman January 24, 2008 ©1999-2008 Vinson & Elkins LLP Shay Kuperman January 24, 2008 ©1999-2008 Vinson & Elkins LLP
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Going Global Access To Markets Access To Resources Favorable Regulatory Environment Diversification
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Going Global - Risks Political Risk Applicable Laws And Government Requirements Enforceability And Dispute Resolution Exit Strategy
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Going Global – Other Issues Deal Structure Tax Considerations Practical Concerns –Travel –Time zones –Local expertise –Employees –Cultural issues Insurance
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Energy 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
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V&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
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Going 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
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Case 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
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International E&P Transaction – Special Issues Tax Issues Deal Structure
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International 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
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Tax Issues – Local Country Taxes Overview 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)
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Taxable 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
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Acquisition 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
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Tax 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
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Local Co Foreign Owner 10% withholding tax 30% withholding tax No tax: participation exemption 0% withholding tax Treaty Hold Co Foreign Owner Local Co Treaty Holding Companies Withholding tax burden reduced to 10% Tax Planning Strategies/Issues
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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
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Tax Haven Companies Tax Haven Project Co 1 Project Co 2 Project Co 3 Owner reinvestmentearnings Tax Planning Strategies/Issues
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Deal Structure Asset Purchase Stock Purchase Merger
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Some 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.
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Purchaser’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
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Seller’s Goals Obtain maximum value Minimize residual risks Certainty of the deal
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The 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
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The 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
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Common 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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Vinson & Elkins Offices NEW YORK WASHINGTON, D.C. HOUSTON AUSTIN BEIJING DALLAS MOSCOW LONDON DUBAI SHANGHAI TOKYO HONG KONG ABU DHABI
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