Western Canada’s oilpatch has been of increasing interest to Asian firms seeking to expand their global energy acquisitions. While the purchases by Asian firms have so far involved relatively small-scale operations, it’s expected there will be more as the cost to invest decreases in comparison to the frenzied boom period that was drawing investors three years ago.
The Asian buyers include three state-owned energy conglomerates in China, a large energy player in Japan, South Korea’s public electricity provider, and more. Yet the requisite due diligence involved in facilitating the development of natural resources in Canada is becoming more complex. “Generally there are two kinds of real estate or property issues to consider in an M&A transaction,” says David Lefebvre, a partner at Stikeman Elliott LLP’s Calgary office and head of its China practice. “You have to look at whether you’re acquiring the interests in the company or an interest in the lease.”
A corporate and securities lawyer, Lefebvre was instrumental in representing China Petroleum & Chemical Corp. (known as Sinopec Group) in its recent acquisition of the Canadian- and Swiss-owned Addax Petroleum Corp. for $8.3 billion. While Addax does not have assets in Canada, last spring Sinopec Group also purchased an additional 10-per-cent interest to attain a 50-per-cent ownership in Alberta’s proposed Northern Lights oilsands project, viewed as an affirmation of China’s interest in Canadian energy properties.
When buying into a joint venture, the deal can be a relatively straightforward transfer, says Lefebvre. For instance, when Sinopec upped its share of the Northern Lights project, “the oilsands lease was held by the joint venture so there wasn’t an actual change.” Whereas an outright acquisition would require a change of title to place the Crown lease for the land into the new owner’s name, which could mandate different terms and conditions.
Much of the due diligence involving natural resource acquisitions requires lawyers to ensure the parties are compliant with provincial and federal environmental laws. “What you really do is go through your due diligence and see if there are any environmental issues before you buy the lease or the company,” Lefebvre says. “You have to understand the asset that you’re buying to make sure there aren’t any significant environmental problems that’s going to increase the cost of the asset beyond what you thought it would be worth.”
The environmental issues are largely associated with how the site will be operated in compliance with the laws and, perhaps more importantly, how it will be rehabilitated once the operation winds down. “There are a whole host of environmental issues and areas that need to be addressed when investing in an oilsands project,” says Alex MacWilliam, a partner at Fraser Milner Casgrain LLP’s Calgary office and chairman of the firm’s national environmental law group.
Alberta is in the throes of developing a registry of contaminated properties similar to registries in Ontario and British Columbia, which MacWilliam says will be of great assistance to practitioners once it’s up and running. “[C]ertainly for real estate lawyers, when they build that into their standard checklist when they’re doing a deal, it will help because, in my view, there are a lot of traps out there for real estate lawyers relating to environmental matters and unless you’re used to dealing with these things, it’s easy to miss.”
Compliance requirements are the same for an acquisition from within the country or from abroad although clients seem to vary widely in their knowledge or acceptance of Canada’s protections for natural resource exploration and development. MacWilliam says while working on a real estate deal for an American-based client last summer, their expectation of environmental due diligence exceeded that of most of his Canadian clients, largely because of the responsibilities and liabilities asserted by the United States courts. “On the flip side of that is when you get investors whose environmental laws aren’t as stringent, they may not be as in tune or concerned with environmental issues that we would discover as a result of doing due diligence,” he says. “When you bring those to their attention, they may think that we’re being too conservative or almost alarmist. So you sometimes have to educate foreign buyers on the way things work here so they realize the issues are serious enough to consider in the transaction.”
Similar to Alberta, Saskatchewan is cresting a wave of exploration and development that has piqued the interest of foreign investors. “We have a lot of examples of foreign-owned companies involved in exploration work,” says Danny Anderson, a partner at MacPherson Leslie & Tyerman LLP’s Saskatoon office. Besides oilsands development, the province is a bountiful resource of uranium, potash, coal, gold, and diamonds, and each resource has its own set of regulations.
But obtaining a green light to extract those valuables from the Saskatchewan ground is also becoming more onerous. “The real estate aspect involves dealing with rights that can be obtained from the Crown to do the exploration work,” says Anderson. “If a company’s fortunate enough to find an economic deposit to develop, they need to achieve other rights through licensing and permits.” That would involve all the legal documentation to get the site ramped up for operations, from building roads to diverting waterways, he explains.
There are also restrictions on foreign ownership of Saskatchewan’s farmlands that could complicate a prospective investor’s interest in mining potash, he says.
Rangi Jeerakathil, another partner at MLT, points out the province is in the process of rewriting its environmental management and protection legislation. “That will clearly impact these types of developments especially from a real estate perspective,” says Jeerakathil. Companies that enter into agreements with the Crown to develop mining and oil sites must post a financial assurance for reclamation and rehabilitation of property when the operations close. For a foreign-owned company, there may be an implication there depending on what your credit rating is, and if you don’t have a substantial presence in Canada, you could potentially face [a] higher assurance amount.” But he also notes if the amendments enhancing reclamation are passed, “it will become easier for people to sell these types of lands.”
The evolution of legislation affecting natural resource development has certainly accelerated over recent years. In Ontario, legislators are poised to pass amendments to the Mining Act that would increase environmental rehabilitation requirements and fines for violations, and limit mine developments in northern communities unless there is an approved community-based, land-use plan.
Rosalind Cooper, a partner and director of the environmental practice group at Fasken Martineau DuMoulin LLP in Toronto, says the changing legislation often requires lawyers to spend a bit more time to educate clients on related developments. “Sometimes when you’re dealing with foreign investors, they may not have the familiarity with the regime and it can take some time to walk them through the requirements upon closure, the kind of plans they have in place, and how those plans can change over time.”
But she says the implications of coming up short on the due diligence work of natural resource development has prompted even investors and lenders to get up-to-speed. “My experience has been when dealing with clients that are lenders or investors in some of these operations and the due diligence that they conduct prior to making these investments, they have a fairly sophisticated understanding of what the regime is and how onerous it can be in ensuring appropriate plans and carrying out those plans,” says Cooper.
The Asian buyers include three state-owned energy conglomerates in China, a large energy player in Japan, South Korea’s public electricity provider, and more. Yet the requisite due diligence involved in facilitating the development of natural resources in Canada is becoming more complex. “Generally there are two kinds of real estate or property issues to consider in an M&A transaction,” says David Lefebvre, a partner at Stikeman Elliott LLP’s Calgary office and head of its China practice. “You have to look at whether you’re acquiring the interests in the company or an interest in the lease.”A corporate and securities lawyer, Lefebvre was instrumental in representing China Petroleum & Chemical Corp. (known as Sinopec Group) in its recent acquisition of the Canadian- and Swiss-owned Addax Petroleum Corp. for $8.3 billion. While Addax does not have assets in Canada, last spring Sinopec Group also purchased an additional 10-per-cent interest to attain a 50-per-cent ownership in Alberta’s proposed Northern Lights oilsands project, viewed as an affirmation of China’s interest in Canadian energy properties.
When buying into a joint venture, the deal can be a relatively straightforward transfer, says Lefebvre. For instance, when Sinopec upped its share of the Northern Lights project, “the oilsands lease was held by the joint venture so there wasn’t an actual change.” Whereas an outright acquisition would require a change of title to place the Crown lease for the land into the new owner’s name, which could mandate different terms and conditions.
Much of the due diligence involving natural resource acquisitions requires lawyers to ensure the parties are compliant with provincial and federal environmental laws. “What you really do is go through your due diligence and see if there are any environmental issues before you buy the lease or the company,” Lefebvre says. “You have to understand the asset that you’re buying to make sure there aren’t any significant environmental problems that’s going to increase the cost of the asset beyond what you thought it would be worth.”
The environmental issues are largely associated with how the site will be operated in compliance with the laws and, perhaps more importantly, how it will be rehabilitated once the operation winds down. “There are a whole host of environmental issues and areas that need to be addressed when investing in an oilsands project,” says Alex MacWilliam, a partner at Fraser Milner Casgrain LLP’s Calgary office and chairman of the firm’s national environmental law group.
Alberta is in the throes of developing a registry of contaminated properties similar to registries in Ontario and British Columbia, which MacWilliam says will be of great assistance to practitioners once it’s up and running. “[C]ertainly for real estate lawyers, when they build that into their standard checklist when they’re doing a deal, it will help because, in my view, there are a lot of traps out there for real estate lawyers relating to environmental matters and unless you’re used to dealing with these things, it’s easy to miss.”
Compliance requirements are the same for an acquisition from within the country or from abroad although clients seem to vary widely in their knowledge or acceptance of Canada’s protections for natural resource exploration and development. MacWilliam says while working on a real estate deal for an American-based client last summer, their expectation of environmental due diligence exceeded that of most of his Canadian clients, largely because of the responsibilities and liabilities asserted by the United States courts. “On the flip side of that is when you get investors whose environmental laws aren’t as stringent, they may not be as in tune or concerned with environmental issues that we would discover as a result of doing due diligence,” he says. “When you bring those to their attention, they may think that we’re being too conservative or almost alarmist. So you sometimes have to educate foreign buyers on the way things work here so they realize the issues are serious enough to consider in the transaction.”
Similar to Alberta, Saskatchewan is cresting a wave of exploration and development that has piqued the interest of foreign investors. “We have a lot of examples of foreign-owned companies involved in exploration work,” says Danny Anderson, a partner at MacPherson Leslie & Tyerman LLP’s Saskatoon office. Besides oilsands development, the province is a bountiful resource of uranium, potash, coal, gold, and diamonds, and each resource has its own set of regulations.
But obtaining a green light to extract those valuables from the Saskatchewan ground is also becoming more onerous. “The real estate aspect involves dealing with rights that can be obtained from the Crown to do the exploration work,” says Anderson. “If a company’s fortunate enough to find an economic deposit to develop, they need to achieve other rights through licensing and permits.” That would involve all the legal documentation to get the site ramped up for operations, from building roads to diverting waterways, he explains.
There are also restrictions on foreign ownership of Saskatchewan’s farmlands that could complicate a prospective investor’s interest in mining potash, he says.
Rangi Jeerakathil, another partner at MLT, points out the province is in the process of rewriting its environmental management and protection legislation. “That will clearly impact these types of developments especially from a real estate perspective,” says Jeerakathil. Companies that enter into agreements with the Crown to develop mining and oil sites must post a financial assurance for reclamation and rehabilitation of property when the operations close. For a foreign-owned company, there may be an implication there depending on what your credit rating is, and if you don’t have a substantial presence in Canada, you could potentially face [a] higher assurance amount.” But he also notes if the amendments enhancing reclamation are passed, “it will become easier for people to sell these types of lands.”
The evolution of legislation affecting natural resource development has certainly accelerated over recent years. In Ontario, legislators are poised to pass amendments to the Mining Act that would increase environmental rehabilitation requirements and fines for violations, and limit mine developments in northern communities unless there is an approved community-based, land-use plan.
Rosalind Cooper, a partner and director of the environmental practice group at Fasken Martineau DuMoulin LLP in Toronto, says the changing legislation often requires lawyers to spend a bit more time to educate clients on related developments. “Sometimes when you’re dealing with foreign investors, they may not have the familiarity with the regime and it can take some time to walk them through the requirements upon closure, the kind of plans they have in place, and how those plans can change over time.”
But she says the implications of coming up short on the due diligence work of natural resource development has prompted even investors and lenders to get up-to-speed. “My experience has been when dealing with clients that are lenders or investors in some of these operations and the due diligence that they conduct prior to making these investments, they have a fairly sophisticated understanding of what the regime is and how onerous it can be in ensuring appropriate plans and carrying out those plans,” says Cooper.
