Legal Considerations for Investment in Iraq’s Refining Sector

1. Legal Considerations for Investment in Iraq’s Refining Sector Prepared for the Iraq Refinery 2012 Conference London, UK April 18, 2012

2. Panelists Ahmed el-Gaili Partner, Dubai Vinson & Elkins LLP +971.4.403.6240 ael-gaili@velaw.com Christopher Strong Partner, Abu Dhabi / London Vinson & Elkins LLP +971.2.412.0706 cstrong@velaw.com

3. Firm Overview Regional Depth Iraq Experience Global Footprint Commercial Focus • Deep understanding of legal, business and regulatory systems in Iraq • More than 100 matters involving clients located in or doing business in Iraq • Strong relationships with the local legal community • Experienced transactional and regulatory lawyers, including trade regulations and government policies and positions • Active in the Middle East for more than 30 years • U.S., English and regionally qualified lawyers • Four native Arabic speaking partners in the Middle East • Leading Middle East firm for Projects and Energy, Islamic Finance and Funds — Chambers Global, 2011 • 2011 Middle East “Energy Law Firm of the Year” • Understanding of the business drivers for clients based in and doing business in Iraq and throughout the MENA region • Practical approach to deal making and problem solving • Seamless cross-practice and cross-office teamwork • Valuable relationships with other professional service providers • “World’s leading Energy law Firm” • 760 lawyers across 15 offices • International network allows us to meet clients’ needs whenever and wherever they need it • An understanding of legal and regulatory structures in jurisdictions around the world

4. Iraq Practice • V&E has a dedicated, multidisciplinary Iraq Practice Group, which provides legal counsel for our clients who wish to broaden or commence activity in Iraq • We have handled more than 100 matters involving Iraq including many complex and high-profile projects, transactions and litigation and arbitration matters and we have particular experience with project finance and development; M&A and private equity; public policy; international dispute resolution; government contracts; and export control matters in Iraq • Currently advising the Ministry of Oil on the $17Bn Basrah Gas Project "The team is doing extremely well and has developed great relationships." - Chambers Global • We maintain strong relationships with the local legal community, enabling us to provide critical support to clients by helping them to efficiently navigate any legal and commercial challenges they may face • We have a deep bench of internationally qualified, Arabic speaking lawyers • Track-record of advising on complex and sophisticated transactions, including, project development, joint ventures, contract negotiations

5. Agenda • Overview of Iraq’s Legal System • Refining Private Investment Law • Other Legal Considerations

6. Iraq’s Legal System

7. Iraqi Legal System • Iraq is a Civil Law jurisdiction with a Civil Code modelled on the Egyptian Civil Code • Hierarchy of Laws (substantive law) • Constitution • Statutes • including pre-2003 legislation, which remains valid unless repealed • Regulations • Instructions • Hierarchy of Civil Law (regulates affairs between persons) • Iraqi Civil Code • Local Custom and Usage • Shari’a Law • Principles of Equity

8. Constitutional Framework - General • Generally, the Constitution: • Establishes regimes of exclusive Federal competence (art. 110) and shared competence (art. 114) • Remaining areas of competence are reserved to Regions/Governorates, whose rules also take precedence in areas of shared competence (art. 115) • Sharing of responsibilities between Federal Government, Regions and Governorates, especially in relation to oil and gas (art. 112)

9. Constitutional Framework - Oil and Gas • Articles 111 and 112 relate specifically to oil and gas • Article 111: Hydrocarbons are the property of all the people of Iraq • Article 112 • Federal Government has “management” control over oil and gas with the Regional Governments and Provinces • Strategic oil and gas policy to be developed by Federal Government, Regions and Provinces co-operatively

10. Refining Private Investment Law

11. Applicable Laws • Law of Private Investment in Crude Oil RefiningNo. (64) Of 2007 • Instructions No. (1) Of 2009 • Amendment No. (10) of 2011 • Investment Law No. (13) Of 2006

12. Private Sector Investment (Article 2) • The private sector is entitled to: • establish crude oil refineries • possess, operate and manage their facilities • market their products • but is not entitled to own land • the “private sector” means • Iraqi private companies incorporated according to the provisions of the Companies Law No.(21) of 1997 • foreign companies with financial capability and ability to meet the technical specifications accepted by the Ministry of Oil (the “Ministry”) • any consortium among the foregoing

13. Government Participation (Article 9) • Ministry is entitled to “enter into contracts of any international common form in the field of investment in the refineries” • Presumably includes various PPP structures (BOO, BOT, BOOT, etc.) • May become a joint venture partner in a proportion that does not exceed 25% of the investment value

14. Crude Supply (Articles 5/6) • The Ministry obligated to supply crude oil • Contract to specify minimum quantity of crude to be supplied by the Ministry • Price equal to international export price less 5% discount • Discount shall not be less than $4 and shall not exceed $8 and shall apply for a period of 50 years • Price = P1 – D – B (A1 – A2) – C • P1: Brent price • D: Differential to Brent • B (A1-A2): Price of density variance between contractual and supplied crude • C: transportation cost from the refinery to the export tanker

15. Crude Supply (cont.) • Crude Delivery • Delivery point in is the nearest appropriate point on transporting pipelines to the refinery • The investing company (the “Company”) shall undertake the construction of a pipeline from the delivery point to the refinery at its own expense and shall be responsible for its operation and maintenance • Periodical inspection and calibration of measurement and control facilities to be performed by a specialized third party nominated by the Company with the approval of the Ministry

16. Product Sales (Article 10) • Price • The Company is entitled to determine the prices of its oil products according to the international applicable prices • Domestic Sales and Export Right • The Company may sell products inside Iraq or export them to foreign markets • The Company may utilize public facilities (such as terminals, export ports and pipelines) pursuant to a contract to be signed between it and the Ministry and the relevant governmental entity (Article 14) • The company may establish and operate its own oil products sale stations • Ministry Priority • Ministry has priority to purchase products • Priority still subject to price being set by the Company

17. Land (Article 12) • Lease Right • Right to lease requisite land owned by the state or relevant municipalities • Right to lease private lands under a contract setting forth the the rights and obligations of the Company and the landowner • Land Allocation • The Ministry of Finance undertakes the allocation of suitable land for the Company through leasing for a renewable period of 50 years • Annual rent to be agreed upon by both parties • Explicit exemption from the provisions of the Law of Selling and Leasing the Property of the State No. (32) of 1986

18. Other Incentives • All the privileges stipulated in the Investment Law No. (13) Of 2006 • 10-year tax holiday from start of operations • 3-year import duty exemption for imported assets • Subsequent exemption for spare parts and expansion imports • Capital and salary repatriation • The right to open offshore accounts • Employment of non-Iraqis if unable to employ Iraqis with the requisite qualifications • The right to provide for international arbitration in commercial project contracts

19. Other Requirements • The refinery should be technologically advanced (Article 4) • Heavy oil products must not exceed (20%) • Commitment to employ no less than 75% Iraqi personnel of the total employees (Article 3) • Compliance with environmental and industrial safety laws and regulations (Article 15) • Prohibition on trading crude oil received from the Ministry and oil products produced by the state owned refineries (Article 8) • The Company is obliged to submit periodical financial and technical reports to the Ministry (Article 9) • The company is responsible for electric power supply and other utilities (Article 13)

20. Process (Article 17 / Instructions) • Investment applications shall be submitted to the Ministry to be decided upon by a specialized committee • Regions and Governorates have the right to grant licenses to establish refineries and contract with investing companies in coordination with the committee mentioned above • Preliminary acceptance required at time of application from: • Relevant Governorate or Region • Ministry of Finance (if required land is public) or private lease contract

21. Process (cont.) • Financial Requirements • Financial Reports (3-years) • Creditworthiness and financial qualifications • Expected funding sources • Expected total investment • Preliminary economic feasibility study • Technical Requirements • Advanced technology to maximize the production of gasoline and/or gas oil • Fuel oil production shall not exceed 20% • Compliance with environmental regulations and industrial safety • Project product mix and specifications • Project location, area, timetable

22. Other Legal Considerations

23. Corporate Law Considerations • Foreign majority participation in Iraqi companies permitted • Foreign management permitted • Multiple corporate vehicles available (LLC, JSC, etc.) • Tax Issues can be crucial for choice • Establishment procedures take between 6 weeks and 6 months • Relevance of Articles of Association and Shareholders Agreement • Capital losses

24. Project Finance Considerations • Legal framework likely to be deemed generally bankable, particularly in the case of export-oriented projects • Lenders focus likely to be on: • Economics • Political risk • Crude supply risk • Offtake risk

25. Project Finance Considerations (Cont.) • Equity funding risk (for any local/governmental shareholders) • Ability of any government shareholders to provide completion support or to pledge shares • Security package • Perfection • Share pledges and assignment of contracts • Enforcement of judgments/arbitral awards • Withholding tax on interest payments to foreign lenders

26. Other Considerations • Required Approvals • Crude and product pipeline right of way • Environmental approvals • Export arrangements • Shared facilities / use of port facilities • Coordination with SOMO • Applicability of international compensation schemes