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, PartnerBruce 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

3

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

4

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

5

Resources

Alberta Reserves 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

6

Resources

2012 Production (vs worldwide) 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

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)

7

Investment Canada Act

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

8

New SOE Rules

Revised legislation (June 26, 2013) New SOE guidelines introduce four changes in assessing future

investments by SOEs: 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

9

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. Size of parties: all parties to transaction and affiliates having assets or

revenue from assets in Canada greater than $400 million; and2. 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

11

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)

12

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 Service Standards2 Average Waiting Periods(2011-2012 Q1 – Q3)

ARC Request N/A 14 Calendar Days (non-complex mergers)3

45 Calendar Days (complex mergers), or, if a SIR is issued, 30 Calendar Days after a full response to a SIR is submitted

11.1 Calendar Days (non-complex mergers)32.4 Calendar Days (complex mergers)

Notification 30 Calendar Days, PLUS, if applicable, 30 additional Calendar Days after a full response to a SIR is submitted

FILING FEES – COMPETITION ACT

Document Fee

ARC Request $50,000- no GST *where both a Notification and an ARC request are submitted with respect to the same transaction, only one fee applies

Notification $50,000- no GST

13

Executive Summary of Competition Act & Investment Act RequirementsNOTIFICATION – 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) $600 million (expected later in 2013 or early 2014) except for State Owned Entities (“SOEs”) which will remain at $344million

Book value of Canadian business’ assets (current calculation method)Enterprise value6 of the Canadian business (expected later in 2013 or early 2014)

None

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.

14

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.

 

15

Immigration

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

16

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

17

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

18

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

19

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”

20

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

21

Taxation

Withholding Tax (cont) Interest- 0% for interest paid to “arms length” parties- 25% for “participating” interest and interest paid to non-arms-

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

22

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)

23

Possible Structures

Corporation (Federal or Provincial)- limited residency requirements for directors (25% Federally and for

Alberta) “ULC” – Unlimited Liability Corporation Limited Partnership General Partnership Trust Joint Venture License Agreement Distributorship Consulting Agreement

24

Possible Methods of Investment

Equity Debt Combination IP Transfer/License Equipment Transfer/Lease

25

Business Factors

Commodity Price (and Exchange Rates) Costs Environmental Social License Regulatory Framework (new Alberta Energy

Regulator) First Nations

26

State of Industry In Alberta

Influences and Indicators: Worldwide Demand for Resources Product Pricing/Breakeven costs Cycles

Macro Annual

Shale Gas Fracking Issues LNG Service Companies Juniors Demand for skilled Personnel and Services

27

State of Industry In Alberta

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

28

State of Industry In Alberta

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

29

Contractual Pinch Points

Ownership percentage Governance Employment laws & severance payments Non-compete provisions Tax planning for repatriation of profits Future expansion opportunities Ownership of Intellectual Property

30

The Top 10

1. Canada is very open for foreign investment (only 3 refusals of foreign investment in last 30 years)

2. Significant demand for skilled professionals, processes and equipment particularly in Alberta

3. Win/win tax structure is possible, but be mindful of tax rules before finalizing any transaction

4. Massive development potential in resource sector (current recovery rates average just over 10%)

5. Reliable infrastructure, but challenges remain as evidenced by 4 major pipeline proposals to move oil and gas to international markets

6. Stable government and legislative regime with more centralized approval process

7. Numerous methods of accepted investment and operational structures, but due diligence is critical

31

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

32

Representative Transactions

BLG acts as government relations advisor to a pipeline company on a proposed $20 billion pipeline project

Acted for a major integrated oil company on a cross-border exchange of assets and facilities integration transaction valued at $11.7 billion

Acted for a drilling company with respect to its $6.7 billion reorganization

Acted for a domestic company with respect to its sale to a super-major for $3.2 billion

BLG acts for a foreign entity with respect to its participation in a $20 billion dollar LNG project in British Columbia

BLG acts for a major offshore east coast enterprise with respect to a multi-billion dollar expansion

Acted for a large services company in relation to the spinout of a division in a $2.3 billion acquisition

Acted for a drilling company in the $2.3 billion sale of its energy services and international drilling divisions

33

Representative Transactions

Represented numerous domestic companies with respect to takeovers by way of plans of arrangement totalling in excess of several billion dollars

Acted for a foreign entity in its $1.8 billion acquisition of an interest in a domestic company

Acted for a domestic company in its $1.3 billion acquisition by a foreign entity

Acted for a drilling company on its $1.3 billion acquisition by a services company

Acted as advisor to the developer of a proposed $1.2 billion liquefied natural gas facility and related pipeline and terminal facilities

Acted in relation to a $1.1 billion joint venture for the construction and operation of an ethylene petrochemical plant

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

34

Representative Transactions

Acted for a domestic company with respect to sale of an interest in a hydro-electric plant for approximately $825 million

Acted for a major producer in its US$588 million acquisition of all the issued and outstanding shares of another producer and certain assets

BLG acts for a transmission company with respect to a proposed gas storage business acquisition valued in excess of $500 million

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

Acted on behalf of one of the participants in a joint project for the construction and operation of a $250 million derivatives production plant

35

Thank you!

Colin P. MacDonald, Partner

403.232.9523 cmacdonald@blg.com

Bruce A. Lawrence, Partner

403.232.9597 blawrence@blg.com

36 DM # - 1404554