©2013 vinson & elkins llpconfidential & proprietary chinese energy investments into the...

©2013 Vinson & Elkins LLP Confidential & Proprietary

Chinese Energy Investments into the U.S.

Mingda Zhao | May 13, 2013


• U.S. has enjoyed increased oil and gas exploration activities due to shale gas/oil developments

• Chinese companies are increasingly active in the sector

• Non-oil and gas Chinese energy investments are also increasing

Introduction

©2013 Vinson & Elkins LLP Confidential & Proprietary 3

Trends in Exploration Activity

Source: EIA, Annual Energy Outlook Executive Summary (2012)


Drilling Activity

Source: Wall Street Journal, October 18, 2011


Trends in Exploration Activity

Source: fracktracker.org


Foreign Domestic Amount Partner Country Partner Shale Play ($B) Year

BP UK Chesapeake Woodford 1.70 2008

BG UK EXCO Marcellus 0.95 2009

Statoil Norway Chesapeake Marcellus 3.38 2009Reliance India Pioneer Eagle Ford 1.36 2010Reliance India Atlas Marcellus 1.7 2010Reliance India Carrizo Marcellus 0.39 2010

Total France Chesapeake Barnett 2.25 2010CNOOC China Chesapeake Eagle Ford 1.08 2010

BG UK EXCO Haynesville 1.3 2010Mitsui Japan Anadarko Marcellus 1.4 2010

CNOOC China Chesapeake Niobrara 0.57 2011KNOC Korea Anadarko Eagle Ford 1.55 2011

Marubeni Japan Marathon Niobrara 0.27 2011Mitsui Japan SM Energy Eagle Ford 0.68 2011GAIL India Carrizo Eagle Ford 0.1 2011Total France Chesapeake/EnerVest Utica 2.3 2012

Sinopec China Devon TMS, Niobrara, Utica 2.2 2012Marubeni Japan Hunt Oil Eagle Ford 1.3 2012Indian Oil India Carrizo Niobrara 0.08 2012Sumitomo Japan Devon Cline, Midland-Wolfcamp 1.36 2012Sinopec China Chesapeake Mississippi Lime 1.02 2013

Sinochem China Pioneer Wolfcamp 1.7 2013Tokyo Gas Japan Quicksilver Barnett 0.485 2013

Total…… 29.12

Foreign Joint Venture Investment in U.S. Shale Gas and Tight Oil Plays


• Entity choice

• Cross border tax considerations

• Technology transfer restrictions

• Qualifications to own federal and state real property interests

• Unfamiliar property concepts

• Private ownership of mineral interests

• Title due diligence

• Disclosure requirements

• CFIUS considerations

• Anti-trust review

Certain Considerations


Asset Versus Entity Deals

• Joint Ventures

– Large JV transactions (>$500 million) tend to be with foreign investors

– Fewer large JV deals with mid-size ($300-$500 million) to small (>$100 million) JV deals becoming more common

– More private equity/financial player investment

• Deal Structure: generally direct ownership of leasehold interests (but private equity favors investments through an entity)

– Transferability/encumbrance of interests

– Gathering/marketing issues

– Non-consent issues

– Real property issues

Deal Structure


• Type of entity– Corporation– LLC (Limited Liability Company)– Partnership– Sole Proprietor (N/A)– S-Corporation (N/A)

• Select considerations regarding formation of companies in the U.S.– Whether the corporate law of the individual state is flexible and business-friendly– Whether the courts of that state have a reputation of reaching reasonable and fair

conclusions when construing the corporation laws– Capital requirement and number of shareholder– Cost– Tax implications– Privacy

• State corporate governance requirements

Company Formation & Jurisdictional Planning in the U.S.

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• Types of U.S. Tax

– Federal taxation

– State taxation

– Local taxation

• U.S. individuals, corporations and their foreign branches must pay U.S. federal, state and local tax on their worldwide income

Taxation the U.S.

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• Technology transfer restrictions

• IP related issues

– Patents (most common)

– Registered copyrights

– Registered trademarks

• Certain remedies of 337 violation

– Exclusion orders (limited or general)

– Cease and desist orders

– No damages

– Enforcement of ITC orders by CPB

Technology

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• Federal & State Lands

– Public domain lands and acquired lands

– Western states – many federal lands, some have large tracts of state lands

– Texas – small amount of federal lands

• Private Lands (Texas)

– Most of the lands in Texas are private lands

– The State and its predecessors granted the lands to private parties

– The grants from the State or its predecessors usually included all or part of the minerals

– In some cases the State or its predecessors reserved a portion of the minerals or a right to a portion of the royalties

U.S. Land and Mineral Ownership


• Federal onshore leases

• Federal offshore leases

• State leases

• Indian leases

• Solutions

Foreign Ownership Restrictions

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Potential Transaction Issues

CFIUS Overview Committee on Foreign Investment in the United States

Conducts the U.S. Government’s inter-agency review of foreign direct investment for national security concerns and reports directly to the President

Has the power to recommend that the President “suspend or prohibit” transactions that threaten national security

Key jurisdictional elements: Foreign acquirer Control of U.S. business

CFIUS filing timeline:

Full Investigation (45 Days)Initial Review (30 Days) Presidential Consideration (15 Days)

Typical Total Process From Filing Date (90 Days)

• Commences upon accepted “complete” filing.

• Review by CFIUS members. Majority of reviews completed at this stage.

• If identified national security concern, CFIUS commences full investigation.

• Common for state-controlled acquirors and sensitive assets/industries.

• If no settlement, President has final authority.

• Exceedingly rare to submit to President.


CFIUS Overview (Cont’d)

• An increased percentage of CFIUS filings continue to be subjected to a second-level “investigation” period

• Higher percentage of CFIUS reviews required companies to implement mitigation measures

• CFIUS has the authority to initiate investigations on its own account and it has increasingly exercised its authority, requiring parties to submit joint voluntary notices

• CFIUS has shown an increasing interest in energy transactions

• Recent V&E experience with CFIUS in public mergers:– Statoil/Brigham Exploration: No CFIUS condition to tender offer and no CFIUS filing was

made initially; CFIUS requested that Statoil and Brigham make a filing, but did not conduct a full investigation. Closed prior to completion of initial review period.

– CB&I/Shaw Group: CFIUS approval was a condition to closing (target bore risk); filing made and full investigation was undertaken. Clearance was successfully received.

– Technip/Global Industries: CFIUS approval was a condition to closing (target bore risk); filing made and no full investigation was undertaken.

Potential Transaction Issues


• If non-U.S. acquirer competes with target, may trigger U.S. federal antitrust scrutiny or state regulatory scrutiny

– Competition may be direct or indirect

• The review process can take months, and result in:

– Forced divestitures

– Blocked transactions (see, e.g., AT&T/T-Mobile)

• Regardless of whether there are questions of competition, HSR filing must be made for most investments of greater than $66 million and certain smaller investments

– Minimum of 30 days post-filing prior to clearance (15 days in tender offer)

U.S. Competition Review – Antitrust Scrutiny/HSR


U.S. Competition Review

• In addition, the HSR filing requirements also provide for thresholds for subsequent acquisitions of voting securities

• The FTC treats acquisitions of voting securities on a cumulative basis. That is, prior acquisitions of voting securities of the same party are included in the valuation of future transactions between the same parties

• Whether an HSR filing is required in a subsequent acquisition between the same parties depends on the cumulative value of what the buyer will hold post-transaction

• However, it should be noted that FTC would view the subsequent related transaction collapsed with the prior transaction between the same parties as one transaction if the subsequent related transaction is fixed at the time when the prior transaction is closed


• Purpose: Prohibits U.S. companies and individuals corruptly giving anything of value to any foreign official; FCPA also regulates the financial accounting of the companies listed on the U.S. exchange

• Scope: Not only apply to the U.S. companies, but also apply to foreign companies listed on the U.S. exchange and foreign companies that have operations in the U.S.

• The Anti-bribery Provisions

• The Books and Record Provisions

Foreign Corrupt Practices Act (FCPA)


Practical Chinese Regulatory Approval Process


• Integration of Company Culture

– Language

– Management style

• Labor Contract Management

– Retention Strategy

– Compliance with local laws

– Labor union

Labor


• The following issues may become obstacles to achieving successful integration after closing:

– Employee disputes (e.g., departure of senior executives)

– Violation of anti-trust laws and regulations

– Violation of foreign investment laws and regulations

– Major litigations over assets

– Breach of material contracts

– False financial statements

– Disputes over product liability

– Intellectual property defects

– Environmental issues

– Corruption

Issues that May Encounter during Integration Process


Q&A

Thank You

Mingda ZhaoVinson & Elkins [email protected]+1.713.758.2069

©2013 vinson & elkins llpconfidential & proprietary chinese energy investments into the...

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