Benefits of Energy Price Stabilization

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Benefits of Energy Price Stabilization
Not an official UNCTAD record

• 8th Africa Oil Gas Trade and Finance Conference
• Marrakech, April 28, 2004
• Deutsche Bank

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Contents
Section 1 Energy price stabilization 2 Benefit
s of Hedging in Structured Finance 3 Current
hedge environment 4 Credentials, Capabilities,
and Contacts
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Energy Price StabilizationSection 1
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Energy Price StabilizationOverview

• Governments are affected by energy price
  movements through
• Direct exposure oil exporting countries or
  countries with regulated domestic energy markets
  
• Indirect exposure oil importing countries and
  countries with liberated internal energy market
• Governments tend to manage this in various
  ways
• Passive
• Reactive through the creation of an energy fund
• Proactive through the implementation of a macro
  risk management strategy

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Energy Price StabilizationOverview

• Passive at the mercy of the market
• Reactive at the mercy of change in economic
  policy making and politicians
• Proactive use price risk management tools to
  mitigate the impact of adverse energy price
  movements

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Proactive Strategic Risk Management

• Strategic objective classically is Management
  of Cash Flow uncertainty
• Two-step process needed in risk management
• Measure risk quantify how oil prices adversely
  impact cash flows
• Change risk if risk tolerance exceeded, hedges
  can alter profile

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Reasons to hedge academic financial theory

• Pure Economists view (Modigiliani-Miller)
• In perfect financial markets (absence of taxes,
  no transaction costs, constant investment and
  production policy , no bankruptcy costs, full and
  symmetric information amongst market
  participants) Financial structure (including
  hedging) is irrelevant to firms value.
• Financial Economists reasons to hedge all focus
  on market imperfections
• Cost of funds Optimization of investment policy
  / internally generated cash flow
• Lowering probability of financial distress
• Reduction of expected taxes

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Local oil prices

• Global nature of oil market will make any local
  pricing mechanism dependent on the international
  oil price
• Even in local subsidized price environment,
  somebody (government) will ultimately carry
  international oil price risk

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Benefits of Hedging in Structured FinanceSection
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Transaction Diagram
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Structured Finance Basic Considerations

• Typically an issuance secured by future commodity
  receivables involves an issuer that generates
  offshore denominated receivables from
  sales/service provided to offshore customers
• When analyzing the probability of timely payments
  of both interest and principal, the lenders and
  rating agencies will consider, specifically, the
  factors listed below
• The Borrowers credit
• The Borrowers ability to continue to provide
  services
• The type and importance of the service provided
• The nature of the receivables and payment terms
• The size and maturity of the issue
• The legal structure of the issue

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Structured FinanceRisk Assessment

• Typically these structures mitigates the
  following risks
• Price risk The risk that adverse price
  movements will threaten the payments. The price
  risk is mitigated by the hedge
• Delivery Risk The risk that the Borrower will
  not make the scheduled deliveries of natural gas
• Currency control risk The risk that the Borrower
  will not have access to foreign currency to make
  scheduled debt service payments. This risk is
  mitigated by the pledge of offshore receivables
  to the lender
• Credit Risk Risk that the Borrower will not be
  able to meet its debt payments
• Sales risk The risk that the commodity produced
  is not sold. This is mitigated by the designation
  of approved buyers

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Why Hedge Structured Finance Transactions

• Commodity producers and consumers are both
  exposed to substantial risk should the price of
  their associated commodities move in an adverse
  direction
• Therefore, using financial hedging tools the
  borrower can
• Minimize debt service coverage ratios
• Maximise borrowing leverage
• Reduce risk associated with volatile commodity
  markets
• Stabilise income stream
• Allow for more predictable and accurate forward
  planning
• Secure shareholder value
• Any activity which minimises an inherent and
  volatile business risk is viewed favourably by
  lending institutions. Generally ratings agencies
  view energy risk management positively,
  especially when analysing cash flow volatility

The decision not to hedge is itself a
position taking or speculative view of the
market.
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Current Hedge EnvironmentSection 3
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Average 2004 Brent priceAnalysts forecasts range
and expected accuracy

• Current average (Reuters Jan 2004 survey, spot
  price 31 USD/BBL) Brent forecast is 24.70 USD/BBL
• Studying analyst performance over last 5 years
  shows systematically bearish mean-reversion
  based forecasts have underestimated realized
  prices by an average 25-35, imply a corrected
  32.40 USD/BBL Brent price

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Credentials, Capabilities, and Contacts Section 4
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Example Publications

• Daily
• Coal Report
• Energy Crack Report
• Metals Daily
• Natural Gas Report
• Relative Value in Base Metals
• Weekly/Monthly
• Commodities Weekly
• CFTC Commitment of Traders
• Commodities Update
• EIA Weekly Outlook
• EIA Weekly Recap
• Energy Fundamentals Monthly

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Commodity Credentials Energy

• Energy
• Global crude and oil product market maker
• 24 hour trading capability
• Regional natural gas market maker
• Regional electricity market maker
• Swaps and options capabilities

Crude Oil WTI Brent (IPE) Dated
Brent Dubai Tapis Japanese Crude
Cocktail Other Grades by agreement
Refined Products Jet Fuel Gasoil /
Diesel Fuel Oil Gasoline Naphtha
LPG Tenor Crude Oil Up to 10 yrs
Refined Products Up to 5 yrs
Natural Gas US Natural Gas NYMEX and Basis
Winner
European Power and Natural Gas U.K. Based Trading
Energy/
Commodity
Derivatives House
of the Year
Correlation Trading European Weather
(Carbon Credits)
Coal Freight Swaps Options
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Contacts

• Structuring desk 44 207 545 7893
• Sales desk 44 207 547 4305
• Trading desk 44 207 547 3874

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Disclaimer

• The information herein is believed to be reliable
  and has been obtained from sources believed to be
  reliable, but we make no representation or
  warranty, express or implied, with respect to the
  fairness, correctness, accuracy, reasonableness
  or completeness of such information. In addition
  we have no obligation to update, modify or amend
  this communication or to otherwise notify a
  recipient in the event that any matter stated
  herein, or any opinion, projection, forecast or
  estimate set forth herein, changes or
  subsequently becomes inaccurate.
• We are not acting and do not purport to act in
  any way as an advisor or in a fiduciary capacity.
  We therefore strongly suggest that recipients
  seek their own independent advice in relation to
  any investment, financial, legal, tax, accounting
  or regulatory issues discussed herein. Analyses
  and opinions contained herein may be based on
  assumptions that if altered can change the
  analyses or opinions expressed. Nothing contained
  herein shall constitute any representation or
  warranty as to future performance of any
  financial instrument, credit, currency rate or
  other market or economic measure. Furthermore,
  past performance is not necessarily indicative of
  future results.
• This communication is provided for information
  purposes only. It is not an offer to sell, or a
  solicitation of an offer to buy, any security,
  nor to enter into any agreement or contract with
  Deutsche Bank AG or any affiliates. In addition,
  any subsequent offering will be at your request
  and will be subject to negotiation between us. It
  is not intended that any public offer will be
  made by us at any time, in respect of any
  potential transaction discussed herein. Any
  offering or potential transaction that may be
  related to the subject matter of this
  communication will be made pursuant to separate
  and distinct documentation and in such case the
  information contained herein will be superseded
  in its entirety by such documentation in final
  form.