Chinese Energy Investments into the U.S.
Mingda Zhao | May 13, 2013
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Introduction
• 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
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Trends in Exploration Activity
Source: EIA, Annual Energy Outlook Executive Summary (2012)
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Drilling Activity
Source: Wall Street Journal, October 18, 2011
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Trends in Exploration Activity
Source: fracktracker.org
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Foreign Joint Venture Investment in U.S. Shale Gas and Tight Oil Plays
Foreign
Partner
Country
Domestic
Partner
Shale Play
BP
BG
Statoil
UK
UK
Norway
Chesapeake
EXCO
Chesapeake
Woodford
Marcellus
Marcellus
1.70
0.95
3.38
2008
2009
2009
Reliance
Reliance
Reliance
Total
CNOOC
BG
Mitsui
CNOOC
KNOC
Marubeni
Mitsui
GAIL
Total
Sinopec
Marubeni
Indian Oil
Sumitomo
Sinopec
Sinochem
Tokyo Gas
India
India
India
France
China
UK
Japan
China
Korea
Japan
Japan
India
France
China
Japan
India
Japan
China
China
Japan
Pioneer
Atlas
Carrizo
Chesapeake
Chesapeake
EXCO
Anadarko
Chesapeake
Anadarko
Marathon
SM Energy
Carrizo
Chesapeake/EnerVest
Devon
Hunt Oil
Carrizo
Devon
Chesapeake
Pioneer
Quicksilver
Eagle Ford
Marcellus
Marcellus
Barnett
Eagle Ford
Haynesville
Marcellus
Niobrara
Eagle Ford
Niobrara
Eagle Ford
Eagle Ford
Utica
TMS, Niobrara, Utica
Eagle Ford
Niobrara
Cline, Midland-Wolfcamp
Mississippi Lime
Wolfcamp
Barnett
1.36
1.7
0.39
2.25
1.08
1.3
1.4
0.57
1.55
0.27
0.68
0.1
2.3
2.2
1.3
0.08
1.36
1.02
1.7
0.485
2010
2010
2010
2010
2010
2010
2010
2011
2011
2011
2011
2011
2012
2012
2012
2012
2012
2013
2013
2013
Total……
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Amount
($B)
Year
29.12
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Certain Considerations
• 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
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Deal Structure
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
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Company Formation & Jurisdictional Planning in the U.S.
• 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
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Taxation the U.S.
• 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
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Technology
• 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
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U.S. Land and Mineral Ownership
• 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
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Foreign Ownership Restrictions
• Federal onshore leases
• Federal offshore leases
• State leases
• Indian leases
• Solutions
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Potential Transaction Issues
CFIUS Overview

Committee on Foreign Investment in the United States



Key jurisdictional elements:



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
Foreign acquirer
Control of U.S. business
CFIUS filing timeline:
Initial Review (30 Days)
Full Investigation (45 Days)
Presidential Consideration
(15 Days)
• Commences upon
accepted “complete”
filing.
• If identified national security
concern, CFIUS commences full
investigation.
• If no settlement,
President has
final authority.
• Review by CFIUS
members. Majority of
reviews completed at this
stage.
• Common for state-controlled
acquirors and sensitive
assets/industries.
• Exceedingly rare
to submit to
President.
Typical Total Process From Filing Date (90 Days)
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Potential Transaction Issues
CFIUS Overview (Cont’d)
• An increased percentage of CFIUS filings continue to be subjected to a secondlevel “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.
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U.S. Competition Review – Antitrust Scrutiny/HSR
• 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)
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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
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Foreign Corrupt Practices Act (FCPA)
• 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
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Practical Chinese Regulatory Approval Process
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Labor
• Integration of Company Culture
– Language
– Management style
• Labor Contract Management
– Retention Strategy
– Compliance with local laws
– Labor union
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Issues that May Encounter during Integration Process
• 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
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Q&A
Thank You
Mingda Zhao
Vinson & Elkins LLP
mzhao@velaw.com
+1.713.758.2069
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