RBL Financing [de Saint Gerand Electronic PEF Material Final Oct 2013]

8/10/2019 RBL Financing [de Saint Gerand Electronic PEF Material Final Oct 2013]

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Project Evaluation and Financing

Course Material

October 2013


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3

Time Day One Part

9:00 -

10:45

Introduct ion to Financing / Key Valuation Drivers

Introduction

Key Valuation Drivers

1

11:00 -

13:00

Case Study #1: Upstream Negotiation

Contracting & Strategy

Key Drivers

2

13:00 -

14.00

Lunch Break

14:00 -

16:00

Non Recourse Financing

Project Financing and Reserve Base Lending3

16:15 -

16:45

Case Study #2

Launching a Facility 4

16:45-

17:00Conclusion / Q&A

Agenda

2

3

4

1

5


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Introduction: Key Drivers of the Oil & GasIndustry

1.


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Source: BP Statistical Review 2012

Hydrocarbon Today: Offer & Demand

Hydrocarbon Today: Offer & Demand

World Supply/ Demand closeto c.90MMboepd in 2011

Middle East accounts f or 32%of supp ly and less than 8% ofdemand

Europe/Eurasia fairlybalanced between suppl y anddemand, but t hanks toEurasia producti on

Over the last 4 years APAChas become the first worl dconsumer (30%) in front ofNorth America (28%)

Middle East

South &Central

America

Europe&

Eurasia

Afr ica

North AmericaAsia Paci fic

ProductionConsumption

Driver #1: Volumes and Markets


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Oil & Gas Spot Prices(1)

(in $/boe)

Driver #2: PricingOil & Gas Pricing Differential

Notes:

(1)Source: Bloomberg 2012

0

20

40

60

80

100

120

140

160

09/2006 03/2007 09/2007 03/2008 09/2008 03/2009 09/2009 03/2010 09/2010 03/2011 09/2011

NBPGWTHN Index EUCRBREN Index

With the advent o f Shale Gasand increased local gasavailability, gas price has

started to follow utilit ybehaviour

The gas price i s effectivelyde-linking from the oil pricealthough LNG pricing isregionally tied to the oil pr ice(such as in Asian L NGtransactions)

Some proj ects are now moredirectly impacted by the oilprice due to their pri ceformula and/or contractlengths


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Who Operates in the Oil Business? (1)

Profil e Key Drivers Players Financial Produc ts

IOCs

Private & Listed Companies

Integrated

Mainly OECD

Footprint: Historical roots

Hunting for Reserves

Reserve Replacement

Private Company Agenda(dividends, performance,HSE)

Most of projects are onbalance sheet but might useProject and Export Finance,Non Recourse Financing forvery specific reasons

NOCs

State owned companies

Strong control from Ministry

of Energy althoughsometime State in the State

Mostly Local footprint / localintegration

National Interest

Wealth Management for

future generation What can be achieved

without IOCs

Quality of signature andpolitical risk can makefinancing difficult

Project Financing and TradeFinance with large offshorecomponent can stimulatemarket appetite

OFSE

Private & Listed, but ofsmaller size

Contract driven, no reserves

Historical links with IOCs

R&D and technology

Cyclicality of the industrycritical

Complexity increasing

Competition: btw players,with IOCs, with new NationalOFSE

OFSE might use asset back

financing for Shipping Yardand Financing

Note:(1) IOC: International Oil Company, NOC: National Oil Company, OFSE: Oil Field Services

Driver #3: Players


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8

Journalists, Investors, governments use all the same word Reserves butthe definition varies

Economic / Society of Petroleum Engineers reserves are different fromgeological Reserves

Geoscientists will estimate the OIP /GIP (Oil in Place / Gas in Place)

Corporates will book only recoverable reserves

Technically recoverable

Economically recoverable (i.e. SEC assumes average of previous yearprice and NPV 10%)

How many years of oil left ?: the picture is blurred when we startcalculating the reserves in number of years

At what production level?

For what consumption level?

At what price...

Reserve Definition

SPE Reserve Classificati on and Risk Allocation

A Pro bab il is ti c Approach

Reserves vs. Production: Oil Reserves

mmboe

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%100%

70.0 65.0 60.0 55.0 50.0 45.0 40.0 35.0 30.0 25.0 20.0

P50

P10

1P

2P

3P

P90

1P

2P

3P

ProvenDebt and

Equity

Reasonable certainty to be commercially recoverable under current economic conditions, operating methodsand government regulations

Probable

Limit ed DebtAppet ite

Equity Market

Analysis of geological data suggests that they are more likely than not to be recoverable

Possible Pure Equity Risk Analysis of geological data suggests that they are less likely to be recoverable than Probable reserves

Driver #4: Reserves


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9

Discussion over Project Profiles

Types of production

Oil (Gravity-API: light/heavy, Sulfur content: sour/sweet)

Liquids (NGL: C3-C4, Condensate: C5+)

Gas (C1: Methane)

Water (BSW)

Key ratios to focus on

Production decline (decline rate)

GOR: for associated Gas & Oil, Gas to Oi l ratio

CGR: for associated Gas & Liquid, Condensate to Gas ratio

Defining the Productio n

Reserves vs. Production: Oil Production

Schematic Production Profile

0

20

40

60

80

100

120

140

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

Ramp-up Plateau Decline(kbpd)

PossibleProbableProven

Player Expectations

Sponsors

Will try to maximise the upfront flow to maximise NPVSponsor might favour liquid production upfront for risklimitationSponsor will also look for the maximum economicrecovery level

Host State State will favour maximisation of reservesState will look for maximisation of its return

Lenders

Banks will take very little risk above 1P reserves,appetite for Proved Undeveloped reserves and Possiblereserves can be fairly limited function of the sponsor andsize of the projectLenders will expect a reasonable tail at the end of therepayment of the facility (c.25%) to provide room forflexibility

Driver #4: Reserves


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10

What is a Concession?

State grant / sell a right on the sub-surface

The Contractor, the owner of the Licence:

has exclusive exploration and production rights

will finance exploration and development at its own risks

owns the production at the wellhead

owns the installation and plant for the life of the concession

pays royalties and taxes to the state

Sharing the Revenues

Royalty

SalesRoyalty

OPEX & Financin g Charges

Dep. CAPEX

Dep.EXPLO

Corporate Tax

Net Contractor Margin

EXPLOOPEX & Financin g Charges

CAPEXRegion

Royalty/Petrleum Tax

Russia

USA

UK

NL

Driver #5: Fiscal Regime


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What is a PSC?

State remains the ultimate owner of mining rights

The State / Ministry of Energy or National Oil Company will negotiatewith private company for the development of the reserves

The contractor will

Execute and finance exploration at its own risks

Is paid back for expenditure by a portion of the production (Cost Oil)

Is paid back for the risk and the investment by a portion of theproduction, post Cost Oil (Profit Oil)

The State might hold some share in the project and usually owns thefacilities

Sharing the Revenues

Profit Sharing Contract

Contractor Oil

= COST-OIL= PROFIT-OIL

EXPLO

CAPEX

Sales

OPEX & Financin g Charges

COST-STOP

Repayment OPEX & Financ ing Charges

Repayment CAPEX & EXPLOR.

Contractor Profit-oil

State Oil

Region

PSC/PSA

Africa

Middle East

India

Driver #5: Fiscal Regime


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Key Valuation Drivers2.


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13

Key Concepts:

Bottom- Up Analysis

CAPM

WACC & Discount Rate

Cost and Production analysis

Market and Transaction ValuationWhat People Pay For an Asset

Intrinsic valuation will be use bycorporates and investors to:

Select Projects (against eachother)

Analyse key risks andsensitivities

Develop green field project

Fundamental ValuationIntrinsic Value of a Project

Who Use ValuationAnd What Methodology to use

Comparable valuation will be useby corporates and investors to:

Conduct Acquisition andDivesture

Understand the market Make Strategic decisions at top

B/S level

Key Concepts:

Top-Down Analysis

Market Comps and Trading Comps

Metrics and Ratios

Relevant Benchmark

Valuation is no tdefinitely not a rigorousscientifi c exercise

Nevertheless economictheory and pragmatismare generally mixedduring a valuationexercise

A valuat ion exerc ise isalso very differentfunction of the

underlying objective: Screening and

ranking projects

Buying an Asset

Selling an Asset

...


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14

Forecasting Costs

Focusing on the Key Project Patterns

Capex

Capital Expenditures

Expenditures creating future benefits. A capital expenditure is incurred when a business

spends money either to buy fixed assets or to add to the value of an existing fixed assetwith a useful life that extends beyond the taxable year

Usually capitalised then amortised

Drillex

Drilling Expenditures (part of Capex)

Expenditures related to the Drilling phase, can be either part of exploration ordevelopment phase of a project

Capitalisation and depreciation are function of the contract, most favourable contractsmake them expendable

Facilex

Facility Expenditures (part of Capex)

Expenditures related to treatment, stabilisation and export of oil & gas products

Usually capitalised then amortised

Opex

Operating Expenditures

On-going expenditure for running a product, business, or system

Usually expendable in the year they occur

Tax Regime

Ring Fencing vs. Consolidation of assets

Royalty vs. Profit Sharing Agreements

Economic Valuation of an Oil& Gas Project wi ll generallyfocus on fo ur categories of

key item: Capital Expenditures

Drilling Costs

Facility Costs

OperatingExpenditures

Tax Regime

During t he pre-FID period amodel will be pr epared in

order to und erstand key riskof each segments


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Definition s and TermsUnderstanding the Jargon

Understanding the Cash CycleCash in / Cash Out

Cash Flow Definition

Terms Definition

Free CashFlow

Free Cash Flow Discretionary cash flowless capital

OperatingCash Flow

Revenue less lease operating expenses,production

taxes, transportation, and income taxes

After TaxCash Flow

Revenue less capital, lease operatingexpenses,

production taxes, transportation, andincome taxes

Before Tax

Cash Margin


taxes, and transportation

OperatingMargin


taxes, transportation, and DD&A

Case Study:XL Spreadsheet Cash Flow

Turn Over In / Out ?

Drilling Expenditures In / Out ?

Facility Expenditures In / Out ?

Capital Expenditures In / Out ?

Operating Expenditures In / Out ?

Increase in Working Capital In / Out ?

Tax Payables In / Out ?

Cash Flow Available for Debt Service In / Out ?


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Key Issue

comparing money today to money in the future is a difficulttask

The NPV will help to bridge future and present

by considering that time value of money is reflectedin interest rates

Choices over time: invest in a project if return frominvestment > return on best alternative

Appetite for Present is generally true and remains a strong

empirical basis for this theory

Theoretical Background of NPVAppetite for Present

Fundamental Valuation

Modelling Net Present Value of an Asset

MethodologyDiscounting the Appropriate Flow

Numerical for DummiesAt 6% of Interest what 1 Euro worth Tomorrow ?

0

0.2

0.40.6

0.8

1

1.2

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Euro

Undiscounted Discount ed at 6%

DCF is often the primary valuation methodology in M&A

Comparable public company and comparable acquisition analysisare often used as confirming methodologies

DCF is the PV of 2 main types of free cash flows:

1. Free cash flows to all capital providers (debt and equity)

2. Free cash flows to equity capital providers

DCF measures the inherent value of the asset and best capturesbusiness in transition

Fundamental in nature, DCF allows for questioning all of theassumptions and for performing sensitivity analysis

Definition

1. Project operating results and free cash flows

2. Calculate appropriate discount rate

3. Discount the annual cash flows and the terminal value to present

4. Determine range of values

5. Interpret the results and perform sensitivity analysis


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17

Calculate a IRR and NPV Calculate IRR of the enclosed project

Calculate NPV at Various Rate

8%

10%

15%

20%

Calculate the NPV rate required to have a NPV equal to $0

Any Conclusion ?

NPV and Brent Price

Calculate the Brent Price Required to have a 20% IRR

Calculate the Brent Price to have a NPV 20% at $0

What is the Break-even price?

NPV in Nominal and Real Term

Input 2% of inflation in the Model

Does the NPV at 15% goes up or down?

Theoretical Background of NPVAppetite for Present

Assessing Risk and Reward

Exercise

Numerical for Dummies

-80

-60

-40

-20

0

20

40

60

80

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Flow of Cash Flow of Cash Discounted at 10 %

Case Study: XL Spreadsheet NPV 1

IRR 17%

NPV Rate 10%

NPV 10 % 89.3

Annual Inflation 0%


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CAPM Equation

WACC Analysis

CAPM Model is g enerallyused in order to assess thereturn expectation

Function of the Capitalstructure and the tax burden

Wacc will assess theexpected return o f a gi venfirm to do a project

Where:

wd= % of debt in capital structure

wps= % of preferred stock in capital structurewce= % of common equity in capital struc ture

rd= firms cost of debtrps= firms cost of preferred stockrs= firms cost of equity

T = firms corporate tax rate

Weights

Componentcosts

WACC = wdrd(1-T) + wpsrps+ wcers


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Methodolo gy for Comparable AnalysisStep by Step

Comparisons with similar, publicly traded companies

Common uses:

1. Imply value fo r:

public company

division as an independent, publicly traded company

private company

valuation does not reflect control premiums or synergy

2. Defense analysis:

are we a possible takeover candidate?

What is Public Market Valuation?Benchmark and Comparison

Alternative Methodology: Comparable Analysis

The steps:

1. Determine the peer group (your comps universe)

2. Gather the appropriate financial information

3. Enter the financial information into your spreadsheet

4. Normalize for non-recurring items

5. Calculate relevant historical or forward multiples(P/E; EV/EBITDA)

6. Forecast your companys future financial performance(EBITDA, EPS, Cash Flow, etc.)

7. Apply appropriate multiples to your companys financial stats andderive implied valuation range

My Main Competitor trade at 5 EBITDA (EV/EBITDA = 5)

My EBITDA is $100 Therefore my implied valuation is $500

(EBITDA * % = EV)


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Subjective nature and process

How do you asses differences in the operationsand financial aspects?

do you assess intangible differencessuch as brand equity, reputation ormanagement expertise?

What is the appropriate number ofcomps?

Selection may be more art than science

Use judgment

Difficulty in finding pure compsSubtitle

Comparable or similar in terms of:

Operations

products / services; distribution;costs structure

geography; interest exposure;customers, etc

Financial Aspects

size (sales, mkt cap)

capital structure

margins / profitability

management experience

etc.

Tip: You are probably better off to not excludethe comps that are different but use them toexplain different relative valuation

What is a comparable fi rm?Subtitle

Notes:

(1) []

(2) []

Multiples will vary by ind ustry:

Oil : Production & Reserve

Retail: EPS, PEG

Industrials: EBITDA, EPS

Internet: Revenues, Subscribers, Page views

Banks/Financial institutions: EPS, BookValue

Use forward multiples if possible

Projected EBITDA, EPS

Use research

Value based on publ icmultipl es (relative value)

Implied value in publ icsecurities markets (IPOanalysis)

Focused on forwardlooking EBITDA, EPS orCash Flow

Alternative Methodology: Comparable Analysis


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What is the Implied valuation ( as of 2012 and on Median Multiples) for a Company with the following Metrics: EBITDA: $100M

2P Reserves: 25MMBoe

Current Production: 5,600boepd

ExerciseImplied Valuation for IFP Master Co

Example of a Comps Table

Case Study: XL Spreadsheet Comps 2

Company

Share

Price % of 52W

Market

Value

Enterprise

Value EV/ EBITDA

Name (local) Low High ($m) ($m) 2011 2012 2013 1P 2P 2011 2012 Core Total

Lundin Petroleum AB 62.85 112.6% 45.7% 2,885 2,783 5.4x 3.6x 3.0x n.a 15.8 94.7 54.7 n.a -31%

DNO International ASA 4.90 193.9% 60.8% 791 1,011 4.8x 3.7x 3.0x n.a 12.0 68.2 55.5 n.a n.a

Etablissements Maurel et Prom S.A. 13.98 108.2% 49.9% 2,515 2,767 11.4x 8.2x 8.9x n.a 24.6 89.6 170.8 n.a -13%

PA Resources AB 22.70 122.5% 37.4% 587 716 2.8x 1.5x 1.4x n.a 6.8 133.6 35.8 n.a n.a

Maximum 11.4x 8.2x 8.9x 0.0 24.6 133.6 170.8 0.0% 0.0%

Aver age 6.1x 4.3x 4.1x n.a . 14.8 96.5 79.2 n.a . n.a .Median 5.1x 3.6x 3.0x n.a. 13.9 92.1 55.1 n.a. n.a.

Minimum 2.8x 1.5x 1.4x 0.0 6.8 68.2 35.8 0.0% 0.0%

EV/ Reserves

($/boe)

EV/ Production

($k/boepd)

Price/NAV

Premium

Market Comparables


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Getting the ValuationSummary Valuation

Notes:

1) NAV based on Analysts Research.

2) Discounted to 1 January 2012 at 10%

3) Discounted to 1 January 2012 at 10%

4) Share price as at 28 November 2011

Metric Low Multiple High Multiple Equity Value Pc/Share

Last 3 Months Pc 88/Share Pc 251/Share

Last 6 Months Pc 88/Share Pc 300/Share

Current Pc 216/Share Pc 344/Share

Analysts NAVs

June 2008 Pc 240/Share Pc 374/Share

Current Pc 135/Share Pc 355/Share

Market

Analysts Price Targets

June 2008 Pc 203/Share Pc 375/Share

UK Midcap E&Ps(Price to Total Risked NAV(1)) Pc 298/Share 40% 63%

MajoPc(EV/DACF 2008)

2011 DACF(2)Pc 106,414m

5.4x 9.2x

Asians(P/CF 2008)

2011 CF(3)Pc 106,161m

2.9x 5.8xTrading

Comps

Russians(EV/DACF 2008)

2011 DACF(2)Pc 106,414m

3.4x 5.8x

Price to Total

Risked NAVPc 298/Share

64% 85%

Recent

M&A

Premium to Share Price Pc 141/Share70% 145%

FundamentalValuation

Base CaseBuild-Up on $90/bbl

DCF

Oil Price Sensitivityto Base Case

Total NAV at $50/bbllong-term

$70/bbllong-term

$90/bbllong-term

$100/bbllong-term

255

237

191

122

121

208

118

203

135

240

216

88

88

186

251

300

245

225

253

0 100 200 300 400 500

Current SharePrice(4): Pc 141

Core NAV 318

Core + Dev 380

Total NAV 392

392PcSha

415320

367

375

355

374

344

342


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Case Study #1: Upstream Negotiation3.


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A Forced Coo peration?

Developing hydrocarbons requires

Actual proved hydrocarbons / reserves

Access to capital and funding

Experience and technology

Access to end-market

None of the IOCs, hosting State or NOCs have all factors togethersimultaneously

Negotiating the agreement between the three main parties is a question of:

Capital environment

Geo / Political positioning

Willingness to negotiate and share resources

Potential of the asset

TIME !

IOCs and NOCs

Living Together?

Trust?

Political Links?

Trust?

Capital

Knowledge

Project MgtWorkforce

Licence


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Youre representing the National Oil Company

You are appointed by your government on aprecise mandate

Maximize national natural resources

Improve local employment and transfer ofskills

Generate revenues for the state

NOC

Youre representing the International Company

Your board has given you a mandate for aspecific project

Maximize the value of this given field (IRR)

Maximize the reserves your company canbook

Tie strong relationship with the hosting state

and all that within budget

IOC

Youre representing the Ministry of Energy

Your minister hasnt gave you a precise mandate(he is too busy for that) but you guess it lookslike that:

Maximize local content and transfer of skills

Insure that the deal will not be too juicy forthe Foreign Company

Insure that cash is not leaking out of the NOC

Preserve future generations interest

MoE

Key Teams


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Case Structu re

Understanding what are your respective roles

Read your Check List / Team Agenda

Read about the player you represent

Understand where you can push your agenda and bargain with other team

Ask questions

have side discussion with other team make up your mind before thevote

Remember: when you enter the board room, the decision is generallyalready set

Try to maximize your objectives but make the deal happen

Have fun!

How to Handle the Case

Process

NOC TeamAgenda

MoE TeamAgenda

IOC TeamAgenda

Vote

Model

TeamScoreCards

ModelOutput

Each provision subject to vote hasa particular impact on the

production, the size and theperformance of the project. Thegame being back by a model, allprovision agreed will be insertedin the model. The model will thenprovide the final outcome of thegame. Teams will receive scorecard and we will discuss together

the performance of eachstakeholder.

NOC

0

1

2

3

4

5Production Profile

Reserves

InvestmentCost

InvestmentProfile

TechnologyEmployment

BonusPayment

"Publish What You Pay"

Trading /Downstream

NOC

0

1

2

3

4

5Production Profile

Reserves

InvestmentCost

InvestmentProfile

TechnologyEmployment

BonusPayment

"Publish What You Pay"

Trading /Downstream

Each provision subject to vote hasa particular impact on the

production, the size and theperformance of the project. Thegame being back by a model, allprovision agreed will be insertedin the model. The model will thenprovide the final outcome of thegame. Teams will receive scorecard and we will discuss together

the performance of eachstakeholder.


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Process (Cont d)

Cabinet Warm-Up Board Presentation Board Discussion & Vote

Format

Discussion to be held in three groups

Tutor will help on understanding theresolution to be voted

Three mini speeches to be given tothe Board

Each team presenting the key pattern oftheir group

Presentation should be under a BoardFormat: Formal, Simple and already inline with each group objective

Discussion should be polite and formal

Board discussions are usually smooth

A deal-breaking is a situation that allgroups should avoid

Message

Key points to be assessed: Deal breakers,minor points

Assumption on other parties vote

Preparation of potential package deal

NOC Group presenting: QP

IOC Group presenting: Oxy

MoE Group presenting: Governement

Each group should promotes its targets

Deal will happen only if everybody is onboard

Timing 15 minutes Five minute for each group 1hour


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Non Recourse Financing4.


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Project Finance and Risk Allocation

Upstream DownstreamMidstream

Off-take Agreement

Feedstock & Utilities

Agreement

EPC

Inter-creditor

JV Agreement

JOA

Licences

Legal & Contractual

Pollution

HydrocarbonLeakage

Seveso

Environment & Safety

NGOs

Immediateneighbour-hood

Stakeholders & Civil

society Tax and Fiscal

regime

Licences & Permits

Stability

Convertibility

Sovereign and

Political

Availability of funds

Sponsor support

Project Cash Flows

Financing

Commodity price

FX and Currency

Off-taker

Market

Reservoir quality

Pressure

Water Content

Reserve & Productio n

Completion

On time

On budget

On spec

Production Capacity

Technical


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Project Finance and Risk Allocation

Delivering the project on time, on budget,

reaching the expected production capacityduring commissioning

Completion Risk

An EPC (Engineering, Procurement and Contracting) will be able to

cover this risk. For instance, companies like Saipem or Technip willprovide such a guarantee in a Turn Key agreement

Can the project reach the appropriate level of

production during all its l ife?

Performance Risk

Performance risk starts at the technical completion and can last for

the life of the project. If the project is sponsored by a reliable operator

(TOTAL, Shell), this will be carried by them. If the project is a JV,

then Banks can ask for more comfort. For instance a JOA (Joint

Operating Agreement) or an O&M (Operation & Maintenance)

agreement

Can the project sell the product?

Will the off-taker pay, at least, the break-even

price? Market / Off-take Risk

Lenders in Project Finance do not like market risk, they prefer to

have a project selling its production in the frame of a Long Term

Agreement (for instance IWPP in the UAE or most LNG projects)

Has a BOT or Licence been granted?

Lenders are repaid after tax has been paid. Is

there any risk of tax increase?

Is there any polit ical risk, like expropriation?

Currency convertibility

Legal & ContractualRisk

The project documentation will try to mitigate all these risks

Due Diligence will cover extensively contractual risks


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Key Project Risk & MitigantsAssessing and Allocating Project Risk

Risk Categories

Sponsors will have to assessall the project risks

In a Project Finance the

Financial Advisor wi llrepresent a cornerstone inassessing all the ri sk

Key benefit of ProjectFinancing is to bring upfro ntmain risks and assess them

Providing a uniqueopportu nity to allocate them

Mid CostSometimes

High Cost

Low Cost

Cost

Often

Rarely

Occurring

Category Example Workload Occurring Cost

Completion price, delay, performance, reopeners,

variation orders, interfaces Sponsor, EPC Contractor

Technology proven, obsolescence EPC Contractor, sub contractors

Environmental ground contamination, emissions,

resettlement Operator, EPC, Sponsor

Consents availability, breach, revocation Sponsor, Legal team

Supply term, sufficiency, field risk, quality,

security, back ups, price Supply Contractors, Reserve

Engineer

Offtake term, volume, price, transport, backups Offtakers, Sponsor

Credit contractors, suppliers, offtakers, insurers,

sponsors, lenders All

Market traffic, volume, price, correlations,

competition Offtakers, Market analyst

Operation capacity, reliability, efficiency, utilities,

decommissioning Operator, Sponsor, EPC (during

start-up)

Change in law sector regulation, environmental

legislation, taxation Government, Legal Team

Political

interference, nonperformance, war, civildisturbance, nationalisation, foreignexchange, expropriation, licencerevocation

All, IFI can help to mitigate


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Key Project Risk & MitigantsAssessing and Allocating Project Risk

Risk Categories (Contd)

Mid CostSometimes

High Cost

Low Cost

Cost

Often

Rarely

Occurring

Category Example Workload Occurring Cost

Legal Enforceability contracts, lenders security Legal team, Sponsor

Financial Interest rates, exchange rates, inflation,

commodities Lenders, Hedge providers, Sponsor

Force Majeure (Insurable) fire, explosion, earthquake Sponsor, Insurers

Force Majeure (Uninsurable) war, radiation, strikes, sonic boom, plague

Partnership cultural, documentation Stakeholders, Shareholders

Dispute Resolution breach of contract Legal team, Arbitrage Court


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34

Project Finance Players and Stakeholders

Indicati ve IWPP Structu re(1)

Sponsor

Generated the idea, will have some control over the project operations

Has the capacity to gather and coordinate various parties to finance theproject

Borrower

A Project company: SPV, SPC,

Will carry the liability, will own and operate the asset and is thecollateral/security

Contractors

Will help the project company in building the plant (EPC), operating

the plant (gas, water, power suppliers), buying the production (Off-taker)

Advisors

Will advise the various parties (Sponsor, Partner, Banks) in assessingaccurately the risks

Market Analysis (Gas Strategy, CERA)

Legal and Contractual (law firms)

HSE

Technical

CPR / Reserve engineer

Key Parties

FuelSupplier

Off-taker

ConstructionContractor

Landowner/State

Sponsor 1

Sponsor 2

Operation &Maintenanc

e (O&M)

Lenders

Project

Company

Shareholder AgreementProject Development

Agreement& Other Corporate Agreements

$ Equity

Land LeaseAgreement

Senior Loan & SecurityPackage (lender will alsorequire 3rdpartycontractors to enter intodirect agreements

Power & WaterPurchase

Agreement(PWPA)

$ Equity

O&MAgreement

EPCContract

Gas SupplyAgreement

Note:(1) Independent Water & Power Plant


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35

Making the Deal: Energy Project Life Cycle

(2,000)

(1,500)

(1,000)

(500)

0

500

1,000

1,500

Y01 Y02 Y03 Y04 Y05 Y06 Y07 Y08 Y09 Y10 Y11 Y12 Y13 Y14 Y15 Y16 Y17 Y18 Y19 Y20

Cumulative Cashflow

Pre

FEED*

FEED* EPC Capex

Construction

Start up

Operation

Maintenance

Positive cash-flow generation Decommissioning

Abandonment

Feasibility study Funding

arranging

Corporate

study and

reporting

ESAP*

E&S

Consulta

nts to

conduct

DD

Review

ESAP

Deliver

DD

report

Continued DD on social and environmental

impact of project

Independent consultant provide further report to

new lenders on request

Technical

Financial

Socialand

Environmental DD*

Notes: (1) FID: Final Investment Decision; (2) FEED: Front End Engineering Design; (3) ESAP: Environmental and Social Action Plan; (4) DD: Due Diligence

EquatorPrinciple

ComplianceLoad Period

($M)

FID*

FinancialClose

Decommissioning/ Exit

Break EvenCoD

Start up

Project Finance Credit Process


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36

Financing Schedule can be back-calculated from targeted FID Date

In order to get a clear view on Financing Condition for FID Sponsor andbanks should have successfully conducted:

A full Due Diligence Process

An EIS Process

A Bank Commitment process (subject to)

Tight Control of DD Advisor and a strong process, managed by theFinancial Advisor / Arranger will be critical

To keep the momentum

To Coordinate all parties

Illust rative Financial CalendarKey Tasks

Indicative Financing ScheduleFrom Due Diligence to Closing

j

Understanding Banking Approval & Commitment Process

Lenders common counsel appointed and legal due diligencecommenced

Y+0

Lenders Independent Consultants appointed and duediligence commenced

H1/Y+1

EIS submitted H1/Y+1

Negotiation of Term Sheet with Lead ECAs H1-H2/Y+1

Completion of EIS process H2/Y+1

Preparation and negotiation of Finance Documents andcompletion of lenders Due Diligence

H2/Y+1

Definitive financing commitments obtained from ECAs andcommercial banks

H1/Y+2

Award of construction contracts and Project Sanction H2/Y+2

Target Financial Close H2/Y+2

Target Completion Date H1/Y+6

0%

20%

40%

60%

80%

100%

1 5 9 13 17 21 25 29 33 37 41 45

KYC Technical Environment Legal

Due Diligence

InitialManagement /Credit Analysis

Initial

Pricing Tenor Key Terms &

Conditions

Term Sheet

Credit Committee

Credit

Finalised LoanAgreement &Security Package

Loan Agreement

Closing Signing Condition

Precedents CPs First

Disbursement

Closing &Disbursement

(% of Success)

Pass:1 Project

on 20

Pass:1 Project

on 8

Pass:1 Project

on 2

Pass:1 Project

on 1.2

(Weeks)

Getting the Agenda Right


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37

Making the Deal: Detailed Analysis

Understand the project scope Agree on Key Terms Preparing Documentation Paying the Bill

Description

Having a clear view on the

project, and the main risks Analyse if the Borrower can

accept the risk on a non-recourse basis

Define the frame work of the

borrowing Agree on the key terms and

conditions on the deal

Organise the loan structure

and the various securitycollaterals

Get the revenues and return

associated with commitmentand risk

MainDocuments &

Terms

Legal Due Diligence Report

Technical Study

Market Study

Financial Modelling

Sign Mandate Letter

Term Sheet Loan Agreement

Security Agreements

Share Pledge Agreement

Front End Fee

Commitment Fee

Margin over base rate

Break up Fee

Early Repayment Fee

Key Parties

Lender

Borrower & Sponsor

All Advisors

Lender

Borrower & Sponsor

Lender

Borrower & Sponsor

Legal Advisor

Lender

Borrower & Sponsor


38/58

Getting the Approval


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39

Credit and Approval Process

Stake holderCredit OfficerDeal Team

Deliverables:Present Deal SummaryDescribing the projectAssessing the key risk and mitigantsProviding some numbersSeeking for approval

Deliverables:Present Credit PaperDescribing the banks risksTesting sensitivitiesAssessing the soundness andsecurity packageDeciding to go / no go

Deliverables:Present Press ArticleDescribing the one or two key social/ environmental aspectProposing mitigants


40/58

Specifics of Reserve Based Lending6.


41/58

Reserve Based Lending

Proven track record Proven track record: Widely accepted source of debt finance for upstream assets from

marginal to giant fields straggling fiscal regimes

Monetization Monetization: Allows companies to raise pre-production development financing, which is

difficult to raise at the corporate level

Flexibility in structure Flexibility in structure: allows non-recourse / limited recourse / hybrid corporate structures,relieving stress on corporate balance sheet

Scalability Scalability: Ability to increase borrowing base at pace of company growth (existing assets

through E&P organic / inorganic life cycle or acquisition assets)

Readily accepted

financing structure

Readily accepted financing structure: most corporate creditors accept project finance,including non-recourse reserve base indebtedness carve-outs

Understanding the Risk Equationf S


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Understanding Debt and Equity Key diff erentiatorReturn is an increasing function of Risk

42

Understanding the Drivers of the Financing State Equation

Equity Analysis Credit Analysis

Revenue Stream Dividend stream

Capital Gain

Fixed income / Interest stream

Focus on Exploration Potential Production

Upside / downsideparticipation

Full upside anddownside

No upside / full downside

Rate of Return Target Yield c.15/30% Libor + margin

Term No limit Up to 5 years

Exit strategy At any point of time fora liquid security / OTCfor a private company

no exit until fully amortised orrefinanced

Financing State Equation :return is an increasingfunction of risk

Debt hol ders have limited / noupside potential and arelooking for fixed revenues

Debt holders have a definedtime horizon, equity holdercan get in and out at anypoint of time

Defining the Financing StrategyD bt St t i P tt


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43

Debt Structuring Patterns

Asset(s) Use of Proceeds

Asset maturit y and quali ty

Life cycle of each asset /life cycle of the company

Premium gi ven to product ion / 1P, and portfol io

diversification

Flexibilit y sought in use of proceeds

Willingness to pursue / or not large exploration effort

Lenders involvement in operational decision

(Expenditures)

Speed of Execution Recourse

Structural complexit y and speed to market

Asset Backed Debt process vs. Co rporate

Security offered or level of recourse desired

Size of the reserve base

Liquid ity / marketabilit y of the asset

Quality o f the sponso r (does recourse worth anything?)

Fi ld D l t d Fi i L if C l

Understanding the Asset Life Cycle


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Field Development and Financing Life Cycle

Risky exploration ph aserequires equity fundi ng

Non-producing single fielddevelopments can be

financed with RBL, assessingdebt capacity against ProvedReserves

Expanded Borrow ing Baseoften contains a mix ofproducin g and developingfields, with debt capacitypotentially enhanced byrisked Proved plus ProbableReserves of producin g fieldswith demonstrated track

record. Borrowing BaseFields can straddle mul tiplebasins and fiscal regimes

Reserve Based / Asset Backfinancing will focus on step 2and 3 of the di agram

DEBT SINGLE-FIELD /GREENFIELD FINANCING

(Proved Reserves)

EQUITY

Step 1

Step 2

Exploration

Step 3

Discovery

Appraisal

DEBT EXPANDEDBORROWING BASE

(Proved plus Probable Reserves)

Development

Production

Expansion

Step 4

Step 5

Step 6

FieldDevelopment

approval

FieldCompletion

BridgeFinance

Stretched Seniorand Junior Debt

Life cycle of E&P Company

1 2 3

E it D bt i f A t V l

Principles of Debt Sizing for RBLs


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300

225

169130 113

75

131170 188

0

50

100

150

200

250

300

350

NPV 10 % @ $100/bbl NPV 10 % @ $75/bbl Over Loan Period Debt Capacity @Cover Ratio 1.3x Debt Capacity @Cover Ratio 1.5x

$M

Debt Sizing AssumptionAs Per Credit Process

Understanding the Value BridgeFrom Partners perspective to Credit Committees Screening

Equity versus Debt v iew of an Asset Value

Assumptions Equi ty Analysis Credit Analys is

Base Case Price Scenario(FOB)

$100/bbl or ForwardCurve

$65-75 /bbl

Length of Valuation Concession term Debt Tenor (c.5 to 7 year)

Cover Ratio N/A LLCR [1.50- 1.70]

DSCR [1.25-1.50]

Valuation Methodology Deterministic Monte-Carlo Analysis

Key Focus Return on investment Return on Risked Weighted Asset

Valuation is a good exampleof the diff erence betweendebt and equity perspective

Debt hol ders will test

valuation with

a lower Crude pricedeck

the tenor of the debt

a reasonabl e coverratio

Equity Risk

Debt Comfort Zone

Price

Deck Tenor

Cover

Ratio

Principles of Debt Si ing for RBLs


46/58

Principles of Debt Sizing for RBLs

Reserve Tail Date. Point at which 20% - 30% of total approved reserves remain to be produced.

Facility Maturity Date. Usually a door-to-door tenor of 5 to 7 years from Financial Close as per market practice.

RBL Maturi ty Date would be the earlier of

The Facility Amount. An absolute maximum borrowing limit which represents the Lenders total actual funding commitments. The Facility Amountdeclines by a pre-defined, fixed Reduction Schedule, whose amortization broadly reflects the BBs projected cashflow profile

Usually lenders want to see a minimum Debt/Equity Ratio (D /E). 50/50 70/30 for most relevant greenfield projects.

The Borrowing Base Amount (BBA). The BBA typically is determined by the NPV of the expected Cashflow Available for Debt Service (CFADS) tobe produced by those BB assets, applying a discount rate of the higher of 8% or the real cost of debt and applying a combination of standard ratiotests. The BBA is the lowest amount of debt supported by the selected test(s):

Field Life Cover Ratio (FLCR). Sum of NPVs of each field to Abandonment Date divided by [~1.5-2.0];

Loan Life Cover Ratio (LLCR). Sum of NPVs of each field to RBL Maturity Date divided by [~1.3-1.6]; and

The Maximum Available Amount that a Borro wer may draw would be the lesser of the fo llowing How does the debt work ?

When ? The initial borrowingbase is calculated at thestart of the loan tenor, i.e at

financial close

What ? The borrower candraw up to the minimum ofthe existing totalcommitments and theborrowing base amount(BBA)

How often ? The borrowingbase amount is re calculatedperiodically (usually every 6

months) and may increase,decrease or remain thesame

A Redu ct ion Schedu le

Lenders determine the MaximumAvailable Amount or reduction schedule

at financial close. This amount isamended periodically through regular redeterminations

USD M$

Reduction Schedule (forced amortization profil e)

4. Unavailable Amount

2. Drawnamount

1. InitialFacility

Commitment3. UndrawnAmount

BorrowingBase Amount

Outstanding Debt (drawn by Borrower)

Understanding an RBL Over timeA Dynamic Tool


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47

A Dynamic Tool

Field Li fe NPV

FLCR

Grace Period

2013 2014 2015 2016

Borrowing BaseReduction Schedule

2012

mm$ Loan Li fe NPV

LLCR

Facility AmountReduction Schedule

RBL is scalable

Borrower have the ability toincrease the ind ebtedness atpace of company growth

existing assetsthrough

Acq uisi tion o f newassets

A Debt Product Evolving with th e AssetFlexibility and Scalability

From the Data Collection to the First Drawdown

Understanding the Process


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From the Data Collection to the First Drawdown

Phase 1: EarlyAnalysis

Phase 2: Initial BBDetermination

Phase 3: Structuringand Funding

Phase 4: Monitoring

2 to 6 months depending on due diligence and syndication process

Data collection Initial Financial Modelling Technical and Environment

Due Diligence

KYC

Financial Model running onCredit assumptions: Reserves Prices

First 1-2 year NPV CapexAdded Back

Initial Term Sheet discussion

Structuring an RBL facilitysuitable to clients needs

Final term sheet and loandocumentation

CPs satisfaction First Drawdown

Repayment Period Borrowing Base re-

determination Cover Ratio Tests

Understanding the pro ject andthe client

Understanding the need andthe validi ty of the product

Tailoring the product Disbursing and Monitoring


49/58


50/58

Conclusion7.


51/58

Appendices8.

Typical RBL Facility Structure


52/58

Typical RBL Facility Structure

Facility Agreement betweenthe Borrower and the Lenders

Security package :

Shares in Borrower

Charges over assets

Assignment of materialagreement

Project accounts

Project accounts:

Project Costs Account

Proceeds Account

Debt Service Account

Sale of hydro carbons toeligible buyers

Payments of hydro carbonrevenues, insurance andhedging proceeds intoaccounts

Withdrawals from projectaccounts pay preferentially:

Capex, Opex, taxes of theborrowing base assets

Financing Costs and Fees

Resulting cash flow from is

available for debt service(CFADS)

Resulting cash flows afterdebt service may bedistributed to Borrowersubject to tests

Capex

Opexand

taxes

Revenues

LendersStandard Chartered

BankEligible

Off-takers

Purchase &Salecontract

Oil / Gas deliveries

Cashflows

Security and Contracts

Products flows

Key :

SPVSpecial Purpose Vehicle

(Borrower & Co-borrowers)

Proceeds Account

Project Costs Account

Projects Accounts

Debt Service Account

Distribution Account

Cash Flows Available for Debt Service

Free Cash Flow f or Borrow ers

Payment of allhydrocarbon salesfrom the BB Assets

Debt Service(principal +interest)

Hedging Bank

Hedge proceeds /losses (If any)

DSRA

Free Cash Flow

Sponsors

Cash waterfalls

Loan

Dividend Test

RBL Mechanics


53/58

53

Principles

The model will calculate what is the main constraint from the ratio (DSRC /

LLCR/ PLCR) to size the borrowing base

Then this borrowing base is checked with the maximum facility amount,

and what has been drawdown

This amount is then compared to the next period and if

Current period below next period: drawdown

Current period above next period: repayment

Flow Chart

RBL Mechanics

1

2

3

Drawdown or

Repayment if

PLCR /LLCR /DSCR

MaximumFacility

AmountMin

NPV of Assets

AmortisedMaximum

Facility Amount

BorrowingBase decline

1

2

3

Indicative Terms


54/58

Illustrative Financing Structure Terms and Condit ions

Borrower SPV or Corporate Parent/Subsidiary

Financial Advisor Standard Chartered Bank

Mandated lead Arranger(s) Standard Chartered Bank and possibly other Financial Institutions

Lenders The Mandated Lead Arranger(s) and a Group of participating Financial Institutions

Facility Type RBL

Initial Available Amount USD [] Mn, depending on agreed production profile, hedging strategy, and technical assessment

Additional Permit ted Indeb tedness TBD, often allowed for unsecured working capital overdraft lines

Purpose/ Use of Funds Financing of development costs for [] f ields, consistent with CapEx add-back assumptions

Final Maturit y Earlier of Facility Maturity Date (< 7 years door-to-door ) or Reserve Tail (> 20%-30% level) Date

Interest Margin Cost of borrowing over a reference (e.g. Libor)

Repayment As per pre-defined BB Reduction Schedule (usually semi-annual)

Off-Takers A Creditworthy offtakers

Debt Service Reserve Account Equivalent of [] months of forward debt service (usually 6-12 months)

Security

Including, but not limited to, a full share pledge over the shares of the Borrower, security over alloff-take contracts and off-shore accounts, tangible assets, insurances and re-insurances, andshares of the subsidiaries or entities holding the licences.

Hedging To optimize facility availability as well as secure a low breakeven oil price.


55/58

Bibliography


56/58

56

g p y

General

The Prize : The Epic Quest for Oil, Money & Power, Daniel Yergin

Oil and Gas Exploration and Production, Denis Babusiaux. Editions IFP Publications

Ptrole & Gaz Naturel - Comprendre L'avenir, Emmanuelle Bauquis. Editions Ronald Hirl

Reserves Debate

The Coming Oil Supply Crunch, Paul Stevens. Chatham House Report

A Crude Awakening: the Oil Crash [2006]. DVD ~ Basil Gelpke & Ray McCormack

For the WE !

LUCKY LUKE Tome 18 : A l'ombre des derricks, Goscinny - Morris

TINTIN Land of Black Gold, Herge

There Will Be Blood (2007)Directed by Paul Thomas Anderson. With Daniel Day-Lewis

Le Sucre, Jacques Rouffio (1978)

Or noir et Maison blanche : Comment l'Amrique a vendu son me pour le ptrole saoudien, Robert Baer. Poche

Websites

http://www.iea.org/

http://www.opec.org/home/

http://www.chathamhouse.org.uk/

http://www.cera.com/aspx/cda/public1/home/home.aspx


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58

Disclaimer

We, Standard Chartered Bank have prepared this document for information purpose only and for restricted circulation. We have based this document on information

available to the public from sources We believe to be reliable. While We have taken all reasonable care in preparing this document, We do not represent the

information contained in this document is accurate or complete and We accept no responsibility for errors of fact or for any opinion expressed in this document.

Opinions, projections and estimates reflect Our assessments as of the document date and are subject to change. We have no obligation to notify You or anyone of

any such change. You must make Your own independent judgment with respect to any matter contained in this document. Neither We nor any of Our affiliates or Our

respective directors, officers or employees will be responsible for any losses or damages which any person may suffer or incur as a result of relying upon anythingstated or omitted from this document. This document is not an offer or commitment to arrange or underwrite any form of financing and does not create any legally

binding obligations on Us and/or Our affiliates.

.