Unlocking Upstream Financing for Africas Oil Sector Development

UNCTAD Conference, Nairobi, June 23rd, 2007

NOT AN OFFICIAL UNCTAD RECORD

AGENDA
Africa is a growth relay for the oil & gas sector

A strong need to unlock financing in a difficult environment

New and adequate financing techniques for independent E&Ps Accompanying the oil sector growth in Africa and developing local content.

AFRICA IS A KEY CONTINENT IN TERMS OF RESERVES POTENTIAL AND DISCOVERIES

Africas reserves currently represent near 10% of the Worldwide reserves, i.e. approx. 105 billion barrels, but rate of new oil reserves discoveries in Africa has been the fastest in the world in the past decade, leading to a growing importance of Africa in the worldwide reserves.

Africas oil is also a growing part of USAs oil importations. Sub-Saharan Africa is said to represent 25% of North American oil imports by 2015 compared to approx. 15% at present.
Africa produced over 9 million bpd of oil in 2005. 16 countries are currently producing and prospects are high in at least another 5 countries.
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AFRICA BENEFITS FROM SIGNIFICANT STRENGTHS

Mostly light crude oil with low sulfur tenor

Sizeable oil & gas fields

Geographical location (open to Europe and USA)

Low costs of production in numerous countries (in particular on onshore and shallow water concessions accessible to the independents).
Attractive fiscal terms in most countries independents and local content companies for

An oil & gas upstream sector opened to foreign partners

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TRENDS IN WEST AFRICA

Majors are focusing their attention to large scale projects notably in the deepwater areas

Portfolio rationalization and disposal of marginal assets

Local capacity creation within the indigenous private sector The high price of oil allows lowered breakeven costs Progress in term of technique also allows more aggressive exploration New emerging small E&P companies
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TRENDS IN EAST AFRICA

The region is still largely under-explored

Geologists assess that there should be important oil discoveries thanks to the progress in the techniques of explorations
Onshore and offshore potential is opening the doors for Majors and independents companies Countries like Uganda should start producing at a rate of 60,000 bpd of oil in 2008. This part of the African continent to successfully reach a significant production level will require huge investments at all the stages of the oil and gas sector (exploration / production / oil services / infrastructures)
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AGENDA
Africa is a growth relay for the oil & gas sector

A strong need to unlock financing in a difficult environment

New and adequate financing techniques for independent E&Ps Accompanying the oil sector growth in Africa and developing local content.

A DIFFICULT AFRICAN ENVIRONMENT

African countries are almost all rated as speculative grade, when rated. The legal environment can be constraining and companies / Banks have to face and adapt to various type of legal framework Political uncertainties Modern and expensive equipment is required for E&P in difficult areas (deep and ultra deep-water)

PROBLEMATICS FOR INDEPENDENT OIL PRODUCERS IN AFRICA

Buying assets through tenders or direct negotiations Buying companies licenses owning producing assets or

Establishing a JV with local partners Managing independence Farming in / Farming out with Independents and/or Big names Finding relevant partners Choosing appropriate contractors at an effective cost rate & time schedule Financing exploration, development and acquisitions
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AGENDA
Africa is a growth relay for the oil & gas sector

A strong need to unlock financing in a difficult environment

New and adequate financing techniques for independent E&Ps Accompanying the oil sector growth in Africa and developing local content.

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EVOLVING FROM TRADITIONAL CORPORATE AND PRE-EXPORT FINANCE

Historically designed for large E&Ps, traditional financing techniques are not relevant for smaller / independent E&Ps

Corporate Financing: Not relevant for independents characterized by limited Balance Sheets and P&L accounts and no credit rating Traditional corporate banks are often not comfortable with emerging countries. Pre-Export Financing: Based only on the exported portion of existing production Small production: facility insufficient to fund asset development Lack of flexibility
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POTENTIAL ALTERNATIVES

Project Finance Quality of the Sponsor Lack of flexibility Development risk (full asset development) New Equity Cost Dilution of existing shareholders Time schedule

Need for an adequate financing tool for independent producers

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FINANCING TOOLS AND PROJECT PHASING

DEVELOPMENT EXPLORATION BEFORE FIRST OIL High risk-High reward Development risk Investors role AFTER FIRST OIL Operational risk

Investors/banksrole Banks role

IPO/equity Farm-Out

Pre first Oil RBL

PRIVATE PLACEMENT / PARTNERSHIP

BRIDGE FINANCING

RESERVE BASED LENDING

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RESERVE BASED LENDING: AN ADAPTED TOOL

Financing Based on cash flows deriving from the development of the reserves, not corporate risk analysis Detailed and recurrent technical due diligence on the financed oil & gas assets A borrowing base approach evolving in line with development of reserves and production level Strong structure allowing to accommodate country risk and even limited asset portfolios Tailored to the financing needs and company development from a single asset to multi-asset, multi country portfolio Various facility types depending on the purpose: Senior Debt, Stretched Facility, Junior/Mezzanine Debt Flexibility in balancing contributions from equity holders and debt providers 14

DIVERSIFIED RBL TYPE FACILITIES TO ADRESS VARIOUS FINANCING NEEDS

BRIDGE
Facility: Purpose: Tenor: Amount fixed on a case by case basis To finance acquisitions or licenses purchase Short-term, until repaid by Senior facility

SENIOR RBL FACILITY

Facility: Borrowing Base: Purpose: Fully revolving credit facility Based on Proved Reserves + a portion of Probable in certain cases To finance development and production on the existing reserve base, working capital and eventually acquisition Medium-term (5years & more) Charge on interests in oil & gas properties and major contracts Domiciliation of revenues at the banking agents counters According to cash flow ratios 15

Tenor: Collateral: Collection Account : Amortization:

DIVERSIFIED RBL TYPE FACILITIES TO ADRESS VARIOUS FINANCING NEEDS

STRETCH Identical to the Senior Facility, except:

Amount:
Purpose: Amortization:

additional amount based on stretched CF ratios

Development of the existing reserve base and acquisition According to cash flow ratios (less restrictive than senior tranche)

MEZZANINE
Facility: Purpose: Tenor: Amortization: Amount fixed on a case by case basis (subordinated credit facility) Acquisition Senior facility Tenor + 1 day Bullet

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AGENDA
Africa is a growth relay for the oil & gas sector

A strong need to unlock financing in a difficult environment

New and adequate financing techniques for independent E&Ps Accompanying the oil sector growth in Africa and developing local content.

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BANKS NEED TO ADAPT TO CURRENT MARKET TRENDS AND PROVIDE COMPREHENSIVE SOLUTIONS The market is currently consolidating, more and more clients request Banks to provide acquisition financings needs as well as innovative solutions for the development of their oil & gas assets.

Banks have to evolve to provide comprehensive solutions and to be involved in the life E&P projects: Equity raising manager and/or participator Acquisition financing Financing of pre-first oil facilities Financing of the local oil services sector which is a key necessity for the development of the independents E&P assets

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A NEED TO EXPAND FINANCING FROM E&P TO OIL SERVICE AND OTHER SUPPORT ACTIVITIES
The

E&P sector will not grow and thrive without the simultaneous growth of the associated related oil sector: mainly the infrastructure and the oil services sectors development will not be possible without the strong implication of the local actors oil services sector through the lack of availability of equipment for the independent is opening the door for the development of the local content oil companies the local content is becoming one of the key elements to ensure a further development of the African continent oil & gas industry

Such

The

Promoting

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DEVELOPING LOCAL CONTENT

Africa needs to effectively exploit its vast natural resources and with the support of the international finance communitys active participation. Certain countries like Nigeria are trying hard to develop local skills through the transfer of technologies Local content bill (45% of local content in the oil sector by 2008) Creation of the Nigerian Content Support fund (local oil groups working as subcontractors) A new market opportunity for banks, willing to provide innovative structured financing based for example on: Assignment of oil services contracts Pledge on assets Pledge on receivables / fares / revenues

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CONCLUSION

Natixis is dedicated to provide its clients with all its experience and knowledge in:
Introduction

partners

to

reliable

professionals

and

Technical
From

and advising

debt to equity financing

Financing

development and acquisition

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THANK YOU

Michel JAY Structured Finance & Natural Resources Global Head of Upstream & Commodity Structured Finance Energy e-mail: michel.jay@natixis.fr phone: + 33 (0) 1 58 19 94 44 Laure PIRONNEAU Head of Africa & Middle-East Upstream & commodity structured Finance Energy e-mail: laure.pironneau@natixis.fr phone: + 33 (0) 1 58 19 28 79

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