Dr. B.O. Oramah

1. Innovative Solutions In Financing Local Entrepreneurs:Structured Oil Service Deals NOT AN OFFICIAL UNCTAD RECORD By Dr. B.O. Oramah Director (Planning & Development Department) African Export-Import Bank (Afreximbank) Cairo, Egypt Paper Presented at the 10th African Oil & Gas, Trade & Finance ConferenceHotel El-Aurassi, Algiers, AlgeriaApril 2 – 5, 2006

2. INTRODUCTION 1.1 Preamble • The Oil & Gas Sector (the “Sector”) still remains an enclave with limited linkages to other sectors of the economies of African Oil Producing nations. • That notwithstanding, the Sector constitutes the backbone of the economies of the African Oil Producing nations. • The Sector accounts for over a third of the total merchandise export revenues of the Continent.

3. Against this background, African Export-Import Bank (the “Bank” or “Afreximbank”) considers it as a Strategic Sector and supports activities within the Sector, especially operations within the Upstream segment of the Industry. • Afreximbank is therefore pleased to be invited to participate in this Conference and to share with delegates its experiences in the financing and promotion of Local Content in the Sector in Africa.

4. Afreximbank (www.afreximbank.com) has come a long way in bringing Structured Finance to Support Local Entrepreneurs operating in the Upstream segment of the Sector. From 1995 to 2005, the Bank’s credit approvals in favour of the Sector amounted to USD1.69 billion. • Prior to the introduction of Afreximbank’s Structured Oil Field Services Financing, Corporate Finance was the Instrument of Choice in Financing Operators in the Sector.

5. The consequence was that Oil Field Services remained under the control of Large Multinationals with very little local participation in the Sector as they were unbankable under corporate finance mind-set. • Afreximbank’s activities in the Sector seems to be reviving the interest of International banks in the financing of Local Entrepreneurs operating in Africa’s Oil & Gas Sector.

6. 2. Africa’s Oil & Gas Sector 2.1 Activities in the Oil & Gas Sector Activities in the oil sector can be broadly categorized into: a) Upstream Activities: • Exploration; and • Production of crude. Oil Field Services support the above activities b) Downstream Activities: • Refining; and • Distribution and Sales.

7. 2.2 Major Oil Producers in Africa

8. 2.3 THE UPSTREAM SECTOR 2.3.1 Africa's Strengths • Africa accounts for about 11% of global oil production and 10% of proven global oil reserves. • Africa also accounted for about 8% of proven global gas reserves. • Increasingly higher quantities of oil and gas reserves are being found in Africa's deep and ultra deep offshore areas, especially in west Africa.

9. 2.3.2 Problems Among the many problems are: • Over-dependence on foreign technology and skills; • Limited linkage with the Local Economy; and • Lack of Finance.

10. 2.3.3 Prognosis • Despite the weaknesses, activity in the Sector is expected to continue to grow driven by: • New technologies that have facilitated deep offshore activities; • Events in the Middle East that have accelerated geographic diversification and a surge in interest in Africa’s Oil fields; • Current high Oil prices and good near to medium-term market prospects;

11. Prolific nature of most basins; • Some policy support, e.g. Oil free zones in Nigeria, Equatorial Guinea and Angola; • Most activity in the near term, especially in West Africa, will be off-shore to avoid community problems and civil strifes and due to huge discoveries already made;

12. Given higher cost of off-shore activity, financing requirements will increase. • Movement to off-shore will require more logistics support increasing the importance of oil field services. • Empowerment of Indigenous Entrepreneurs through Local Content Promotion

13. 3. LOCAL CONTENT: SOME ISSUES 3.1 Definitional Issues 3.1.1 A Nigerian Local Content Committee defines Local Content as: “…the quantum of composite value-added to, or created in, the Nigerian economy through a Utilization of Nigerian human and material resources and services in the exploration, development, exploitation, transportation and sale of Nigerian Crude Oil and Gas resources without compromising quality, health, safety and environment”.

14. 3.1.2 Key Objective of Local Content Policy is to increase Local Value Added in Oil and Gas production and Sales, i.e. the Sum of: • Rent (R) • Wages (W) • Salaries (S) • Interest (I) • Profits (P)

15. 3.1.3 Thus: • Local Content Promotion does not necessarily mean Indigenization of Ownership of firms operating in the Sector • Local Content Policy is successful if: where n represents all firms in the Industry ;and where LC = Local Content; TS= Total Spend; and t = time • LC is better measured at firm levels rather than focusing on Spends per Project. - TS TS

16. 4. LOCAL CONTENT: Achievement and Targets 4.1 Successful Countries include • Norway • Venezuela • Malaysia • Brazil 4.2 In Africa, Nigeria appears to be the One Country Vigorously Pursuing this goal restricting certain activities to Local Firms e.g. • Certain Seismics • Front End Engineering Designs • Fabrication • Geological and geophysical studies • Fixed Platforms • FPSO Top-Sides construction, etc.

17. 5. Financing Oil & Gas Services 5.1 What Are Oil Field Services? 5.1.1 Restrictively seen as Logistic Services- Marine Services, Provision of Facilities, Maintenance Services 5.1.2 Definition expanded (as Oil Industry evolved) to include Engineering, Fabrication, Drilling, Work - Over and other activities.

18. Oil Field Services Market has enlarged as a result of: • Out-sourcing of most activities by Producers • Increasing importance of off - Shore Activities 7.1.3Accordingly Typical Project is executed with variety of contracts involving Services and Supplies (See Fig. 1)

19. FIGURE 1OIL FIELD DEVELOPMENT PROJECT SHOWING TYPICAL SERVICE CONTRACTS INVOLVED Project Owners Project Construction Contract O&M Contract Spares And Materials Supply Contract Services Ownership interest Service Contracts awarded through JV Operator

20. 5.2 Typical Service Contracts are: • Those signed between Oil Producers (Oil Majors / Minors) and Major oil field services companies, for example; • Schlumberger • Halliburton • Baker Hughes, etcetera • Contracts between Major Oil Producers and Minor Oil Service Companies • Sub contracts between major service providers and minor Oil Service Providers.

21. 5.2.1 In Africa, most of the services shown in “Figure I” are provided by Foreign Companies. Domestic Supply Chains can therefore be formed to provide those services, i.e. by enlarging the role of 5.2b&c in O&G activities thereby improving Local Content in the Oil Service business.

22. 5.3 Promotion of Local Content in Oil Field Services Business is becoming a priority in some African Countries, such as: • Nigeria where target is up to 45% Local Content by 2007. • Angola where goal appears to be 10% • Egypt where Egyptian Drilling Company (JV between EGPC and Maersk) does most drilling work

23. 5.4Goal is to capture huge amounts of money paid to Service Providers and integrate the Oil Sector with the Overall Economy through creating Industry Clusters with strong Local Content. 5.5Financing is a major constraint in promoting domestic Supply Chains in the Oil and Gas (O&G) sector because of the characteristics of indigenous Oil Service Companies (OSC) listed below:

24. 5.6The Critical Issues in Financing Indigenous Companies Revolve Around How To Deal With: • Their Low capitalization (Usually <USD1 million) • Limited experience • No borrowing track record and therefore no credible banking relationships • Their Highly specialized assets with limited secondary market. • Poor Corporate Governance Arrangements. • The above factors mean that pure corporate Finance will be difficult • Resort to local bank financing is constrained by lack of medium term funding in many markets

25. 6.ROLE OF STRUCTURED FINANCE: 6.1 Structured Finance is a technique of providing financing in difficult environments. It involves transferring risks from parties less able to bear those risks to those considered more capable in a manner that permits automatic reimbursement of advances. It essentially makes deals self-liquidating thereby reducing the risk of cumulative exposure to a client.

26. 6.2 The Role of Structured Finance is to mitigate risks by decomposing and transferring them from weaker parties to stronger parties. 6.3 An Innovative Structured Finance Transaction GASON in Support of Indigenous Oil Field Service Coys (OSCs) in Nigeria was recently arranged in Nigeria (Figure 2).

27. OIL SERVICE COs. QUALIFIED LOCAL BANKS (BORROWERS) 2. Security / Assignment 4. Oil Field Services 1.Contract FIGURE 2 GUARANTEED AFREXIMBANK-BACKED SECURITIZED OIL SERVICE NOTES (GASON) Recourse Guarantee (Per Aval) On-Lending OIL MAJORS (SUBSIDIARIES) 2. Acknowledgement AFREXIMBANK Lender of Record 2. L.O.C** 5. C.W.D*** 6. Repayment 2. Risk Participation Agreement Credit Enhancement* (Lloyds /AFREXIM) 3. Funding ESCROW A/C LENDERS (INTERNATIONAL BANKS) * May include Country Risk and Performance Risk Guarantees ** Letter of Comfort *** Certificate of Work Done or Accepted Invoices

28. 6.3.1 Deal Information Arrangers:Afreximbank, Bank of Tokyo-Mitsubishi and Standard Chartered Bank Agent:Standard Chartered Bank Local Arrangers:First Inland Bank and Calag Capital Lender of Record:Afreximbank Deal Size:USD75 million First Loss Guarantor:Afreximbank Second Loss Guarantor:An International Investment-grade rated Insurer Lenders’ Engineers:SNC Lavallin Local Guarantors:Nexim Bank, First Inland Bank, Intercontinental Bank, Fidelity Bank, Oceanic Bank, Sterling Bank. Final Maturity:3 years, with a 2 year Extension Option

29. 6.3.2 Key Advantages of Deal • Lenders benefit from Afreximbank’s preferred Creditor Status. • Lenders benefit from local knowledge of domestic originator banks. • Lenders benefit from a second way out comprising of a diversified pool of local banks with strong oil service financing capabilities.

30. Local banks are able to increase oil service lending by freeing their capital. • Contractors benefit from cheaper and matching currency funding. • Country benefits from greater indigenous participation in the sector by operators and local banks.

31. 6.3.3 Lessons Learnt: • Lengthy process – Deal took 2 years to Closure due to : • Multiplicity of parties. • Limited experience of Oil Service Coys (OSCs) in accessing such funding which delayed CP completion.

32. 7. Local Content Support Fund: 7.1 A Major Oil Producing Country Intent on Aggressive Local Content Targets Approached the Arranger of GASON to put a Deal together for Local Content Support. 7.2 Their Requirements: • A Fund of USD500m – USD1 billion. • Very Competitive Pricing • A Fund Accessible by Indigenous Service Providers that would otherwise not be able to access the Eurocredit Market. • Speed – 4 months to Closure.

33. 7.3 Our Solution: Arrangement of USD350m 3-year Syndicated Oil Service Contract Pre-financing Facility as a Bridge Arranging a USD1 billion Medium Term Note Programme

34. 7.4 STRUCTURE OF THE USD350 MILLION BRIDGING LOAN Fund Promoters & JVS OIL SERVICE COYS CONTINGENT OIL SERVICE COY On-Lending Fund Support Agreement / Fist Loss Guarantee Fund (USD100m) Security / Assignment of Contract Oil Field Services Contracts SPV (Bankruptcy Remote) OIL MAJORS (SUBSIDIARIES) Lending Security Assignment AFREXIMBANK (Lender of Record/ Security Trustee Proceeds of Contract & Repayment Contingent Services Agreement Funding Funded Risk Participation LENDERS (PARTICIPANTS)

35. 7.5 Deal Underpinnings • Strong Promoter Support – A First Loss Guarantee Fund of up to USD100 million contributed by the JVs operating in the Country ARRANGED by the National Oil Company (NOC). • Sound Structure that Mitigated Performance Risk through: • A pre-qualification system conducted by a first class Oil Engineering firm and backed by the National Oil Company • Panel of internationally Reputable Oil Service Companies acting as Contingent Oil Service providers to step in upon Disqualification of any OSC.

36. Strong Support of Oil Majors operating in the Country. • A very ROBUST and CLEAR Local Content Policy in place in the Country.

37. 7.6 THE PROPOSED USD1 BILLION MEDIUM TERM NOTE Issuance Proceeds INVESTORS Program Manager (Interna-tional Financial Institution) Contingent Services Agreement Liquidity Providers Contingent Oil Service Companies Issuance Fully Underwritten by Investment-grade rated Bank Pass Criteria Liquidity, Credit Enhancement & Dealership Agreement Principal Oil Majors Service Providers Multi-Seller Medium Term Note/ Bond Issuance Program Contracts Medium Term Notes/ Bond Dealers Funding Agreement Issue Proceeds Trustee Agreement Issuance of Multi-Currency Notes Assignment of payments from Oil Majors to Designated Trustee Account Trustee Repayment: Principal & Interest

38. 7.7 Proposed Program Structure Multi-Seller Medium Term Note Program * To be arranged as an open ended revolving debt funding scheme structured as a multi seller medium term note (MTN) program collaterized by the receivables of the issuer from joint Venture Partners of NOC (Shell, Mobil, Chevron, Agip). The notes will be issued by the Special Purpose Vehicle and can be in a multiple of tenors and currencies but mainly expected to be in US$.

39. * The MTN is expected to attract Investment-grade rating as it is expected to be underwritten by an Investment grade-rated bank. Performance Risk to be mitigated by introducing a Joint Qualification Systems (JQs) and Contingent Oil Service Companies (Investment grade-rated international Oil Service Coys). * Repayment would be through A LEGAL ASSIGNMENT of receivables by the companies. All cash flows are expected to be captured offshore in high investment grade internationally rated countries. * The receivables will be managed by an independent trustee, acting as Collection and Paying Agent.

40. 7.8 Transaction Flow: • Oil majors tender for contracts. • Local content companies bid and a winner is nominated. The winner will seek to source funding from the Fund. • The Fund will enter into an open-ended funding agreement with the funding program manager who will in turn set up a Medium Term Note Issuance Program to facilitate an evergreen debt funding program. • The debt funding program will also enter into a trustee agreement with an international trustee; to provide paying and collection services to the program.

41. The SPV set up for the program will also enter into a Liquidity Back-Stop Facility Agreement, to provide liquidity to investors to protect against cash flow timing mismatches. Dealer agreement will also be entered into to provide trading and underwriting to the notes in issuance. • On the strength of the credit quality and legal structure of the program, investment grade notes / bonds of varying maturities will be issued to target investors. • Proceeds of notes / bonds issued will be used to fund eligible Local content companies for working capital and contract completion purposes.

42. Contract Receivables will through the assignment be used to repay principal & interest on the notes. • Excess cash flows that accrue to the Trustee / Paying Agent after paying the note obligations will be paid to the individual local oil and gas companies.

43. Benefits to Potential Investors • Repayments will be based on a Legal Assignment of receivables payable to the Trustee Offshore. • Issuance to be underwritten by an Investment-grade rated International financial institution ensuring investment grade rating for the Notes. • Back Stop liquidity facility to ensure cashflow timing mismatches are covered. • Available liquidity in notes via designated dealers • Performance Risk Mitigated. • Strong Programme Sponsor with a track record of successfully accessing the international financial market.

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