THE 10 MOST IMPORTANT THINGS TO KNOW WHEN DOING BUSINESS IN THE OIL AND GAS SECTOR IN CANADA

1. 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

2. Overview • Introduction • Overview of Resource Ownership • Doing Business In Canada • Foreign Investment Legislation • Competition (Anti Trust) Legislation • Immigration • Tax Implications • Structures and Investment Methods • Business Factors and the State of the Oil and Gas Industry 4.Contractual Pinch Points and Representative Transactions 5. Top Ten Issues

3. Ownership of Resources THREE LEVELS: • Federal Government • Very modest holdings • Provincial Government • Approximately 81% • Freehold (Individuals and Corporations) • Isolated

4. 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

5. 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

6. 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

7. Resources • 2012 Production (vs worldwide) • Alberta is the largest producer of bitumen (704 million barrels) • Canada is the 6thlargest 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 3rdhighest 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)

8. 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

9. 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

10. 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

11. 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: • 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

12. 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)

13. Executive Summary of Competition Act & Investment Act Requirements

14. Executive Summary of Competition Act & Investment Act Requirements

15. 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 • 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. • 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. • The Competition Bureau designates mergers as “complex” or “non-complex” normally within 5 business days of receipt of the ARC Request or Notification. • “Non-Canadian” and “Canadian business” are defined in section 3 of the Investment Canada Act. • 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. • 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. • 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. • 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.

16. 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

17. 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

18. 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

19. 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

20. 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”

21. 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

22. 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

23. 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)

24. 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

25. Possible Methods of Investment • Equity • Debt • Combination • IP Transfer/License • Equipment Transfer/Lease

26. Business Factors • Commodity Price (and Exchange Rates) • Costs • Environmental • Social License • Regulatory Framework (new Alberta Energy Regulator) • First Nations

27. 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

28. 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

29. 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

30. 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

31. The Top 10 • 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

32. The Top 10 8. Understand and allow time for regulatory approvals if needed (Competition Act, Investment Canada Act, importation of equipment, other) • Contractual considerations and negotiations are not unique • Strong Rule of Law imbedded in business transactions • Immigration rules are reasonably facilitative • Join industry associations which offer good sources of market intelligence, aggregate market statistics and opportunities for networking (CAPP, CAODC, PSAC to name a few) • Discuss internal approval processes and timeframes sooner than later

33. 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

34. 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

35. 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

36. Thank you! Colin P. MacDonald, Partner 403.232.9523 cmacdonald@blg.com Bruce A. Lawrence, Partner 403.232.9597 blawrence@blg.com DM # - 1404554