Financing African Oil & Gas Investments

Nathan A. Mintah

Director, Project Finance, HSBC

November, 2003

Presentation to the Africa Oil & Gas Forum – Houston, TX

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INTRODUCTION– Capital flows into Africa

ATTRACTING FINANCING TO OIL & GAS PROJECTS– Project issues – Country issues

SOURCES OF FINANCING –– Traditional sources– Future sources

CLOSING REMARKS

HSBC’s OIL & GAS CAPABILITIES AND CREDENTIALS

Capital flows into Africa – recent trends

Introduction

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Foreign Direct Investment into Sub-Saharan Africa

Net Inward FDI into Sub-Saharan Africa

US$ billions

6.1

13.8

7

8.1

6.5

8.1

4.34.3

0

2

4

6

8

10

12

14

16

1995 1996 1997 1998 1999 2000 2001 2002

•Recent increases but on a decline•Targeted towards Oil & Gas Sectors – Nigeria, SA, Angola

Source: Global Development Finance 2003

4.9% of FDI into Developing countries

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Net inward debt flows into Sub-Saharan Africa

Net inward debt flows: developing world vs. SSA

US$ billions •Steep declines in debt flows to the developing countires•SSA net position: outward flow for debt servicing

0.2-1-0.9-0.9-1.44.57.6 3.2

-20

0

20

40

60

80

100

120

140

160

1995 1996 1997 1998 1999 2000 2001 2002

Developing Countries Sub-Saharan AfricaSource: Global Development Finance 2003

Attracting financing into African oil & gas projects – Project issues

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Typical contractual and ownership structure

Operating Agreement

Operator

Offtake Arrangements

•Market &/or•Offtake Parties

Concession Agreement, PSA, license etc

Government

Construction Arrangements

EPC Contractor(s)

Debt

• ?

SPVProject Company

Shareholders Agreement

Equity

Sponsors

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Project issues – sponsors and project company

Credit strength and experience of project sponsors

Sponsor support undertakings

Project company: corporate governance structures, information reporting and transparency

Lenders’ concerns

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Project issues – concession agreement, PSA or license

Transparency of process for granting license – Nigeria’s example

Can security be created over concession or license? Is it assignable?

Enforceability of such security

Are direct agreements between lenders and government/concession grantor possible?

Lenders’ concerns

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Project issues – construction arrangements

Experience of contractor

Proven technology

Independent engineer’s review of development & construction plans, CAPEX and technology

Cost overruns (delay and performance LDs)

Completion guarantees and undertakings

Lenders’ concerns

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Project issues – operating agreement

Operator’s technical expertise and credit strength

Extent of performance linked penalties and bonuses

LDs for lack of performance etc.

Lenders’ concerns

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Project issues – offtake arrangements

Product marketing arrangements and credit strength of offtaker(s)

Product price risk and hedging program, if any

Transportation of offtake products and reliability of export infrastructure

Lenders’ concerns

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Project issues: other – reserves

Sufficiency of reserves:

– reserve life at projected production rates vs. loan life

Reserves due diligence: independent engineer’s report and certification (e.g. Ryder Scott)

Lenders lend against proven reserves

Lenders’ concerns

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Project issues: other (cont’d)

Completion risk – who bears completion risk?

– Mechanical completion

– Financial completion

Security package

Environmental standards

Lenders’ concerns

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Project issues: other – project economics

Project’s economics:

– Cashflow projections

– Capital structure

– Debt servicing capacity – cover ratios– DSCR

– Loan life cover ratios,

– Project life cover ratios etc

Important but not sufficient.

Lenders’ concerns

Attracting financing into oil & gas projects – Country issues

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Country issues – legal & regulatory framework

Security available for loans

– Creation, perfection and enforcement of security given local laws

Regulatory framework for natural resources, oil & gas

– Tax regime

Change in laws – uncertainty

Lenders’ concerns

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Country issues – country risks & mitigation

MIGA’s programs

Private PRI insurance market

World Bank ‘Partial Risk Guarantee’ program

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Typical contractual and ownership structure

Operating Agreement

Operator

•Market &/or•Offtake Parties

Government

EPC Contractor(s)

SPVProject Company

Equity

Sponsors

Credit Enhancement

MLAs, ECAs

Debt

•Banks•DFIs•Other

Projects with solid economic fundamentals, that properly address qualitative lender issues have best chance of attracting debt capital.

Offtake Arrangements

Concession Agreement, PSA, license etc

Construction Arrangements

Shareholders Agreement

Sources of financing

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Sources of financing – Africa focused commercial banks and infrastructure funds

Africa Millennium Fund

AIG Africa Infrastructure Fund

Emerging Africa Infrastructure Fund

Infrastructure funds

Various international banks

AFREXIM Bank

Fund size: ~US$ 200 million+

Senior & subordinated loans, equity

Some will not finance extractive industries but will finance related infrastructure.

Commercial Banks

Local banks

International banks with African risk appetite

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Sources of financing – DFIs

DFIs

Proparco, France RSA

UKUSA

Germany

Germany

CDC – interested in equity

Others – equity, senior & subordinated debt

RSA

FMONetherlands

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Sources of financing – export credit agencies

UKUSA

France

Germany

SACE

Australia Japan

SpainItaly

Export Credit Agencies

ECICSouth Africa

Term debt financing

Term: 7 - 10 years+

CIRR Rates, ECA premium

Must meet local content requirements

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Sources of financing – multilateral agencies

Multilateral Agencies

AfDB

IFC – ‘A’ loan & ‘B’ loan program

Equity, senior & subordinated debt

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Sources of financing: local banks & capital markets – recent notes/bond issues, Nigeria

Lagos State

Nigerian Breweries Plc

Cadbury Nigeria Plc

Unipetrol Nigeria plc

Cement Company of Northern Nigeria

N 15 billion

7

2.5

1.2

1.5

Terms

7 years; 1% over CBN - 365 day Treasuries

3 yrs

3 yrs; Zero-coupon

3 yrs; Zero-coupon

3 yrs; 15% p.a.

Naira US$

$120 million

56

20

9.6

12

The local banking and capital markets are deep in certain countries ….

The mobile telephone industry has successfully raised over US$ 0.5 billion from local bankingmarket in Nigeria.

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Future sources of financing – international capital markets

Debt Capital Markets

– Securitization of export receivables

– 144a bond issues

– International syndicated loans

– Eurobond issues

Equity Capital Markets

– Rule 144a ADRs (RADRs)

– SA’s mining companies have successfully tapped ADR/GDR markets

Disclosure and corporate governance standards are higher still for these sources of funding …

Conclusions

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Conclusions

Financing is available for well structured projects in Africa's oil & gas sector

Quality and credit strength of project participants is important

Good corporate governance and disclosure standards is instrumental in accessing financing. Good governance has value.

Project sponsors should seek advisors: legal, technical & financial advisors

HSBC oil & gas credentials

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Mergers and acquisitions/advisory – oil and gas industry

HSBC has been extensively involved in

providing M&A advice to clients both in domestic

and cross-border transactions in the oil

and gas industry

Confidential

Italy

Adviser

Ongoing

Russian Federal

Property Fund

US$225 million

Disposed of 36.8% stake in Eastern Oil

Adviser

2002

Advised Tosaco on purchase of 25% stake in total South Africa

Adviser

2003

Russian Federal

Property Fund

US$440 million

Sale of 9% stake in Lukoil

Adviser

1999

$300 million

Fairness on disposal of interest in Muturi PSC to BP

Indonesia

Adviser

2001

Terminated disposal of Saga Petroleum Mabruk AS

Libya

Adviser

2001

Confidential

Advised on defense against unsolicitied public offer from Sibir Energy

UK

Adviser

2001

US$389 million

Valuation and Advisery services

Adviser

1999

$100 million

Sale of Australian Subsidiary Gulf Australia

Australia

Adviser

1999

Valuation of a large lubricants business 2002

India

Adviser

2002

US$1.3 billion

Acquisition by ENI

UK

Adviser

2000

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Equity offerings in the oil & gas sector

HSBC has an excellent track record in

successfully raising equity finance for major

oil and gas companies around the world,

including equity, equity-linked, IPOs, rights issues, secondary

placements and convertible issues Integrated Oil NT Corp

C$111 million

Issue of aapital shares and preference shares via a public offer

Co-Manager

1999

US$288 million

Initial public offering

Greece

Co-lead Manager

1998

HK$26 billion

Global offering

Hong Kong/China

Co-lead Manager

2000

£15.7 million

Placing and open offer of ordinary shares

UK

Broker

1999

Confidential

IPO

Greece

Lead Manager

2001

US$440 million

Sale of a 9% stake in Lukoil held by the Russian Federal Property Fund Russia

Advisor

1999

£830 million

Secondary share offering

Turkey

Co-Manager

2000

C$18 million

APF energy trust rights issue

Co-manager

2001

€5.7 billion

Primary offering

Spain

Co-Manager

1999

CA$100.7 million

Issue of trust units

Canada

Underwriter

2001

£2.7 billion

Initial public offering

Hong Kong

Co-Lead Manager

2000

Canada Dominion Resources VI

C$27.5 million

Issue of limited partnership units

Agent

2002

US$4.4 billion

Initial public offering

UK

International Co-manager

1998

£36.3 million

AIM flotation

UK

Adviser and broker

1998

US$151,145,000

Equity financing

Canada

Underwriter

2003

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Debt finance and debt capital markets experience in the oil and gas sector

HSBC’s strong presence in all major (and many

smaller) financial markets, and close relationships with international and domestic banks,

provides us with wide and deep access to the

loan distribution market

Selected oil and gas industry transactions

US$700 million

Syndicated facility

USA

Joint Mandated Arranger

2001

$500 million

Six year loan to finance capital expenditure

Singapore (India)

Lead Arranger

2001

US$500 million

Syndicated loan

India

Joint Arranger

1998

CK5000 million

Term loan for general corporate purposes

Bookrunner and Arranger

2000

US$250 million

Revolving credit facility

Singapore

Coordinator and Agent

2000

US$30 million

Subscription of new preference shares and US$70 million new banking facilities, UK

Adviser and Arranger

1999

US$335 million

Syndicated loan

Brazil

Joint Mandated Arranger

$650 million

Syndicated loan

UK

Joint Arranger and Underwriter

1998

US$350 million

Term loan facility

Norway

Joint Arranger

1999

US$250 million

Syndicated loan

USA

Joint Mandated Arranger

2002

250 million

6.625% Dec 2017

UK

Joint Bookrunner

2002

C$200 million

Cumulative redeemable preferred shares

Canada

Co-manager

1999

£200 million

5.875% Nov 2012

UK

Joint Bookruner

2002

£250 million

7.5% Bond 2013

UKJoint Bookrunner and Lead Manager

2003

€750 million

6.375% May 2009

UK

Joint Bookrunner

2002

2003

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Project finance experience in the oil and gas sector

HSBC has acted as advisor on a number of

internationally renowned projects, to the world’s

largest oil and gas companies. Our Project

and Expert Finance practice utilises

considerable industry expertise in the sector,

acquired over a number of years, together with

first-class knowledge of leading edge project

finance techniques

US$600 million

Guangdong LNG Terminal and trunkline project

China

Adviser

2001

US$700 million

Financing for the gas to liquid plant

Qatar

Adviser

2002

US$1.37 billion

Refinancing of 6.6mtpa Oman LNG facility

OmanJoint Mandated Lead Arranger

2002

CSPC Nanhai

US$4 billion

Landmark CNOOC/Shell petrochemical project involving US EXIM, JBIC, NCM, ECGD and SACE ChinaFinancial Adviser

Ongoing

US$3.2 billion

HPEF advised the export credit agencies on the financing for the Blue Stream pipeline

Russia/TurkeyAdviser

2000

Oman Gas

Company

US$410 million

HPEF advised the borrower on the financing for the Sohar and Salalah pipelines Oman

Adviser

2000

US$100 million

ECGD-guaranteed supplier credit finance

Oman

Arranger

2003

US$300 million

Fairness opinion of the sale of Muturi PSC interest

MalaysiaAdviser

2001

US$1 billion

Debt and equity financing for LNG regasification plan, Texas/Louisiana

United States

Adviser and Underwriter

2003

Selected oil and gas transactions

Qatofin

US$800 million (approx)

Development of LLDPE/Ethylene plant

Qatar

Financial Adviser

Ongoing

US$4 billion

Private sector project financing

Quatar

Adviser

2000

US$400 million

Export credit

Arranger

2003

Yanbu Petrochemical Co.

US$2.3 billion

Financing

Saudi ArabiaAdviser/ArrangerAdvisor/Floating rate

Egypt LNG

US$1.1 billion

$ 1,100 million financing of BG/Edison LNG plant

EgyptLead Arranger and Bookrunner

Ongoing

US$129 million

Limited resources financing of LNG Ship

Brunei

Sole Adviser

2002

US$5 billion

Bidding strategy and structure for construction and investment of Guangdong LNG Terminal projectChinaCo-lead Manager

2000

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Nathan A. MintahDirector, Project Finance

HSBC

Tel: +27-11-481-4369

Fax: +27-11-646-8485

E-mail: nathan.mintah@za.hsbcib.com

Thank you