Question
July 25, 2006
Michael Verne
PremergerNotification Office
Bureauof Competition
FederalTrade Commission
600 Pennsylvania Ave., NW
Washington, DC 20580
DearMr. Verne:
Thisletter summarizes the factual situation described to you in our conference callon Monday, July 24, 2006, during which you confirmed our conclusion that thebelow-described transaction would not be Hart-Scott-Rodino reportable. I wouldappreciate your confirming your concurrence with our conclusion to me by returnemail.
Asdescribed to you in our telephone call, Company A proposes to acquire aninterest in off-shore oil and gas leases from Company B. Specifically, thetransaction involves three agreements: (1) an Acquisition Agreement under whichCompany A will assume a one-third undivided interest in a block of approximately8090 leases in the Gulf of Mexico (the "leases"); (2) a JointOperating Agreement under which Company B agrees to conduct all operations onthe leases subject to Company A's right to approve certain expenditures; and(3) an Area of Mutual Interest Agreement under which the parties will agreethat any further interest acquired by either party within the range of acertain geographic area surrounding the above-mentioned leases will be subjectto the one-third (Company A) / two-third (Company B) ownership interestcontemplated in the Acquisition Agreement. The hydrocarbon reserves subject tothe leases are currently not drilled and are, therefore, currently notproducing.
Thetotal value of the one-third interest in the leases subject to the AcquisitionAgreement is estimated to be in the range of $100150 million. This value willbe paid in the form of a "promote" in the drilling of threeexploratory wells. In addition, Company A will reimburse Company B up to $16.5million for sunk costs already incurred. All other expenses incurred under theterms of the Operating Agreement will be shared on a one-third (Company A) /two-third (Company B) basis.
AcquisitionAgreement:
Wehave concluded that the acquisition of the one-third interest in the Company Blease holdings would not trigger an HSR reporting obligation. Because this isan acquisition of leases related to carbon-based mineral reserves, theacquisition must be analyzed under 16 C.F.R. 802.3. Section 802.3 exempts lain acquisition of reserves of oil, naturalgas, shale or tar sands, or rights to reserves of oil, natural gas, shale ortar sands together with associated exploration or production assets" butonly if their value does not exceed $500 million (the "Oil and GasExemption"). Although not specifically stated in 802.3, we understandthat it is the Premerger Notification Office's position that if an asset wouldqualify for an exemption if purchased outright, the purchase of a lease issimilarly exempt. See ABA Premerger Notification Practice Manual Interpretation 3. The leases subject to theAcquisition Agreement involve the rights to reserves of oil and gas; inaddition, the value of the leases is less than $500 million. Thus, under 802.3, the acquisition of the one-third interest in the leases would nottrigger an HSR reporting obligation.
Inaddition, to the extent that certain properties (oil and reserves) encumberedby portions of the leases have not yet generated any revenues, such propertieswill be treated as falling under the "Unproductive Real PropertyExemption" set forth in 16 CFR 802.2(c). As a result, any such properties would not count towards the $500million Oil and Gas Exemption value threshold. In applying the UnproductiveReal Property Exemption to any non-producing properties subject to the leases,it is not necessary to determine whether, for purposes of 16 CFR 802.2(c)(2)(iii),such properties are or are not "adjacent to or used in conjunction withreal property that is not unproductive real property" as long as any othersuch adjacent properties are otherwise exempt under the Oil and Gas Exemption.That is, if certain unproductive real properties subject to the leases areadjacent to productive real properties, which are part of the transaction butqualify for the Oil and Gas Exemption, the unproductive real properties stillqualify for the Unproductive Real Property Exemption. Thus, because theproperties subject to the leases are currently not producing, their value willnot be applied toward the $500 million Oil and Gas Exemption limit.
I.Joint Operating Agreement:
Wehave also concluded that the formation of the venture contemplated by the JointOperating Agreement also would not trigger an HSR reporting obligation. Becausethe Operating Agreement involves the formation of a venture to operate andmaintain the leases subject to the Acquisition Agreement, the transaction mustbe examined under 16 C.F.R. 801.40. Under 801.40 the Size-of-Transaction test set out in 16 C.F.R. 801.1(h) is first examined. The formation of the joint venture would not meetthe Size-of-Transaction test as specified in 801.1(h). The joint venturecontemplated by the Operating Agreement does not involve the issuance of votingsecurities; it is strictly an agreement regarding the sharing of costs incurredin connection with operating and maintaining the leases. Thus, at the time offormation, no investor in the operating venture will hold voting securities inthe venture valued in excess of $50 million ($56.7 million, as adjusted). Inaddition, no investor will hold securities of the venture at the time offormation. Thus, under 801.1(h), the Size-of-Transaction test is not met andthe formation of the venture contemplated in the joint operating agreementwould not trigger an HSR reporting obligation.
IIL Area of MutualInterest Agreement:
In addition, we have concluded that execution of theArea of Mutual Interest Agreement would not trigger an HSR reporting obligationbecause it does not involve the present acquisition of assets or votingsecurities meeting the criteria of 15 U.S.C. 18(a).