Cross-Border O&G Deals and Alternative Financing Structures

Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm. Cross-Border O&G Deals and Alternative Financing Structures Mona Dajani Chicago Heath Trisdale Houston Jonathan Newton Houston 1

Managing Cross Border Oil and Gas Deals Heath Trisdale, Houston Jonathan Newton, Houston 2013 Baker & McKenzie International Planning for the Transaction What sparked the transaction? What are the key strategic goals? Where is the transaction? Does it involve one or more countries? What is the materiality of each? Any language issues? What is the scope of the proposed transaction? Entire entity? Business operation? Specific oil and gas assets or properties only? How is the sale conducted? Privately negotiated? Auction? Any merger control requirements or red flag compliance issues? 2013 Baker & McKenzie International 4 2

Planning for the Transaction (cont.) How will the purchase price be funded? Internal funds? Stock? Borrowing from third parties (any timing constraints?) Mix thereof? Will the source of funding impact the structure? Any timing issues? Will local laws require registration or disclosure of source of funds? 2013 Baker & McKenzie International 5 Planning for the Transaction (cont.) Who will be the transaction team? Internal Who will lead from the business and legal sides? Are there sufficient resources, coverage, skill sets, etc.? External Accountants (including forensic) Attorneys one law firm or many Investment bankers Third party investigators or similar resources Schedule an organizational meeting of the team and establish roles and responsibilities for the team members 2013 Baker & McKenzie International 6 3

Planning for the Transaction (cont.) Consider the costs of doing the deal Learn about the seller/buyer Consider how the acquired company will be integrated Agree on due diligence approach Consider time zone challenges in terms of due diligence, meetings, disclosures and information exchange Structuring / tax issues Consider confidentiality considerations Internal External 2013 Baker & McKenzie International 7 Timing of Transaction How long will it take to: Plan and agree upon the team members, the scope of their work and the responsibility timelines for the team? Conduct due diligence of target? Respond to due diligence requests by financing source, if any? Satisfy regulatory requirements/filings, e.g., HSR, etc.? Obtain required third party consents? Other closing conditions, e.g., board/shareholder approval, etc.? Negotiate the transaction documents? Close the deal? 2013 Baker & McKenzie International 8 4

Letter of Intent/Term Sheet Why use a preliminary agreement? How will a preliminary agreement impact timing? Should the preliminary agreement be binding or non-binding? What is the effect of local law on non-binding provisions? Consider express and implied duties Consider non-competition / non-solicitation obligations and restrictions Deal protection Should you ask for and obtain exclusivity / no-shop protection? Why you should ask for breakup fees? How do you respond to requests for reverse breakup fees? What are the public disclosure obligations? Will any regulatory filings be required? Remember to address confidentiality provisions if there is not a separate confidentiality agreement 2013 Baker & McKenzie International 9 Structure of the Transaction How will the acquisition be structured? Equity interests Asset acquisition Merger, if available under applicable law What is the appropriate acquisition vehicle? US or local? Holding or intermediate company for liability, tax or other reasons? Consider limitations on liability of equity owners in the possible jurisdictions What is the appropriate capitalization? How does this impact post-acquisition integration? Consider the tax and accounting issues regarding 2013 Baker & McKenzie International 10 5

Structure of the Transaction (cont.) How will the documents address: Risk allocation? Representations and warranties Purchase price installment payments and holdbacks Working capital / debt adjustments Indemnification Escrows Funding of purchase price? Covenants pending and conditions to close? How do I hold target to the deal but give myself a way out? Governing law? Dispute resolution (litigation vs arbitration)? 2013 Baker & McKenzie International 11 Due Diligence Discuss and establish the scope with target Legal vs Business Benefits Financial Litigation Regulatory Environmental Real Estate/Property IP Compliance Other Consider materiality thresholds How will the information be provided? Agree upon place for, or mode of, production or delivery, e.g., virtual data room, etc. 2013 Baker & McKenzie International 12 6

Due Diligence (cont.) Be prepared to negotiate Scope of target responses Timing of responses Distribution of responses Consider inevitable objections from target Privilege Burden Cost 2013 Baker & McKenzie International 13 Due Diligence (cont.) Continue to refine the budget for costs as you go Continue to refine scope of the requests and consider need for supplemental requests Who is the manager and will keep track? Managing local teams Define the final product to be generated by the results of the diligence Responsibilities for preparation Interim reports Form of final report Use by third parties Consider public sources 2013 Baker & McKenzie International 14 7

Dispute Resolution Choice of Law Consider impact on documents Risk allocation Good faith Enforceability Will the choice be enforceable? Forum Selection Are the local courts fair and efficient? What can you do to find out? What arbitration forums are available? How do you conduct diligence on the available forums? Is mediation an alternative? For any options, will your choice of dispute resolution mechanism, forum and procedure be enforceable? 2013 Baker & McKenzie International 15 Other FCPA and Related Considerations Global Equity Issues 2013 Baker & McKenzie International 16 8

Alternative Financing Structures: MLPs and Yieldcos Mona Dajani Chicago Typical MLP Structure 18 9

Simplified Yieldco Structure Public Control of YieldCo (no economic interest) Sponsor 25% of OpCo economics (net of YieldCo taxes) Cash (after tax) YieldCo Cash and allocations 75% of OpCo economics (exchangeable for YieldCo equity)* Could include MLP subordinated unit and IDR features, which would vary the 25%/75% sharing Control of OpCo + 25% of OpCo economics* OpCo Business assets 19 * Assumes YieldCo acquires a 25% economic interest in OpCo and Sponsor retains a 75% economic interest in OpCo High Level Comparison MLP vs. YieldCo vs. C Corp. MLP YieldCo Traditional C Corp Distribution policy Makes quarterly cash distribution Makes quarterly cash distribution Amount of dividends paid is typically far more limited Sponsor control Sponsor owns MLP's general partner, giving sponsor control of MLP regardless of percentage of MLP equity owned. No public election of directors if an LP Basic structure Public entity (the MLP) is a state law partnership (or sometimes an LLC) Public owns MLP common units Sponsor owns the MLP's general partner, MLP common and subordinated units and MLP incentive distribution rights 20 If YieldCo is a corporation or an LLC, there is public election of directors, but majority ownership of stock will ensure control of board. If YieldCo is an LP, control is the same as an MLP Public entity (YieldCo) is a state law corporation, partnership or LLC Public owns economic interests in YieldCo Sponsor owns noneconomic voting interests in YieldCo and possibly a general partner or managing member interest YieldCo and Sponsor coown OpCo Public election of directors, but majority ownership of stock will ensure control of boar Public entity is a state law corporation Public owns stock Sponsor owns stock 10

High Level Comparison MLP vs. YieldCo vs. C Corp. MLP YieldCo Traditional C Corp Fiduciary Duties Significantly modified by contract Corporation -- Default corporate law duties, though the charter renounces expectations of corporate opportunities Default corporate law duties Requirement for Majority Independent Board Shareholder Approval Required (Under Stock Exchange Rules) to Issue More Than 20% of Outstanding Equity LLC or LP -- Significantly modified by contract No No if a partnership or if a corporation or LLC and YieldCo is a controlled company No if an LP. Yes if an LLC No if an LP. Yes if an LLC a corporation No if YieldCo is a controlled company Yes. 21 Int l Tax Considerations in Connection with Base Erosion Profit Shifting (BEPS) Jurjen Bevers Amsterdam Susan Stone Houston 11

Impact of BEPS on the O&G industry Is BEPS a game-changer for the O&G industry? 23 24 12

BEPS related unilateral measures in 2014/2015 Below, we have indicated how many action items are followed-up or otherwise addressed by unilateral actions by the listed countries, out of a total of 10. It concerns 10 action items due to the reason that action items 8-10 are recognized as one action item and that action items 11, 14 and 15 are not included in the analysis. 10 9 8 7 6 5 4 3 2 1 0 25 BEPS related unilateral measures in 2014/2015 (cont d) From a total of 32 countries, including the major part of the G20 countries, 77 actions were taken. The chart below reflects the most popular action items that were addressed unilaterally in 2014. Action item 12 Action item 8-10 Action item 7 Action item 3 Action item 5 Action item 1 Action item 6 Action item 13 Action item 4 Action item 2 Total 0 2 4 6 8 10 12 The table below reflects which percentage of the 32 selected countries have taken action unilaterally in 2014 with respect to the action items listed below. 1 2 3 4 5 6 7 8-10 12 13 28% 38% 19% 38% 25% 28% 13% 13% 6% 34% 26 13

Considerations Increase tax compliance Increase tax uncertainty Change tax ruling practice (more difficult / full disclosure) Sustainability current internal tax policy? Likely to increase tax cash expenditure and effective tax rate (ETR) Revisit tax clauses in third party agreements, esp. gross-up clauses Shift from profits tax to source tax 27 Implications for the O&G industry - Concept of Official Selling Prices (OSP) - General anti-abuse rule in tax treaties - Specific focus on the relationship with Low Income Countries - Ownership of assets versus lease - Head office re-charges methodology and G&A expenses - Increased scrutiny of existing Transfer Pricing Policies - Potential for multilateral instrument and unilateral changes in treaty policy arising from BEPS 28 14

Risk Mitigation Post Macondo Brendan Cook Houston Risk Mitigation Post Macondo 15

Overview Macondo Litigation Status. Risk Mitigation Programs. Contract Implications. Indemnity and Insurance. 31 Tracking Macondo: Where Are We In 2015? 32 16

Developments in Multi-District Litigation MDL 2179 (focus) In re Oil Spill cases. Judge Barbier, Eastern District of Louisiana. High-profile, complex, encompasses majority of litigation issues. MDL 2185 Judge Ellison, Southern District of Texas. Securities class litigation set for trial January 11, 2016. Re-pleading of certain claims allowed in ERISA litigation. 33 In re Oil Spill MDL 2179 Claims include wrongful death, personal injury, economic damages, environmental, insurance and indemnity coverage. Three Trial Phases: Phase 1: Liability for Loss of Well Control. Phase 2: Quantification of Oil Spilled and Source Control Efforts. Penalty Phase: Amount of Civil Penalties Owed to the US under the CWA, per rulings in Phases 1 and 2. 34 17

MSJ (1/26/2012) Indemnity will cover gross negligence. Will not extend to punitive damages. Did not extend to CWA penalties, but did cover OPA. Can Breach of Contract vitiate indemnity? 35 MDL 2179 Phase 1: Liability Findings Feb. 22, 2012: District Court ruling on U.S. gov t MSJ re strict liability under Sec. 311(b)(7)(A) of CWA. BP and Anadarko strictly liable for subsurface discharge. Subsurface discharge from Macondo well rather than Deepwater vessel. 5 th Cir. affirmed District Court finding June 4, 2014. Denied rehearing 7-6 on July 21, 2014. Petition for cert. to SCOTUS filed April 9, 2015. 36 18

MDL 2179 Phase 1: Liability Findings Sept. 4, 2014: Liability and Fault Allocation Findings. BP, Transocean entities (excluding Transocean Ltd.), Halliburton liable under general maritime law for blowout, explosion, and spill form Macondo. BP s gross negligence, willful misconduct subject to enhanced civil penalties (set at maximum of $4,300/barrel). BP Operator and person in charge for purposes of CWA. U.S. and BP now arguing re merit of interlocutory appeal. 37 MDL 2179 Phase 2: Quantification Findings First conclusive finding re barrels of oil spilled. BP Estimate: 2.45 million barrels. DOJ: 4.1 million barrels. Judge Barbier: 3.19 million barrels. BP not grossly negligent in source control efforts Result: 3.19 M barrels subject to CWA penalty. 38 19

MDL 2179 Phase 3: Penalty Trial commenced January 20, 2015. Post trial briefing concluded April 24, 2015. Court to determine amount of civil penalties owed under CWA. Application of CWA penalty factors to Phase 1 & 2 findings. Efforts to mitigate, seriousness of violation, degree of culpability involved, extent already penalized, etc. Great discretion given to District Court. 39 Risk Mitigation 40 20

What Should An Effective Risk Management Strategy Include? A holistic plan that spans all stages of project development and operation. A balance between technical and human factors. A balance between leading and lagging indicators. Coordinate with third parties. 41 Preventative Maintenance Improve/assure safety. Corporate culture. Hazard awareness training. Technical/regulatory compliance. State of the art training. Improved well control. Aggressive risk management strategy. 42 21

Contractual Implications Contractual Liability Post-Macondo Departure from past regime of knock for knock indemnity The cause or degree of fault matters: limits indemnity. Increased need to expressly state all possible terms so as not leave anything open to interpretation. Indemnity for legal costs, defense costs, and gross negligence must be expressly stated to be valid in the U.S. When drafting indemnity and limited liability clauses, must account for the differences of enforcement in various jurisdictions. Ex: U.S. Circuit split over limited liability clauses. 44 22

Contract Negotiation: Operators v. Contractors Tug of war between operators and contractors. Contractors favoring increasingly specific indemnity provisions that include: Legal fees, defense costs, gross negligence, strict liability--must be expressly stated to be effective. Operators, on the other hand, likely to prefer more general clauses. Legal fees, defense costs, gross negligence not mentioned U.S. court likely to find no indemnity. 45 Contract Negotiation: Operators v. Contractors Now that there is no guarantee of indemnity or limited liability for certain damages (i.e. punitives), more and more likely that contractors will desire increased oversight and control. However, increased involvement in operators may increased exposure to liability. Realization that damages, liabilities (and resulting amount of indemnities) can be enormous may cause smaller operators, such as those in the North Sea, to stick to safer operations. 46 23

Indemnity Basics MSA is a building block for most operations. Must have valid "magic language" to obtain indemnity for one's own negligence. Indemnity (and magic language ) must be broad enough to extend to all intended beneficiaries. Anticipate and address possible restrictions on indemnity. Be aware of any issues relating to the scope of the indemnity or the scope of the MSA. Deepwater Horizon - indemnity for gross negligence (as opposed to release) is not against public policy under maritime law-indemnity for punitive damages is. 47 Carefully Consider Who Should be the Indemnitees Use defined term such as Company Group. Consider all parties you may want protected. Include contractors and subcontractors or use another approach to provide pass-through protection. Expand use of a Company Group. Allows consistent and uniform risk allocation scheme. Use same definition in insurance requirements and certificate of insurance. Use same definition in other contracts if at all possible. 48 24

Insurance Basics Named as additional insured. Waiver of subrogation. Coverage must be primary (at least for risks assumed by naming party). Insurance not a limit on indemnity. Dovetail insurance with indemnity-extend to same parties. Insurance may provide more protection in some instances. 49 Keys to Contractual Risk Allocation Understand big picture Recognize the impact of drilling contracts. Consider different reciprocal indemnity approaches. Prepare your pass-through" protection plan. Develop your master service agreements (MSA s) and analyze how other contracts will come in to play. Devil is in the details: Focus on the indemnity, insurance and limitation of liability. Coordinate with your risk management department and insurance broker. 50 25

Anti-bribery and Corruption / Compliance and Sanctions Reagan Demas Washington, DC Lance Stricklin Senior Counsel Int l Trade Compliance Halliburton Ross Denton London Steven Hill Washington, DC Danielle Valois Rio de Janeiro Top Tips for Managing Regulatory Hurdles on Global Transactions Luis Gomez London Jonathan Newton Houston Steven Hill Washington, DC 26

Global Merger Control State of Play Voluntary Regimes Australia, Bolivia, Chile, Costa Rica, Hong Kong, Malawi, New Zealand, Panama, Singapore, UK, Venezuela DM Ref: United States US$ 4.95m (2014) US$ 900,000 (2014) US$ 720,000 (2013) US$ 480,000 (2013) US$ 850,000 (2012) US$ 500,000 (2011) US$ 900,000 (2010) El Salvador US$759,000 (2013) Colombia US$484,000 (2011) Brazil US$987,000 (2015) US$270,000 (2014) US$1.25m (2013) Argentina US$27.5m (2010) Iceland US$91,000 (2010) Jersey US$139,000 (2011) Netherlands US$0.5m (2013) US$891,000 (2010) US$2.2m (2010) US$1.8m (2010) US$1m (2010) US$760,000 (2010) US$155,000 (2010) US$775,000 (2010) Ireland Transaction declared void (2010) France US$4.5m (2013) US$540,000 (2013) US$527,000 (2012) Portugal US$200,000 (2013) Spain US$5,702 (2014) US$61,000 (2013) US$385,000 (2012) US$124,500 (2012) US$101,000 (2012) US$45,700 (2011) US$4,000 (2011) US$188,000 (2010) European Union US$26.8m (2014) Czech Republic US$27,000 (2013) Italy US$5,600 (2013) US$3,400 (2013) US$11,000 (2012) US$7,000 (2011) Norway US$3.3m (2014) US$90,000 (2014) US$46,000 (2013) US$230,000 (2012) Bosnia & Herzegovina US$132,000 (2010) Germany US$120,000 (2013) US$560,000 (2011) US$271,000 (2011) Slovakia US$6,368 (2010) Latvia US$117,393 (2015) US$8,000 (2013) Lithuania US$401,000 (2013) US$43,000 (2012) Croatia US$1,487 (2013) Turkey US$91,000 (2013) South Africa US$140,000 (2010) Hungary US$98,000 (2010) US$22,000 (2010) Indonesia US$477,000 (2012) China US$50,000 (2014) South Korea US$190,000 (22 companies in 2012) Taiwan US$164,000 (2014) US$131,000 (2014) US$41,000 (2013) US$29,000 (2012) India US$500,000 (2014) US$160,000 (2014) US$160,000 (2013) US$80,000 (2013) Fines for gun-jumping / failure to notify: January 2010 May 2015 27

Global Merger Control Strategy Global Landscape Local rules Global Strategy Consistency Ensure arguments/positions are consistent across time and geography Encourage consistency as between authorities be an advocate for best practice and encourage/facilitate regulator coordination, if necessary, in complex deals Coordination will generate cost - efficiencies Flexibility Be attuned to local enforcement practices/trends Exploit local differences, where possible In-depth local knowledge helps to prioritise resources DM Ref: Global Merger Control and Market Definition Global Consistency, Locally Tailored Be sure to address local (legitimate) variations Prior authority decisions Local market differences The Funnel Approach to Market Definition* Widest (credible) market definition Likely (consensus) market definition Narrowest (conceivable) area of overlap * Less scope of manoeuvre in regional/global markets DM Ref: 28

Global Foreign Investment Restrictions Current State of Play DM Ref: 57 DM Ref: 58 29

Global Foreign Investment Restrictions Important Takeaways Energy Sector may be of Critical Importance Resource stewardship Energy security Critical infrastructure Source of revenue Considerations Is the investment target closed or severely restricted to foreigners? Target in a sensitive sector? Requirement (de jure or de facto) to team up with local investor? Investment threshold for review? Investor (in whole or in part) is a stateowned or controlled entity? Timing for approval? DM Ref: 59 U.S. CFIUS Reviews Current State of Play DM Ref: 60 30

DM Ref: 61 Summary of Top Tips on Regulatory Hurdles 1. Sensitive Industry - Expect Scrutiny 2. Global Coordination and Consistent Messaging, Key 3. Be Alert to Local Sensitivities- Understand the Rules (and the Enforcement Agencies) 4. Prepare for the Long-Haul (and Deploy Expediting Strategies, where possible) 5. Understand the Underlying Businesses EARLY AND FULL PLANNING ESSENTIAL DM Ref: 62 31