Hugh Tucker September 29, 2005 OWNERSHIP ARRANGEMENTS FOR INTERNATIONAL PROJECTS

Types of Projects  Upstream  Exploration and Development  Midstream  Pipelines  Downstream  LNG  GTL  Refineries  Petrochemicals  Power

Choice of Entity (Type and Jurisdiction)  Tax considerations in choice of entity  Applicable tax rate, available deductions, etc. in project location for each type of entity  Taxes assessed by jurisdiction of organization, if different from project location  Availability of tax treaties to reduce tax rates and insure creditability in home country  Flow-through v. deferral treatment  Taxation of share/interest transfers

Choice of Entity (Type and Jurisdiction) (continued)  Companies law considerations in choice of entity  Certainty and clarity of corporate law  Available governance structures - manager v. board v. members  Minimum capitalization and ability to use shareholder loans to fund  Allowable numbers of shareholders/members  Availability of different classes of shares or interests with different rights  Liability of shareholders/members  Right to transfer or pledge shares/interests  Ability to issue shares or bonds in the public markets to raise funds  Local shareholder and local director requirements

Choice of Entity (Type and Jurisdiction) (continued)  Host government requirements regarding choice of entity  Local company may be required  Some forms of business organization may not be available to investors  General investment considerations in choice of entity  Political risk of using an entity subject to the laws of a particular jurisdiction  Attractiveness of form of entity to other potential investors and lenders  Availability of foreign investment incentives for that type of entity  Applicability of employee profit sharing, public financial disclosure, and other specific non-tax requirements  Availability of bilateral investment treaties

Choice of Entity (Type and Jurisdiction) (continued)  Limited Liability Companies  Liability of all members limited to contributions  Single layer of tax  Flexibility of capital structure  Single member benefits - disregarded entity for federal tax purposes  Generally fewer formalities than corporations  Case law limited but growing  Traditionally (and currently) franchise tax issue for Texas LLC's versus limited partnerships; but, likely (?) to change  No entity (unincorporated joint venture) is a possibility

Ownership Structure  Ownership v. operation  Separate operating company owned by the same investors may protect ownership company from liabilities, restrict employee profit sharing, provide an outlet for secondment from the host government, etc.  Operating company could be owned by fewer than all investors, to allow one or several of them to control day to day operations  Payments between owning and operating companies may be subject to taxation  Multiple Phases  Phases -- Separate exploration or development blocks, separate LNG Trains, separate plant facilities or units  Can use a completely separate company with potentially different ownership for each phase

Ownership Structure (continued)  Multiple Phases (continued)  Alternatively, each phase can be a separate subsidiary of the same holding company with tracking stock used to provide rights in different phases to different holding company investors  A holding company with a single class of stock giving each investor the same indirect interest in each phase could be established, but this is unusual in phased projects  Generally do not see one company owning multiple phases - use of separate companies or subsidiaries allows separate taxation of each phase, keeps the other liabilities of the phases separate and allows for separate equity ownership and separate financing of each phase  Common infrastructure used by several phases  Prefer not to allow one phase (or its lenders) to control common infrastructure  Common infrastructure can be in a separate subsidiary, in a holding company, or owned in undivided shares

Alternative Ownership Structures Investor 1 Investor 2 Investor 1 Investor 2 Investor 3 Phase 1 Co.Phase 2 Co. Investor 1 Investor 2 Investor 3 Holding Company (governed by Class A) Phase 1 Co. (governed by Class B) Phase 2 Co. (governed by Class C) Infrastructure Sharing Agreement 45% Class A 50% Class B 40% Class C 45% Class A 50% Class B 40% Class C 10% Class A 20% Class C 100% 50% 40% 20% Infrastructure Sharing Agreement Separate Companies Holding Company with Tracking Stock

Alternative Ownership Structures (continued) Investor 1 Investor 2 Investor 3 Holding Company Phase 1 Co.Phase 2 Co. 45% 10% 100% Investor 1 Investor 2 Investor 3 Phase 1Phase 2 50%40%20%50%40% Operating Agreement Holding Company without Tracking Stock Unincorporated Joint Venture Infrastructure Sharing Agreement Infrastructure Sharing Agreement

Governance Issues - Allocation of Authority  Shareholders/Members  Directors  Officers

Governance Issues - Approval Thresholds  Unanimous - might include:  Approval/amendment/termination of host government contract  Amendment of corporate organizational documents  Change in form or jurisdiction of organization  Merger, dissolution, sale of substantially all assets  Filing for bankruptcy  Issuance of shares on a non-pro rata basis  Entry into new lines of business  Capital contributions beyond an agreed limit  Execution of affiliate contracts

Governance Issues - Approval Thresholds (continued)  Supermajority - might include:  Appointment/removal of officers  Development budget  Individual expenditures over an agreed amount  Approval/amendment/termination of key project documents  Approval of a proposed financing  Establishment of reserve levels  Institution or settlement of major litigation

 Simple majority - might include:  Annual budgets  Approval/amendment/termination of agreements over a lesser threshold level  Individual expenditures over a lesser threshold level  Final investment decision should not require a unanimous vote - if a majority interest wants to proceed with the project, the minority should not be able to block them  Many of the same considerations apply in an unincorporated joint venture Governance Issues - Approval Thresholds (continued)

Governance Issues - Management  Appointment and removal of officers  By board  By individual shareholders (secondment)  Apparent authority of directors and officers  Ability of officers to subdelegate through powers of attorney or otherwise  Adoption of code of conduct/ethics restrictions and corporate internal controls

HOU03: