Oil & Gas Law Report

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Foreign Investment in Energy – Basic Initial Considerations

Inspired by CNOOC‘s recent $15.1 billion bid on Nexen Inc., a growing number of foreign firms (particularly those in Asia) are becoming interested in doing energy deals in North America. 

Without going into the technical details, here are some of the tips that the foreign firms should consider when structuring deals with U.S. energy firms:

  • Due Diligence.  A foreign firm should pay attention to due diligence, when it attempts to identify and evaluate opportunities.  In North America’s vast energy markets, there are literally thousands of targets, ranging from the small coal reserve companies with asset value of multi-million dollars, to the large oil and gas companies with EBITA of hundreds of millions or even billions of dollars.  Deals may take the form of an acquisition, joint venture, partnership, distribution or import/export arrangement.  When performing due diligence, a foreign firm should look at not only the target company’s finances, management, and business model, but also larger factors such as the available infrastructure (e.g., transportation),political climate, and regulations that affect the target company.  Once a target company is identified, the foreign firm, through its engaged representatives (usually, a law firm or investment banking firm with significant experience in similar deals), can approach the target, investigate its business and help a foreign firm decide if the target presents a good business opportunity with acceptable risk.

Production in “Paying Quantities”

The Point: Oil and gas leases are specialized instruments of real estate and contract law. The very existence of the lease can turn on court opinions over 100 years old (with little between now and then) and the court’s interpretation of something as ephemeral as “good faith” can be determinative. Curative documents, a royalty check endorsement, division orders and the like may clarify ambiguities when a lot of money is at stake.

Discussion: The relationship between the owner of minerals (which may be different from the owner of the surface, the subject of a future blog) and the oil company is typically defined in and oil and gas lease where the Owner, in a contract, grants to Lessee defined rights to the property in exchange for promises and money. The length of the lease, the term, is addressed in one of the most important provisions the lease — the “habendum” or term clause, which usually appears near the beginning of the lease. The term clause in an oil and gas lease is the product of long development and experience. It attempts to reconcile the competing interests of the parties. Owner wants a well and its royalty payments quickly (a short term) while Lessee wants flexibility and as much time as possible (a long term). Given the new interest in oil and gas production in Ohio, it is crucial to understand the term clause for both old/existing leases and new ones.…