Financing the Development of Oil and Gas Projects

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Financing the Development of Oil and Gas
Projects Prepared for
December 2004
2
Summary

• Observations on Financing Oil and Gas Development
  in Africa
• Exploration and Production
• Recent Trends Worth Noting

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Realising opportunities in African countries
Heat chart
Tunisia
Morocco
Cape Verde
Algeria
Western Sahara
Libya
Egypt
Mauritania
Mali
Niger
Senegal
Eritrea
Djibouti
Sudan
Chad
Burkina Faso
Guinea
Nigeria
Ethiopia
Attractiveness key
Central African Republic
Cameroon
Somalia
Very high
Ghana
Uganda
Kenya
Côte DIvoire
High
Gabon
Congo (Zaire)
Congo
Rwanda
Liberia
Togo
Burundi
Equat. Guinea
Medium
Tanzania
Sierra Leone
Benin
Low
Guinea Bissau
Malawi
Sáo Tomé Principe
Angola
The Gambia
Zambia
Mozambique
Zimbabwe
Namibia
Madagascar
Botswana
Mauritius
Swaziland
Republic of South Africa
Lesotho
Source Thomson One, EIU, JS Herold, Bloomberg,
HSBC analysis Note Attractiveness determined by
precedent transactions and sovereign debt ratings
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Reserve abundant net exporting nations
Countries with reserves in excess of 1,000 mmboe
Tunisia
Morocco
Cape Verde
Algeria
Libya
Western Sahara
Egypt
Mauritania
Mali
Niger
Senegal
Eritrea
Djibouti
Sudan
Chad
Burkina Faso
Guinea
Nigeria
Ethiopia
Attractiveness key
Central African Republic
Cameroon
Somalia
Very high
Ghana
Uganda
Kenya
Côte DIvoire
Gabon
High
Congo (Zaire)
Congo
Rwanda
Liberia
Togo
Burundi
Equat. Guinea
Medium
Tanzania
Sierra Leone
Benin
Low
Guinea Bissau
Malawi
Sáo Tomé Principe
Angola
The Gambia
Zambia
Mozambique
Zimbabwe
Namibia
Madagascar
Botswana
Mauritius
Swaziland
Republic of South Africa
Lesotho
Source Thomson One, EIU, JS Herold, Bloomberg,
HSBC analysis Note Attractiveness determined by
precedent transactions and sovereign debt ratings
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Project finance deals in Africa
Value of projects (US billions)
Number of deals Oil Gas 4 5 3 2 2 All
sectors 13 15 7 4 12
Source Thomson One
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Key project finance considerations in Africa
Environmental risk
Reserve risk
Contract risk
Issues
Production risk
Financial risk
Country / Political risk
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More options exist for large and midsize companies
Source Oil Gas Financial Journal - 2004 Third
Quarter
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African reserve ownership
Reserves (mmboe)

• National oil companies

• Oil majors/supermajors

• Independent EPs

• Entrepreneurs

Source Wood Mackenzie
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Comparison of players access to finance in Africa
Reserves
Available Funding
Self
Public Debt Equity
Banks
VPPEquivalents
Private Equity Mezzanine
51
National Oil Companies
42
Oil Majors/Supermajors
5
Independent EPs
2
Entrepreneurs
10
Recent use of funds
2003 Cash flow vs. capital spending by region
Global capital allocation
Source JS Herold
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Trends impacting financeability of African
projects

• Reserve reporting
• Volumetric Production Payments and global
  equivalents
• Master Limited Partnerships / Royalty Trusts
• High crude oil price makes marginal fields not so
  marginal
• Rising importance of gas in Africa
• Changing global consumption patterns

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Reserve reporting recent issues
Downward revisions of proved, proved undeveloped
reserves
Proved reserves () PUDs ()
Forest Oil 30 75-80 Nexen 8 25.4 Royal
Dutch/Shell 20 95 Vintage 56 NA El
Paso NA 64.1 Penn West Petroleum 13 22.5 BP
PLC 2.5 52 Baytex Energy Trust (32.3 of proved
and PUDs)
Source Herold Industry Insights, Mar. 19, 2004

• Recent increased focus on reserve estimates
• There are a number of consequences to reserve
  writedowns
• Re-examination of reporting systems and corporate
  governance

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Volumetric Production Payments a US structure
Property sale with a VPP
Production Co.
Working interest subject to VPP (PUDs)
VPP (PDPs)
200 million
300 million
Buyer Co.
Investment Bank
Payments on VPP
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Master Limited Partnerships / Royalty Trusts

• A limited partnership that is publicly traded
• Combines tax benefits of a limited partnership
  with liquidity of publicly traded company
• Qualification criteria

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High crude oil price make marginal fields
attractive
WTI - spot price
Louisiana sour - spot price
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Rising importance of gas in Africa
Global LNG trade
Norway Snohvit
US - Kenai
Towards Japan
Russia Sakhalin
Canada St Lawrence
From US
ELHG
Arzew - Skikdo
Zybid
Iran
Qatargas
Egas
Adgas
Oman
Trinidad - Atlantic
Yemen
Nigeria -Bras
Venezuela
Indonesia Arun
Brunel
Nigeria - Escrevos
Malaysia Bintulu
Indonesia - Tangguh
Indonesia - Bontang
Australia - Sunrise
Angola
Australia - Bayu Undan
Existing LNG plants
Peru
NW Shelf
Sepetiba
Australia - Gorgon
Importer
Exporter
Total export capacity (bcm)
Source EIA, Equity research, HSBC analysis
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Changing global consumption patterns
Estimated net increase in Asia Pacific crude
distillation capacity
World oil demand - 2002-2030 CAGR
Source CERA, IEA
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Conclusions

• Energy consumption and supply in the world is
  changing rapidly
• If you are looking for oil gas development
  financing
• 1. Know your reserves
• 2. Mitigate risks where possible
• Financial derivatives
• Insurance/guarantees
• 3. Cast a wide net for financing sources
• 4. Banks are different
• US banks comfortable with reserve-based lending
  but Africa is newer concept
• European banks more familiar with African
  countries but less reserve-based lending heritage

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Reserve abundant net exporting nations
Alternative
Countries with reserves in excess of 1,000 mmboe
Tunisia
Morocco
Cape Verde
Algeria
Libya
Western Sahara
Egypt
Mauritania
Mali
Niger
Senegal
Eritrea
Djibouti
Sudan
Chad
Burkina Faso
Guinea
Nigeria
Ethiopia
Attractiveness key
Central African Republic
Cameroon
Somalia
Very high
Ghana
Uganda
Kenya
Côte DIvoire
High
Gabon
Congo (Zaire)
Congo
Rwanda
Liberia
Togo
Burundi
Equat. Guinea
Medium
Tanzania
Sierra Leone
Benin
Low
Guinea Bissau
Malawi
Sáo Tomé Principe
Angola
The Gambia
Zambia
Mozambique
Zimbabwe
Namibia
Madagascar
Botswana
Mauritius
Swaziland
Republic of South Africa
Lesotho
Source Thomson One, EIU, JS Herold, Bloomberg,
HSBC analysis Note Attractiveness determined by
precedent transactions and sovereign debt ratings