THE 10 MOST IMPORTANT THINGS TO
KNOW WHEN DOING BUSINESS IN THE
OIL AND GAS SECTOR IN CANADA
Presented to:
Italian Business Mission to Canada
October 18, 2013
Colin P. MacDonald, Partner
Bruce A. Lawrence, Partner
Overview
1. Introduction
2. Overview of Resource Ownership
3. Doing Business In Canada
(a) Foreign Investment Legislation
(b) Competition (Anti Trust) Legislation
(c) Immigration
(d) Tax Implications
(e) Structures and Investment Methods
(f) Business Factors and the State of the Oil and Gas Industry
4. Contractual Pinch Points and Representative Transactions
5. Top Ten Issues
2
Ownership of Resources
THREE LEVELS:
 Federal Government
 Very modest holdings
 Provincial Government
 Approximately 81%
 Freehold (Individuals and Corporations)
 Isolated
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Resources
 Alberta is in the middle of the prolific Western Canadian
Sedimentary Basin
 While the WCSB is predominately in Alberta, now extends
commercially into Northeastern British Columbia and
Saskatchewan
 The Bakken formation extends up from North Dakota into
Saskatchewan
 We have an abundance of hydrocarbons:
• Oil sands
• Heavy oil
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Resources
•Light and medium crude
•Natural Gas
 About ⅓ produced in Alberta is sour (H²S)
 Shale or tight gas
 Coalbed Methane or Natural Gas from Coal
•Coal
 98% of Canada’s oil reserves are in Alberta
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Resources
 Alberta Reserves
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169 billion barrels of recoverable bitumen (based on a 9%
recovery rate)
1.5 billion barrels of recoverable conventional oil (based on an
8% recovery rate)
35 trillion cubic feet of recoverable natural gas (based on a 16%
recovery rate)
33 billion tons of marketable coal
500 trillion cubic feet of coal bed methane reserves
Resources
 2012 Production (vs worldwide)
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Alberta is the largest producer of bitumen (704 million barrels)
Canada is the 6th largest producer of oil (3.2 million barrels per
day)
Alberta is the 3rd largest natural gas producer (3.7 trillion cubic
feet)
 Alberta has the 3rd highest petroleum reserves in the
world
 Oil Sands Projects
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Approximately 127 operating projects (only 5 are surface mining)
Estimated investment in 2012 is $27 billion (in addition to $37
billion for conventional oil and gas)
Investment Canada Act
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Federal legislation
All acquisitions of Canadian businesses by non-Canadians are subject
to notification
Acquisitions of control of Canadian businesses in excess of monetary
thresholds are subject to review
Currently $344 million (based on “book value”); announced changes to
increase to $1 billion, with an interim increase to $600 million later in
2013 (except for State Owned Enterprises (SOEs) which remain at $344
million) and anticipated replacement of “book value” with “enterprise
value”
Exceptions include cultural businesses and non-WTO investors ($5
million threshold) and investments by non-Canadians that may be
“injurious to national security” (no $ threshold)
Recent Significant Amendments
New SOE Rules
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Revised legislation (June 26, 2013)
New SOE guidelines introduce four changes in assessing future
investments by SOEs:
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Investments by foreign SOEs to acquire control in Canadian oil sands
business will be found to be of “net benefit” only in exceptional
circumstances
In other sectors of the Canadian economy, the Minister of Industry will
closely examine:
• The degree of control or influence a SOE would likely exert on the
Canadian business that is being acquired
• The degree of control or influence a SOE would likely exert on the
industry in which the Canadian business operates
• The extent to which a foreign state is likely to exercise control or
influence over the SOE acquiring the Canadian business
New SOE Rules
 Free enterprise principles and industrial efficiency are additional
criteria that will be used during assessment where investor is
owned, controlled or influenced – directly or indirectly – by a foreign
state
• “Influence” is a new concept that broadens the definition of a
SOE
 The review threshold will be increased to $1 billion over a four year
period (not for SOEs – remains at $344 million)
• Basis of the calculation of the threshold will be changed from
“asset value” to “enterprise value”
• “enterprise value” to be defined in Regulations
10
Competition Act
 Federal legislation
 Purpose is to maintain and encourage competition in
Canada to promote efficiency and adaptability of the
Canadian economy
 Two financial thresholds trigger a notification obligation:
1.
2.
Size of parties: all parties to transaction and affiliates having assets or
revenue from assets in Canada greater than $400 million; and
Size of transaction: target has assets or revenues from those assets in
Canada greater than $80 million
 An initial 30 day merger review period followed by a
possible second request
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Tips
 If a Competition Act filing is necessary, negotiate the sharing of the
$50,000 filing fee
 Even if the transaction size falls below the notification threshold, the
Commissioner of Competition can challenge a merger if market
share is high or if there would be a substantial lessening or
prevention of competition
 If a proposed transaction might be politically sensitive, consider
meeting government officials early in the process to provide a
heads-up and to determine any potential problems
 When communicating with Government about proposed transaction,
consider whether you need to register such communication under
lobbyist registration legislation (there is federal and provincial
legislation to consider)
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Executive Summary of Competition
Act & Investment Act Requirements
TRANSACTION THRESHOLDS1– COMPETITION ACT
Threshold
2013 Amount
Calculation
Source of Calculation
Party-size
$400 million
Aggregate book value (of all parties, together with affiliates) of assets in
Canada or gross revenues from sales in, from or into Canada
Most recent audited financial
statements
Transaction-size
$80 million
Aggregate book value of transaction assets in Canada, or annual gross
revenues from sales in or from Canada generated from those assets
WAITING PERIODS – COMPETITION ACT
Document
Statutory Waiting Period
ARC Request
N/A
Notification
Service Standards2
14 Calendar Days (non-complex mergers)3
45 Calendar Days (complex mergers), or, if a
SIR is issued, 30 Calendar Days after a full
30 Calendar Days, PLUS, if applicable, 30
additional Calendar Days after a full response to a response to a SIR is submitted
SIR is submitted
Average Waiting Periods
(2011-2012 Q1 – Q3)
11.1 Calendar Days (noncomplex mergers)
32.4 Calendar Days (complex
mergers)
FILING FEES – COMPETITION ACT
Document
Fee
ARC Request
$50,000- no GST
Notification
$50,000- no GST
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*where both a Notification and an ARC request are submitted with respect to
the same transaction, only one fee applies
Executive Summary of Competition
Act & Investment Act Requirements
NOTIFICATION – INVESTMENT CANADA ACT
Who Must File Notification
When Notification Filed
Filing Fee
“Non-Canadians” must file a notification each and every time a new business activity is commenced in
Canada and on each acquisition of control of an existing “Canadian business” where the acquisition is
not a reviewable transaction.4
Within 30 Calendar Days after implementation
of investment
None
REVIEWABLE TRANSACTIONS – INVESTMENT CANADA ACT
Who Must File Application for Review
2013 Threshold5
Calculation of Threshold
Filing Fee
“Non-Canadians” must file a review application on each
acquisition of control of an existing “Canadian business” where
the acquisition meets or exceeds the applicable threshold.
$344 million (current threshold)
Book value of Canadian business’ assets
(current calculation method)
Enterprise value6 of the Canadian business
(expected later in 2013 or early 2014)
None
$600 million (expected later in 2013
or early 2014) except for State
Owned Entities (“SOEs”) which will
remain at $344million
NATIONAL SECURITY REVIEW – INVESTMENT CANADA ACT
Document
Notice of Review
Timing
Notification or
Application for Review
Where the Minister has reasonable grounds to believe that an
investment could be injurious to national security, the Minister
may notify the Investor that the investment may be reviewed,
notwithstanding the value or size of the proposed transaction.
The time period runs from the time the Minister becomes aware of the investment to the
date which is 45 Calendar Days after the relevant starting point.7 Recently passed
amendments to the Investment Canada Act extend the maximum timeline for
transactions subject to national security screening review by an additional 25 days or as
agreed between the foreign investor and the Government. Where a notice is sent to an
Investor, the Governor in Council has 25 Calendar Days from the date of the notice to
order a review of the transaction.
WAITING PERIODS – INVESTMENT CANADA ACT
Document
Statutory Waiting Period
Notification
Not applicable
Application for Review
45 Calendar Days, extendable by Minister for an additional 30 Calendar Days (further extensions are permitted if both the Minister and Investor agree).
Normal time period is 75 days plus for a review.
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Executive Summary of Competition
Act & Investment Act Requirements
Defined Terms:
“ARC” means Advance Ruling Certificate; and
“Notification” means a notification in respect of a notifiable transaction under Part IX of the Competition Act.8
“SIR” means a Supplemental Information Request issued by the Competition Bureau within 30 days after receiving a Notification, which SIR requires the parties to
supply additional information that is relevant to the assessment of the proposed transaction.
Footnotes
1.
If a proposed transaction exceeds the two thresholds: i) Party-size ($400m Cdn); and ii) Transaction-size ( $80m Cdn), then the transaction cannot close until the
Competition Bureau issues an ARC or a "no action" letter. In the case of a share transaction, the acquisition of more than 20% of the voting shares of a public
entity or 35% of the voting shares of a private entity triggers a filing notification if the thresholds are exceeded. Notwithstanding whether the thresholds are
exceeded, the Competition Bureau may challenge a transaction if, as a result of the proposed transaction, there is a substantial prevention or lessening or likely
prevention or lessening of competition in the relevant market.
2.
The service standards are practical guidelines published by the Competition Bureau. Since 2010, the Competition Bureau has met the service standard waiting
periods in over 90% of cases.
3.
The Competition Bureau designates mergers as “complex” or “non-complex” normally within 5 business days of receipt of the ARC Request or Notification.
4.
“Non-Canadian” and “Canadian business” are defined in section 3 of the Investment Canada Act.
5.
The current threshold is $344 million, calculated by the book value of the Canadian business’ assets. On June 26, 2013, the Government passed amendments
to the legislation that will raise the threshold to $600 million in enterprise value for two years, commencing the day the amendments come into force. It will then
rise to $800 million for the following two years before reaching $1 billion. The new regulations are not in effect until they are registered into Canadian law,
which we expect to occur later in 2013 or early 2014.
6.
For public entities, enterprise value is equal to the market capitalization of the entity, plus liabilities, less cash and cash equivalents. Market capitalization is
calculated over a 20-day period where the notice or application is filed before the implementation of the investment or on the date of which the investment is
implemented in all other cases. Liabilities, cash and cash equivalents are determined using the most recently available quarterly financial statements. For
private entities, enterprise value is equal to the total acquisition value of the Canadian business, plus liabilities, less cash and cash equivalents. This definition
of enterprise value is still subject to pending regulations.
7.
For reviewable investments, the 45-day period begins on the date of certification of the application; for notifiable investments, it begins on the date of
certification of the notification; for all other investments the 45-day period begins on the date of implementation of the investment. The June 26th amendment to
the legislation increased the waiting time by an additional 25 days.
8.
Where a notifiable transaction involves a transportation undertaking, then the parties must also file a notification with the Minister of Transport pursuant to
subsection 53.1 of the Canada Transportation Act. Where the transportation undertaking is an air transportation undertaking, a notification must also be sent to
the Canadian Transportation Agency. These notifications take the same form as a notification under the Competition Act, but must also include information
relating to the public interest as it relates to national transportation.
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Immigration
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Canadian Immigration rules are reasonably facilitative for citizens of Italy
wishing to visit Canada for business purposes or for short or longer term
transfers
For certain short term visits for business purposes (such as to attend
business meetings), no visa or “work permit” is required if they are citizens
of Italy. If they are not Italian citizens or citizens of another visa-exempt
country, they may need to apply for a Temporary Resident Visa (TRV) first
in order to enter Canada
Canada’s Temporary Foreign Worker Program (TFWP) allows for the
transfer of senior managers and specialized knowledge workers from a
foreign entity to a related affiliate, branch, parent or subsidiary in Canada
without the need to obtain a Labour Market Opinion (LMO) from Service
Canada. This exemption from the requirement to recruit in the Canadian
labour market first is one of the quickest and most convenient methods for
certain categories of foreign business persons to work in Canada
Immigration
 In order to qualify under the intra-company transferee category, a
business must be or will be doing business in both Canada and the
foreign country. In addition, the applicant must be currently
employed by a multi-national company and have been employed
continuously by the foreign enterprise in a similar full-time position
for at least 1 year within the 3-year period immediately preceding the
date of application
 The person must be transferred to Canada for a temporary period in:
(i) an executive or senior management position, or (ii) possess
specialized knowledge of a company’s products or services and its
application in international markets or an advanced level of
knowledge or expertise in the company’s processes or procedures
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Immigration
 If the intra-company transferee category or another exemption
category does not apply, the Canadian entity may be required to
advertise the position or demonstrate other recruitment efforts to
hire a Canadian citizen or permanent resident first in order to obtain
an LMO that allows them to hire a foreign worker
 There are also various other routes through which foreign
employees are able to obtain authorization to remain in Canada on a
permanent basis
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Taxation
 Three Levels:
 Federal
 Provincial
 Municipal
 Business Structure for Non-Residents
 Non-residents typically take into account Canadian and
their own domestic tax considerations in determining
structure for Canadian investments
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Taxation
Income Taxation
 Income tax is levied on Canadian resident corporations
(including those owned by non-residents) on their
individual income and non-residents who carry on
business in Canada or dispose of certain types of
Canadian based property (eg. land)
 General corporate rate is 15% Federal tax plus Provincial
tax (10% in Alberta) = 25% total
 Income subject to Federal and Provincial tax generally
includes business income, passive income (interest, rents
and royalties) and 50% of capital gains on the sale of
certain “capital property”
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Taxation
Withholding Tax
 Certain payments made from Canada to
non-residents are subject to 25% withholding tax
 Rate may be reduced under the terms of a tax treaty
 Applies to passive payments as well as management
and similar fees
 Dividends
- often reduced to 5% or 15% under the Canada-Italy
Treaty
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Taxation
Withholding Tax (cont)
 Interest
- 0% for interest paid to “arms length” parties
- 25% for “participating” interest and interest paid to nonarms-length parties; but subject to a reduction to 10% under
the Canada-Italy Tax Treaty
 Rents and Royalties
- 25%; but generally subject to reduction to 10% (5% in the
case of certain software) under the Canada-Italy Tax Treaty
 Return of Equity Capital
- no withholding tax
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Taxation
Goods and Services/Sales Tax
 Federal Good and Services Tax (GST) of 5%
 Certain Provinces also levy a Provincial sales tax (PST) –
not in Alberta
 Certain Provinces have combined GST + PST =
Harmonized Sales Tax (HST)
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Possible Structures
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Corporation (Federal or Provincial)
- limited residency requirements for directors (25% Federally and
for Alberta)
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“ULC” – Unlimited Liability Corporation
Limited Partnership
General Partnership
Trust
Joint Venture
License Agreement
Distributorship
Consulting Agreement
Possible Methods of Investment
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Equity
Debt
Combination
IP Transfer/License
Equipment Transfer/Lease
Business Factors
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Commodity Price (and Exchange Rates)
Costs
Environmental
Social License
Regulatory Framework (new Alberta Energy
Regulator)
 First Nations
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State of Industry In Alberta
 Influences and Indicators:
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Worldwide Demand for Resources
Product Pricing/Breakeven costs
Cycles
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Macro
Annual
Shale Gas
Fracking Issues
LNG
Service Companies
Juniors
Demand for skilled Personnel and Services
State of Industry In Alberta
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Current conditions: Cloudy
Long Range Forecast: Gradual improvement
Capital budgets are being monitored closely
Capital raising activities almost stopped, but now seem to be
restarting for mid caps
Smaller entities cannot raise money, except at very dilutive
levels
Dry gas surplus
Pipeline bottleneck
Oil Sands currently has a bullseye on its back
State of Industry In Alberta
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Opportunities!
 Cost reductions and efficiencies at every level of exploration,
drilling, production, refining and delivery
 Pipelines
 Refining and upgrading design and manufacturing
 New drilling and completion technology
 Fracking technology
 Pad drilling
 Water use reduction
 Disposal techniques and processes
 Environmental impact improvements
Contractual Pinch Points
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Ownership percentage
Governance
Employment laws & severance payments
Non-compete provisions
Tax planning for repatriation of profits
Future expansion opportunities
Ownership of Intellectual Property
The Top 10
1.
2.
3.
4.
5.
6.
7.
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Canada is very open for foreign investment (only 3 refusals of foreign
investment in last 30 years)
Significant demand for skilled professionals, processes and equipment
particularly in Alberta
Win/win tax structure is possible, but be mindful of tax rules before finalizing
any transaction
Massive development potential in resource sector (current recovery rates
average just over 10%)
Reliable infrastructure, but challenges remain as evidenced by 4 major
pipeline proposals to move oil and gas to international markets
Stable government and legislative regime with more centralized approval
process
Numerous methods of accepted investment and operational structures, but
due diligence is critical
The Top 10
8. Understand and allow time for regulatory approvals if needed
(Competition Act, Investment Canada Act, importation of equipment,
other)
9. Contractual considerations and negotiations are not unique
10. Strong Rule of Law imbedded in business transactions
11. Immigration rules are reasonably facilitative
12. Join industry associations which offer good sources of market
intelligence, aggregate market statistics and opportunities for
networking (CAPP, CAODC, PSAC to name a few)
13. Discuss internal approval processes and timeframes sooner than
later
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Representative Transactions

BLG acts as government relations advisor to a pipeline company on a proposed $20
billion pipeline project
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Acted for a major integrated oil company on a cross-border exchange of assets and
facilities integration transaction valued at $11.7 billion
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Acted for a drilling company with respect to its $6.7 billion reorganization
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Acted for a domestic company with respect to its sale to a super-major for $3.2 billion
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BLG acts for a foreign entity with respect to its participation in a $20 billion dollar LNG
project in British Columbia
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BLG acts for a major offshore east coast enterprise with respect to a multi-billion
dollar expansion
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Acted for a large services company in relation to the spinout of a division in a $2.3
billion acquisition
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Acted for a drilling company in the $2.3 billion sale of its energy services and
international drilling divisions
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Representative Transactions
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Represented numerous domestic companies with respect to takeovers by way of
plans of arrangement totalling in excess of several billion dollars
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Acted for a foreign entity in its $1.8 billion acquisition of an interest in a domestic
company
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Acted for a domestic company in its $1.3 billion acquisition by a foreign entity
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Acted for a drilling company on its $1.3 billion acquisition by a services company
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Acted as advisor to the developer of a proposed $1.2 billion liquefied natural gas
facility and related pipeline and terminal facilities
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Acted in relation to a $1.1 billion joint venture for the construction and operation of an
ethylene petrochemical plant
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Acted for an entity in its acquisition of natural gas interests for approximately $1.1
billion, as well as provided advice and direction on joint venture agreements, pipeline
issues and competition law
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Representative Transactions
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Acted for a domestic company with respect to sale of an interest in a hydro-electric
plant for approximately $825 million
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Acted for a major producer in its US$588 million acquisition of all the issued and
outstanding shares of another producer and certain assets
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BLG acts for a transmission company with respect to a proposed gas storage
business acquisition valued in excess of $500 million
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Acted for a drilling company in its US$320 million acquisition of another entity’s
worldwide land drilling assets located in Saudi Arabia, Oman, Kuwait, Egypt and
Venezuela
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Acted on behalf of one of the participants in a joint project for the construction and
operation of a $250 million derivatives production plant
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Thank you!
Colin P. MacDonald, Partner
403.232.9523 cmacdonald@blg.com
Bruce A. Lawrence, Partner
403.232.9597 blawrence@blg.com
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DM # - 1404554