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Legal Considerations for Investment in Iraq’s Refining Sector

Legal Considerations for Investment in Iraq’s Refining Sector . Prepared for the Iraq Refinery 2012 Conference London, UK April 18, 2012. Panelists. Ahmed el-Gaili Partner, Dubai Vinson & Elkins LLP +971.4.403.6240 ael-gaili@velaw.com. Christopher Strong Partner, Abu Dhabi / London

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Legal Considerations for Investment in Iraq’s Refining Sector

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  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

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