(c) V.E. Eromosele Nigerian Nat Petroleum Corp 1 Raising Finance for African Energy Projects Lessons from Nigeria Victor E. Eromosele General Manager –

(c) V.E. Eromosele Nigerian Nat Petroleum Corp

1

Raising Finance for Raising Finance for African Energy African Energy

ProjectsProjectsLessons from NigeriaLessons from Nigeria

Victor E. EromoseleVictor E. EromoseleGeneral Manager – Finance (NAPIMS) General Manager – Finance (NAPIMS)

Nigerian National Petroleum Corporation Nigerian National Petroleum Corporation

UNCTAD 10UNCTAD 10thth African Oil & Gas Trade & Finance Conference African Oil & Gas Trade & Finance Conference Algiers, AlgeriaAlgiers, Algeria

3 April 20063 April 2006

NOT AN OFFICIAL UNCTAD RECORD

2(c) V.E. Eromosele Nigerian Nat Petroleum Corp

Africa and World OilAfrica and World Oil In the decade to 2004, Africa In the decade to 2004, Africa

contributed 27.5 per cent to the contributed 27.5 per cent to the increase in world oil reservesincrease in world oil reserves

Although Africa accounts for Although Africa accounts for 11.4 per cent of world oil 11.4 per cent of world oil production, it recorded a 32 per production, it recorded a 32 per cent growth in production over cent growth in production over last decade compared with last decade compared with world’s average of 20 per centworld’s average of 20 per cent

Nigeria, Algeria, Libya and Nigeria, Algeria, Libya and Angola account for 76 per cent Angola account for 76 per cent of Africa’s oil productionof Africa’s oil production

Oil from ageing fields and new Oil from ageing fields and new deepwater terrains pose deepwater terrains pose unusual challenges and require unusual challenges and require big budgetsbig budgets

Africa accounts for 27.5 per cent of 171 billion barrels net increase in

world oil reserves in decade to 2004

Africa27%

Rest of world73%

1.57

0.3

0.35

0.99

1.61

1.93

2.51

0 0.5 1 1.5 2 2.5 3

Million bpd

Others

Sudan

Eq Guinea

Angola

Libya

Algeria

Nigeria

Africa Oil Production 2004


Africa and World GasAfrica and World Gas Although Africa accounts for 7.8 Although Africa accounts for 7.8

per cent of world natural gas per cent of world natural gas reserves, it supplies 20 per cent reserves, it supplies 20 per cent of world LNGof world LNG

Nigeria and Algeria by far top the Nigeria and Algeria by far top the gas reserves African leaguegas reserves African league

The same is true of LNG supplies: The same is true of LNG supplies: Algeria is a world leader in fourth Algeria is a world leader in fourth position and Nigeria is sixthposition and Nigeria is sixth

With Nigeria LNG Trains 4 and 5 With Nigeria LNG Trains 4 and 5 commencing operations since commencing operations since fourth quarter 2005 and fourth quarter 2005 and exporting since first quarter, exporting since first quarter, Nigeria’s position is soon to Nigeria’s position is soon to changechange

Next to Qatar, Nigeria LNG is the Next to Qatar, Nigeria LNG is the world’s second fastest growingworld’s second fastest growing

176160

6553

42

020

40

60

80100

120

140160

180

Trillion cu ft

Nigeria Algeria Egypt Libya Others

Africa: Natural Gas Reserves 2004

World LNG Suppliers 2004

Indonesia18%

Malaysia15%

Qatar13%

Algeria13%

Nigeria7%

Trinidad8%

UAE7%

Others12%Australia

7%


Nigeria: Financing Energy Nigeria: Financing Energy GrowthGrowth

Some $11bn would be needed for seven LNG Some $11bn would be needed for seven LNG trains to be installed in Nigeria by three entities trains to be installed in Nigeria by three entities in the next six years. The entities are Bonny-in the next six years. The entities are Bonny-Island based Nigeria LNG, Brass LNG and Island based Nigeria LNG, Brass LNG and Olokola LNGOlokola LNG

NNPC projects that $34bn will be invested in NNPC projects that $34bn will be invested in Nigeria’s oil-related projects in the three years Nigeria’s oil-related projects in the three years to 2008to 2008

NNPC would through budgets and ‘carry NNPC would through budgets and ‘carry arrangements’ fund part of this requirement. arrangements’ fund part of this requirement. Majors would fund their share and invest in Majors would fund their share and invest in assets developed under PSCs. Where does the assets developed under PSCs. Where does the balance come from?balance come from?

Third-party financing, with improved terms Third-party financing, with improved terms


Nigerian Energy Projects find Nigerian Energy Projects find FinanceFinance

Between 2002 and 2005, Nigeria has raised more than Between 2002 and 2005, Nigeria has raised more than $3.3bn in financing four energy-related projects$3.3bn in financing four energy-related projects

Nigeria LNG award-winning 2002 deal opened the flood-Nigeria LNG award-winning 2002 deal opened the flood-gatesgates

Varied markets have been tapped: export credit Varied markets have been tapped: export credit guarantees, international and local banks and guarantees, international and local banks and multilateral and bilateral financial institutionsmultilateral and bilateral financial institutions

1060

625

650

460

360

240

0 200 400 600 800 1000 1200

Million US Dollars

NLNG-T4&5

NGLII-Ext

NGLII-Co-Lend

BGT-V11-14

SOF-I: Ext

SOF-I: Co-Lend

Nigeria's Successful Deals: 2002-2005


Case 1: Nigeria LNG Trains Case 1: Nigeria LNG Trains 4&5 (2002)4&5 (2002)

RaisedRaised: $1,060 million Senior debt for : $1,060 million Senior debt for NLNG Trains 4&5 expansion in Bonny NLNG Trains 4&5 expansion in Bonny IslandIsland

Sources and structureSources and structure:: Export credit guarantee cover Export credit guarantee cover

$620m$620m 19 international banks (uncovered) 19 international banks (uncovered)

$180m$180m 6 Nigerian banks 6 Nigerian banks

$160m$160m African Development Bank African Development Bank

$100m$100m TenorTenor: 6 to 8 years (door-to-door): 6 to 8 years (door-to-door) GearingGearing: D/(D+E): 50 percent : D/(D+E): 50 percent

(approx)(approx) ECAsECAs: ECGD of UK, SACE of Italy, US : ECGD of UK, SACE of Italy, US

Exim and NCM of HollandExim and NCM of Holland Key featuresKey features: Strong sponsors : Strong sponsors

(NNPC, Shell, Total and ENI). Brown (NNPC, Shell, Total and ENI). Brown field approach ensured high coverage field approach ensured high coverage ratios. Non-recourse. No completion ratios. Non-recourse. No completion guarantees and World Bank negative guarantees and World Bank negative pledge-compliant. Credit worthy off-pledge-compliant. Credit worthy off-takers and gas suppliers. Offshore takers and gas suppliers. Offshore accounts. accounts.


Case 1: Nigeria LNG Trains Case 1: Nigeria LNG Trains 4&5 (2002)4&5 (2002)

Success FactorsSuccess Factors Although extremely Although extremely

complex, well-structured to complex, well-structured to cover all creditor concerns cover all creditor concerns and mitigate identified risksand mitigate identified risks

Lenders took comfort from Lenders took comfort from seniority over existing seniority over existing shareholder loans and shareholder loans and ‘brown-field’ approach, ‘brown-field’ approach, which improved cover ratioswhich improved cover ratios

59 per cent of uncovered 59 per cent of uncovered $440 million portion $440 million portion provided by African sources: provided by African sources: ADB and 6 local banks: ADB and 6 local banks: “charity begins at home” “charity begins at home”

Project economics was Project economics was sound and technology tried sound and technology tried and testedand tested

Underlying contracts were Underlying contracts were very bankablevery bankable


Case 2: BGT LNG Vessels Case 2: BGT LNG Vessels (2003)(2003)

RaisedRaised: $460 million Syndicated : $460 million Syndicated Loan for four new-build LNG vessels Loan for four new-build LNG vessels dedicated to NLNG Trains 4&5dedicated to NLNG Trains 4&5

Sources and structureSources and structure:: 19 international banks (uncovered) 19 international banks (uncovered)

$455m$455m 1 Nigerian bank 1 Nigerian bank

$5m$5m TenorTenor: 13 years (door-to-door): 13 years (door-to-door) GearingGearing: D/(D+E): 66 percent : D/(D+E): 66 percent

(approx)(approx)

Key featuresKey features BGT is shipping subsidiary of Nigeria BGT is shipping subsidiary of Nigeria

LNG, which has strong sponsors and LNG, which has strong sponsors and transaction builds on previous transaction builds on previous successessuccesses

Longest tenor ever for Project with Longest tenor ever for Project with element of Nigerian riskelement of Nigerian risk

Attracted both project finance and Attracted both project finance and shipping banksshipping banks


Case 3: NNPC-Mobil NGL-II Case 3: NNPC-Mobil NGL-II (2004) (2004)

RaisedRaised: $1,275 million debt for NNPC-: $1,275 million debt for NNPC-Mobil NGL-II project using novel forward Mobil NGL-II project using novel forward sale arrangement (FSA) and special sale arrangement (FSA) and special purpose vehicle (SPV)purpose vehicle (SPV)

Sources and structureSources and structure:: US OPIC cover $325mUS OPIC cover $325m Credit Suisse First Boston- uncovered Credit Suisse First Boston- uncovered

$250m$250m 4 Nigerian banks (uncovered) 4 Nigerian banks (uncovered)

$50m$50m Exxon Mobil (Co-lending) $650mExxon Mobil (Co-lending) $650m

TenorTenor: 12 years (door-to-door): 12 years (door-to-door) GearingGearing: D/(D+E): 87 percent (approx): D/(D+E): 87 percent (approx) The US Bilateral: Overseas Private The US Bilateral: Overseas Private

Investment Corporation provided coverInvestment Corporation provided cover Key featuresKey features: Strong sponsors (NNPC, : Strong sponsors (NNPC,

Exxon Mobil and Mobil Producing Nigeria). Exxon Mobil and Mobil Producing Nigeria). First major joint venture structured First major joint venture structured financing to benefit from FSA. Cash flow financing to benefit from FSA. Cash flow based security. Few financing parties. based security. Few financing parties. Brown field approach. Sponsor lending on Brown field approach. Sponsor lending on pari-pasu basis. Closed within one year.pari-pasu basis. Closed within one year.


Forward Sale StructureForward Sale Structure

Lenders

CAPEX Account

Offshore SPV

SPV Revenue Account

NNPC - 60%

JV Partner -40%

Gas Buyer (eg XX LNG)

FSA

GSA

Loan Agreemt


Case 3: NNPC-Mobil NGL-II Case 3: NNPC-Mobil NGL-II (2004) (2004)

Success FactorsSuccess Factors Few financing parties ensured fast-Few financing parties ensured fast-

track execution of transaction and track execution of transaction and less protracted negotiationsless protracted negotiations

Co-lending ensured commitment of Co-lending ensured commitment of other lendersother lenders

NNPC and Nigerian government NNPC and Nigerian government support ensured that “true sale” support ensured that “true sale” opinion was accepted for the novel opinion was accepted for the novel FSA structureFSA structure

Creativity of financial adviser and Creativity of financial adviser and willingness to try new approachwillingness to try new approach

Ability to convince market that it Ability to convince market that it really does not need hard asset really does not need hard asset security, resulting in a paradigm security, resulting in a paradigm shiftshift

Sound economics of project and Sound economics of project and positive environmental impact positive environmental impact ensured that deal was done with a ensured that deal was done with a structure that did not breach structure that did not breach World Bank negative pledgeWorld Bank negative pledge


Gas AttractionGas Attraction

Gas-related projects are Gas-related projects are amenable to financingamenable to financing

Gas is considered as an environmental-Gas is considered as an environmental-friendly, clean and efficient energy friendly, clean and efficient energy source, hence the projects do not attract source, hence the projects do not attract undue NGO attentionundue NGO attention

Decision is easier as choice is usually Decision is easier as choice is usually between wasting a valuable asset and between wasting a valuable asset and monetising it with environmental benefit monetising it with environmental benefit such as gas flaring reductionsuch as gas flaring reduction

LNG business is characterised by long-LNG business is characterised by long-term sale and purchase agreements (SPA) term sale and purchase agreements (SPA) with credit worthy off-takers: this with credit worthy off-takers: this provides lenders with significant comfort provides lenders with significant comfort in the event of defaultin the event of default

LNG market and technology are fast-LNG market and technology are fast-maturing, resulting in “commoditisation” maturing, resulting in “commoditisation” and international bank markets are now and international bank markets are now familiarfamiliar

Unlike power projects, no LNG project Unlike power projects, no LNG project financing to date has recorded a financing to date has recorded a significant defaultsignificant default

Gas-prices have stabilised on the high Gas-prices have stabilised on the high end of the scale both in the US and in end of the scale both in the US and in EuropeEurope

Several alternatives exist in financing Several alternatives exist in financing LNG vesselsLNG vessels


Case 4:NNPC-MPN Satellite Case 4:NNPC-MPN Satellite Oil Field - SOF1 (2005)Oil Field - SOF1 (2005)

Raised $600m using FSA/SPV Raised $600m using FSA/SPV structure for the first time in structure for the first time in Nigeria oil industryNigeria oil industry

Sources and structureSources and structure Syndicate of International Bank Syndicate of International Bank

$270m$270m 5 Nigerian Banks5 Nigerian Banks $90m $90m Exxon Mobil Co-lending $240mExxon Mobil Co-lending $240m

Success factorsSuccess factors Creative financial adviser, Use of Creative financial adviser, Use of

FSA, NNPC and Nigerian govt FSA, NNPC and Nigerian govt acceptance of structure, sponsor acceptance of structure, sponsor co-lending, no hard asset securityco-lending, no hard asset security

Unique FeatureUnique Feature: Use of Nigerian : Use of Nigerian banks to fund two primer fields to banks to fund two primer fields to secure cheap financing for three secure cheap financing for three phase-1 satellite oil fieldsphase-1 satellite oil fields


Re-cap: Successful Energy-Re-cap: Successful Energy-related Dealsrelated Deals

Oil: $600m NNPC-MPN Satellite Oil Field-I Oil: $600m NNPC-MPN Satellite Oil Field-I (SOF1) closed Dec 2005(SOF1) closed Dec 2005

LNG: $1.06bn NLNG+ closed Dec 2002LNG: $1.06bn NLNG+ closed Dec 2002 Gas: $1.275m NNPC-MPN NGL-II closed Sep Gas: $1.275m NNPC-MPN NGL-II closed Sep

20042004 Gas Transport: $460m BGL vessels 11-14 Gas Transport: $460m BGL vessels 11-14

closed Mar 2003 to be refinanced 2006closed Mar 2003 to be refinanced 2006 Power: $450m Okpai IPP (Equity funded by Power: $450m Okpai IPP (Equity funded by

NNPC/Agip joint venture) commissioned NNPC/Agip joint venture) commissioned 20052005


Nigerian Energy-related Nigerian Energy-related Deals waitingDeals waiting

LNG: Brass LNG in phase 2 financial advisory LNG: Brass LNG in phase 2 financial advisory post-FEEDpost-FEED

LNG: Olokola LNG financial advisers LNG: Olokola LNG financial advisers changing batonschanging batons

Gas: NNPC-Shell et al considering Gbaran-Gas: NNPC-Shell et al considering Gbaran-Ubie gas supply to NLNG for external Ubie gas supply to NLNG for external financing financing

Oil & Gas Services: Innovative $300m Oil & Gas Services: Innovative $300m Nigerian Content Support Fund (NCSF) Nigerian Content Support Fund (NCSF) under developmentunder development


Learning Lessons for future Learning Lessons for future SuccessSuccess SimplicitySimplicity: Future LNG financing, even green-fields, need not : Future LNG financing, even green-fields, need not

be as complex as NLNG+. Need to find easier ways to mitigate be as complex as NLNG+. Need to find easier ways to mitigate risks. Fewer agreeable parties and sympathetic lawyers help risks. Fewer agreeable parties and sympathetic lawyers help deals.deals.

SpeedSpeed: NNPC-MPN NGL-II project and lately, the NNPC-MPN : NNPC-MPN NGL-II project and lately, the NNPC-MPN Satallite Fields project suggest that deals can be started and Satallite Fields project suggest that deals can be started and finished within a year. Can lawyers shorten the list of Condition finished within a year. Can lawyers shorten the list of Condition Precedents (CPs) for drawdown?Precedents (CPs) for drawdown?

Soft MarketSoft Market: We must take advantage of an international bank : We must take advantage of an international bank market that is now keen about Nigeria and extract better market that is now keen about Nigeria and extract better terms e.g. NNPC majority holding (as was done in the Satellite terms e.g. NNPC majority holding (as was done in the Satellite Fields deal)Fields deal)

PricingPricing: With US’ One-year LIBOR at 5.1 per cent, we must in : With US’ One-year LIBOR at 5.1 per cent, we must in future deals strongly negotiate down “Nigerian risk premium,” future deals strongly negotiate down “Nigerian risk premium,” particularly after settling Paris Club and BBparticularly after settling Paris Club and BB__

rating rating TenorTenor: For the right projects, tenors of up to 12-13 years are : For the right projects, tenors of up to 12-13 years are

achievable for Nigerian risk. achievable for Nigerian risk. Charity begins at homeCharity begins at home: With 25 large Nigerian banks, better, : With 25 large Nigerian banks, better,

bigger deals can be donebigger deals can be done


Final ThoughtFinal Thought

Lenders to gas and power projects would always seek all the comfort they can get. Remember:

““A bank is a place,A bank is a place,That will lend you money ifThat will lend you money if

You can prove you don’t need itYou can prove you don’t need it””-Bob Hope (1959)-Bob Hope (1959)

The burden of proof is squarely ours. May we rise The burden of proof is squarely ours. May we rise to the challenge by devising better templates of to the challenge by devising better templates of

success.success.


Documents

(c) V.E. Eromosele Nigerian Nat Petroleum Corp 1 Raising Finance for African Energy Projects Lessons from Nigeria Victor E. Eromosele General Manager –