CHAPTER 4 WHEN INTERNATIONAL ISSUES ARE RELEVANT TO THE DOMESTIC DEAL

JurisdictionUnited States
Due Diligence in Oil and Gas Transactions
(May 2011)

CHAPTER 4
WHEN INTERNATIONAL ISSUES ARE RELEVANT TO THE DOMESTIC DEAL

Scot Anderson
Davis Graham & Stubbs LLP
Denver, Colorado
Craig Spurn
Venn Law LLP
Calgary, Alberta

SCOT W. ANDERSON is a partner at Davis Graham & Stubbs LLP in Denver. His practice focuses on commercial transactions and project development, with specialization in international transactions and transactions involving the mining, oil and gas, and energy industries. Mr. Anderson has worked on transactions in the United States, Europe, Africa, South America, and Australia. He has been engaged in the full sweep of project development in the power, mining and petroleum industries, from drafting construction and operations agreements to negotiating downstream sales arrangements. He has represented a number of clients with projects on Indian lands. Mr. Anderson began his legal career with the Denver office of Arnold & Porter, working primarily on environmental issues, permitting, and product liability litigation. He joined ARCO Coal Company in 1991. During his tenure with ARCO Coal, he worked on the full range of issues affecting the coal industry. He provided advice to the company's marketing group on coal sales and transportation contracts, and litigated major coal contract disputes. He assisted mine operations with permitting and compliance issues, and represented the mines in administrative proceedings under the Surface Mine Control and Reclamation Act (SMCRA), the Mine Safety and Health Act (MSHA), state regulatory programs, and various environmental laws. He also participated in the development of various proactive training programs and related program development, including internal compliance auditing. He worked on federal coal leasing issues, and the acquisition and divestiture of coal properties. Finally, he advised the coal company on issues related to potential mine acquisitions in China and South America, and traveled to Australia to work on a bid for mine mouth power projects during the privatization of the Victoria power industry. Mr. Anderson moved from ARCO Coal to Guildford England, where he represented ARCO British Limited, ARCO Europe and North Africa Limited, and ARCO Global Energy Ventures. While in England, he served as the Legal Manager for the Southern Gas Basin of the North Sea. In that role, Mr. Anderson dealt with the full range of day-to-day operational issues affecting ARCO British properties in the North Sea. He drafted and negotiated gas sales agreements, and helped ARCO British establish its gas trading desk. He drafted negotiated joint operating agreements, gas balancing agreements, pipeline agreements, rig contracts, farm-ins, processing and transportation arrangements, and other operational agreements. He also participated in the negotiations to allow development of the Elgin-Franklin and Shearwater Field in the northern North Sea, which involved a dozen oil and gas companies. While in England, Mr. Anderson also worked on projects in Europe and North Africa. He worked on acquisitions and divestures of oil and gas properties in the Netherlands, Norway, Romania, Tunisia, and Algeria. He also participated in negotiations related to ARCO's participation in the Interconnector, which linked England's gas market to Europe. He negotiated some of the first gas sales agreements selling British gas to the European market. He also worked on power development projects in Ireland, Belgium, and England. He was ARCO's lead lawyer in the construction of the Great Yarmouth Power Project in England, which was financed using non-recourse project financing. Mr. Anderson joined Davis Graham & Stubbs in 2000. Since joining DGS, he has worked on the full sweep of issues affecting the coal, oil and gas, hardrock mining, and renewable energy industries. He has represented clients in administrative proceedings, and in federal and state courts. He has worked on complex transactions for natural resources clients, including the formation of new joint ventures, the divestiture of natural resources projects, and the acquisition of leases and reserves for coal mining, renewables, and oil and gas clients. He continues to advise clients on the full scope of legal issues affecting the natural resources industry. He has extensive experience addressing issues related to mineral development of federal public lands and Indian lands. He continues to work on international energy projects, including projects in Europe, South America, and Africa. He also served as an expert witness in a proceeding concerning the sale of coal from Venezuela. Mr. Anderson is a member of the bars of Colorado and the District of Columbia, as well as the courts of the Ute Indian Tribe of the Uintah and Ouray Reservation. He is an active member of the Rocky Mountain Mineral Law Foundation, the Colorado Mining Association, the International Bar Association, and the Association of International Petroleum Negotiators. He currently serves as chairman of the Board of Directors of Boys Hope Girls Hope of Colorado, a multi-denominational nonprofit benefiting urban children. Mr. Anderson is also a past president of the Denver Chapter of the International Mining Professionals Association. He is listed in Best Lawyers in America and in Who's Who Legal - Oil and Gas 2009.

CRAIG SPURN is Partner at Venn Law LLP in Calgary, focusing on oil and gas law. Previously with Blake at Cassels & Graydon LLP, Craig's clients include senior, mid-sized and junior Canadian and foreign energy companies, income funds, service and technology providers, and private capital firms. He has extensive experience in local and international oil- and gas-related transactions and projects, including heavy oil, oil sands and unconventional gas projects. Craig is recognized as one of Canada's leading energy lawyers by Chambers Global: The World's Leading Lawyers for Business and by Law Business Research's The International Who's Who of Business Lawyers.

"This is a national security issue," R. James Woolsey, director of the C.I.A. in the Clinton administration, said in a hearing of the House Armed Services Committee. "China is pursuing a national strategy of domination of the energy markets and strategic dominance of the western Pacific."

New York Times, July 14, 2005.1

Not every foreign investment in the United States gets quite the same scrutiny as the proposal by CNOOC, the Chinese state-controlled oil and gas company, to purchase Unocal in 2005. Still, when foreign investment intersects with our increasingly strategic domestic natural resources, some unique issues arise.2 This paper explores some of those issues, and their related relevance to the due diligence process.

I. Mineral Interests

A. Mineral Leasing Act

The United States grants the right to develop certain minerals by leasing those mineral rights to potential developers. These leases are granted under the Mineral Leasing Act of 1920 (as amended).3 Leasable minerals include oil and gas, and oil shale.4 The Mineral Leasing Act

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restricts leasing these minerals to foreign citizens or companies. Leasable minerals "shall be subject to disposition in the form and manner provided by this chapter to citizens of the United States, or to associations of such citizens, or to any corporation organized under the laws of the United States, or of any State or Territory thereof, or in the case of coal, oil, oil shale, or gas, to municipalities. Citizens of another country, the laws, customs, or regulations of which deny similar or like privileges to citizens or corporations of this country, shall not by stock ownership, stock holding, or stock control, own any interest in any lease acquired under the provisions of this chapter."5

As a result, the regulations implementing the Mineral Leasing Act include restrictions on leasing to non-U.S. citizens. The regulations relating to leasing of oil and gas provide that leases may be issued only to "citizens of the United States; associations (including partnerships and trusts) of such citizens; corporations organized under the laws of the United States or of any State or Territory thereof; and municipalities."6 The regulations further address how non-U.S. companies may hold federal mineral leases: "Leases or interests therein may be acquired and held by aliens only through stock ownership, holding or control in a present or potential lessee that is incorporated under the laws of the United States or of any State or territory thereof, and only if the laws, customs or regulations of their country do not deny similar or like privileges to citizens or corporations of the United States. If it is determined that a country has denied similar or like privileges to citizens or corporations of the United States, it would be placed on a list available from any Bureau of Land Management State office."7

Thus, the general rule under the Mineral Leasing Act and its implementing regulations allow United States corporations to hold federal leases, but doesn't allow the same flexibility to other forms of business entities, such as limited liability companies, master limited partnerships ("MLPs"), or other partnerships. The Department of the Interior considered precisely this issue in the context of similar restrictions on federal oil and gas leases when revising those regulations. One comment on the revised regulations argued that an MLP should be able to take advantage of the flexibility offered to corporations when addressing alien ownership. DOI demurred: "The fact that the [Mineral Leasing] Act does not reflect recent investment practices does not provide a basis for an interpretation of the Act that would accord a master limited partnership the same status as a corporation."8

The standard approach to solving this limitation in the context of oil and gas leases is to require each limited partner to certify that he or she is a U.S. citizen.9 It is...

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