Houston OILGas Presentation Final

Slide1: 

Financing African Oil & Gas Investments Nathan A. Mintah Director, Project Finance, HSBC November, 2003 Presentation to the Africa Oil & Gas Forum – Houston, TX

Slide2: 

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: 

Capital flows into Africa – recent trends Introduction

Foreign Direct Investment into Sub-Saharan Africa: 

Foreign Direct Investment into Sub-Saharan Africa Net Inward FDI into Sub-Saharan Africa US$ billions 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

Net inward debt flows into Sub-Saharan Africa: 

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 Source: Global Development Finance 2003

Attracting financing into African oil & gas projects – Project issues: 

Attracting financing into African oil & gas projects – Project issues

Typical contractual and ownership structure: 

Typical contractual and ownership structure

Project issues – sponsors and project company: 

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

Project issues – concession agreement, PSA or license: 

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

Project issues – construction arrangements: 

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

Project issues – operating agreement: 

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

Project issues – offtake arrangements: 

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

Project issues: other – reserves: 

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

Project issues: other (cont’d): 

Project issues: other (cont’d) Completion risk – who bears completion risk? Mechanical completion Financial completion Security package Environmental standards Lenders’ concerns

Project issues: other – project economics: 

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: 

Attracting financing into oil & gas projects – Country issues

Country issues – legal & regulatory framework: 

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

Country issues – country risks & mitigation: 

Country issues – country risks & mitigation MIGA’s programs Private PRI insurance market World Bank ‘Partial Risk Guarantee’ program

Typical contractual and ownership structure: 

Typical contractual and ownership structure Operating Agreement Operator Market &/or Offtake Parties Government EPC Contractor(s) SPV Project Company Equity Sponsors 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: 

Sources of financing

Sources of financing – Africa focused commercial banks and infrastructure funds: 

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

Sources of financing – DFIs: 

Sources of financing – DFIs DFIs Proparco, France RSA UK USA Germany Germany CDC – interested in equity Others – equity, senior & subordinated debt RSA FMO Netherlands

Sources of financing – export credit agencies: 

Sources of financing – export credit agencies UK USA France Germany SACE Australia Japan Spain Italy Export Credit Agencies ECIC South Africa Term debt financing Term: 7 - 10 years+ CIRR Rates, ECA premium Must meet local content requirements

Sources of financing – multilateral agencies: 

Sources of financing – multilateral agencies Multilateral Agencies AfDB IFC – ‘A’ loan & ‘B’ loan program Equity, senior & subordinated debt

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

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 banking market in Nigeria.

Future sources of financing – international capital markets: 

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: 

Conclusions

Conclusions: 

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: 

HSBC oil & gas credentials

Mergers and acquisitions/advisory – oil and gas industry: 

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

Equity offerings in the oil & gas sector: 

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

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

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 2001 2003

Project finance experience in the oil and gas sector: 

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 Selected oil and gas transactions

Thank you: 

Nathan A. Mintah Director, Project Finance HSBC Tel: +27-11-481-4369 Fax: +27-11-646-8485 E-mail: nathan.mintah@za.hsbcib.com Thank you