Financing the Development of Oil and Gas Projects Prepared for

2. Summary Observations on Financing Oil and Gas Development in Africa Exploration and Production Recent Trends Worth Noting E&P universe includes upstream, midstream and downstream Focus today is upstream development of oil & gas reserves LNG, midstream and downstream to be addressed by other panel membersE&P universe includes upstream, midstream and downstream Focus today is upstream development of oil & gas reserves LNG, midstream and downstream to be addressed by other panel members

3. Realising opportunities in African countries Financing in Africa is diverse and complex Sector notes for hot regions: Nigeria - oil & gas, power, transport South Africa - power, metals & mining Egypt - predominantly LNG/gas, chemicals Botswana - does not require debt Ghana - mix of mining/transport/power projects Guinea Bissau - large refining and aluminium projects, each costing >$2bn Mozambique - oil & gas, power, mining Zambia - power, metals & mining Disclaimer: Map shows our view of the appetite for development project funding in African countries based on transactions in project finance and M&A, and also based on country sovereign debt ratings. The map shows realisable opportunities based on PEF, Export Credit Agency financing, bank debt, equities, attractiveness of resources, etc...Financing in Africa is diverse and complex Sector notes for hot regions: Nigeria - oil & gas, power, transport South Africa - power, metals & mining Egypt - predominantly LNG/gas, chemicals Botswana - does not require debt Ghana - mix of mining/transport/power projects Guinea Bissau - large refining and aluminium projects, each costing >$2bn Mozambique - oil & gas, power, mining Zambia - power, metals & mining Disclaimer: Map shows our view of the appetite for development project funding in African countries based on transactions in project finance and M&A, and also based on country sovereign debt ratings. The map shows realisable opportunities based on PEF, Export Credit Agency financing, bank debt, equities, attractiveness of resources, etc...

4. Reserve abundant net exporting nations Countries with reserves in excess of 1 bboe are: Algeria Angola Congo (Brazzaville) Egypt Gabon Libya Nigeria Countries with material hydrocarbons have a wide range of financeabilityCountries with reserves in excess of 1 bboe are: Algeria Angola Congo (Brazzaville) Egypt Gabon Libya Nigeria Countries with material hydrocarbons have a wide range of financeability

5. Project finance deals in Africa Note that announced deals not included because many announced Project Finance deals do not make it to development stage and therefore including these would be heavily over-stating 2000: Most significant 2 O&G deals were in Mozambique - natural gas related projects involving Sasol 2001: Many deals across various sectors; O&G included 2 LNG projects in Nigeria and an LNG project in Equitorial Guinea; other sector projects included aluminum in Guinea, hydro in Mozambique, Telecoms in Algeria and Nigeria 2002: Main O&G was Egyptian LNG Train II; other sector projects were transportation in Nigeria and telecoms in Egypt 2003: Main O&G was Lagos Gas Distribution Scheme; other sector projects were phosphate mining in Uganda and a Zambia-Tanzania-Kenya Power Interconnector project 2004: Main O&G was Soku Integrated Gas Supply Project (Nigeria,Oct 04), sponsored by Saipem SpA; other key sector was transportation, with projects in Kenya, Senegal and GhanaNote that announced deals not included because many announced Project Finance deals do not make it to development stage and therefore including these would be heavily over-stating 2000: Most significant 2 O&G deals were in Mozambique - natural gas related projects involving Sasol 2001: Many deals across various sectors; O&G included 2 LNG projects in Nigeria and an LNG project in Equitorial Guinea; other sector projects included aluminum in Guinea, hydro in Mozambique, Telecoms in Algeria and Nigeria 2002: Main O&G was Egyptian LNG Train II; other sector projects were transportation in Nigeria and telecoms in Egypt 2003: Main O&G was Lagos Gas Distribution Scheme; other sector projects were phosphate mining in Uganda and a Zambia-Tanzania-Kenya Power Interconnector project 2004: Main O&G was Soku Integrated Gas Supply Project (Nigeria,Oct 04), sponsored by Saipem SpA; other key sector was transportation, with projects in Kenya, Senegal and Ghana

6. Key project finance considerations in Africa Environmental risk Problem: Negative social and environmental impact Solution: Equator principles Reserve risk Problem: Potentially overstated Solution: Third party engineers to assess Production risk Problem: Faults in JV structure Solution: Third party arbitrator e.g.bank Country / Political risk Problem: Government instability; war and civil disturbance; expropriation Solution: ECA insurance, MIGA Financial risk Problem: Interest rate volatility and other macroeconomic factors Solution: Hedging Contract risk Problem: Cost over-runs; performance Solution: Cap on specific controllable costs; penalties for performance shortfalls Environmental risk Problem: Negative social and environmental impact Solution: Equator principles Reserve risk Problem: Potentially overstated Solution: Third party engineers to assess Production risk Problem: Faults in JV structure Solution: Third party arbitrator e.g.bank Country / Political risk Problem: Government instability; war and civil disturbance; expropriation Solution: ECA insurance, MIGA Financial risk Problem: Interest rate volatility and other macroeconomic factors Solution: Hedging Contract risk Problem: Cost over-runs; performance Solution: Cap on specific controllable costs; penalties for performance shortfalls

7. More options exist for large and midsize companies Multiple financing options exist for large companies and for midsized companies that can find a way to ear acceptable returns employing low risk acquisition and development drilling strategies. The gaps in outside capital availability are for small companies and projects and for exploration of any sort. So we face two areas of need and opportunity: The first is for small pools of capital, funded either by institutions or individuals, that will invest in small companies and projects. Most of these investments can and should be oriented towards lower risk drilling so that the risks of establishing a small company are not compounded by the risks of exploration. Even so, good returns can be achieved with a properly skilled investment management group since so little capital is available to this sector and the opportunities are numerous. The second need is to find a way to fund a greater number of exploration-driven companies. Although great selectivity is needed to choose projects to back, a combination of geoscientific and financial skills should make this possible. A portfolio of reserve targets with probabilities of success on individual wells ranging from 30% to 70% and strong management deserves to get funded. Multiple financing options exist for large companies and for midsized companies that can find a way to ear acceptable returns employing low risk acquisition and development drilling strategies. The gaps in outside capital availability are for small companies and projects and for exploration of any sort. So we face two areas of need and opportunity: The first is for small pools of capital, funded either by institutions or individuals, that will invest in small companies and projects. Most of these investments can and should be oriented towards lower risk drilling so that the risks of establishing a small company are not compounded by the risks of exploration. Even so, good returns can be achieved with a properly skilled investment management group since so little capital is available to this sector and the opportunities are numerous. The second need is to find a way to fund a greater number of exploration-driven companies. Although great selectivity is needed to choose projects to back, a combination of geoscientific and financial skills should make this possible. A portfolio of reserve targets with probabilities of success on individual wells ranging from 30% to 70% and strong management deserves to get funded.

8. African reserve ownership There are currently 214 companies active in African E&P activity The market is dominated by national oil companies (�NOCs�) and oil majors / integrated oil companies There were 24 companies with reserves greater than 500 mmboe - 6 NOCs, 13 majors, 4 independents and 1 entrepreneur; together these 24 companies control 92% of African reserves The smaller players are evenly divided between independent E&Ps, entrepreneurs and foreign companies (not necessarily oil & gas focused, e.g. Japanese conglomerates like Mitsui) In terms of foreign (non-African) ownership, majority are European, North American and Japanese There are currently 214 companies active in African E&P activity The market is dominated by national oil companies (�NOCs�) and oil majors / integrated oil companies There were 24 companies with reserves greater than 500 mmboe - 6 NOCs, 13 majors, 4 independents and 1 entrepreneur; together these 24 companies control 92% of African reserves The smaller players are evenly divided between independent E&Ps, entrepreneurs and foreign companies (not necessarily oil & gas focused, e.g. Japanese conglomerates like Mitsui) In terms of foreign (non-African) ownership, majority are European, North American and Japanese

9. Comparison of players� access to finance in Africa NOCs and oil majors have traditionally had the largest share of reserves in Africa - NOCs because of socio-political/strategic reasons and oil majors because of high levels access to capital Role of independents have potential to grow, as African countries like Libya open up and award licenses to foreign players Entrepreneurs may find it more difficult to establish greater market share because of limited access to capital Need incentivesNOCs and oil majors have traditionally had the largest share of reserves in Africa - NOCs because of socio-political/strategic reasons and oil majors because of high levels access to capital Role of independents have potential to grow, as African countries like Libya open up and award licenses to foreign players Entrepreneurs may find it more difficult to establish greater market share because of limited access to capital Need incentives

10. Recent use of funds Industry returns are at record levels primarily as a result of high commodity prices - the top exhibit shows cash flow exceeds capital spending Significant windfalls are being returned to shareholders - the lower exhibit shows share buybacks rise to 25% of capital returned to shareholders Investment levels remain behind rises in revenue; the industry remains wary of another downturn in the cycle and is facing opportunity constraints While M&A investments have fallen since the megamergers, we are seeing evidence of new asset and corporate deal activity Costs are rising, and the industry needs to avoid the complacency that can arise in times of plenty and avoid value destruction from misplaced investmentIndustry returns are at record levels primarily as a result of high commodity prices - the top exhibit shows cash flow exceeds capital spending Significant windfalls are being returned to shareholders - the lower exhibit shows share buybacks rise to 25% of capital returned to shareholders Investment levels remain behind rises in revenue; the industry remains wary of another downturn in the cycle and is facing opportunity constraints While M&A investments have fallen since the megamergers, we are seeing evidence of new asset and corporate deal activity Costs are rising, and the industry needs to avoid the complacency that can arise in times of plenty and avoid value destruction from misplaced investment

11. 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 Traditional financing vs. new approaches Difficulty of reserve-based lending Complicated by filing fees Further complicated in Africa with tax issues (stamp duties could amount to 2-3% of a loan in Nigeria, because of the need to use a locally incorporated vehicle), political and country riskTraditional financing vs. new approaches Difficulty of reserve-based lending Complicated by filing fees Further complicated in Africa with tax issues (stamp duties could amount to 2-3% of a loan in Nigeria, because of the need to use a locally incorporated vehicle), political and country risk

12. Reserve reporting � recent issues Increased focus on reserve estimates Recent announcements � Shell, El Paso and others Recent press � Wall Street Journal, The Economist Sarbanes-Oxley initiatives � focus on controls Market reaction Congressional inquiries and increased regulation Reserve writedown consequences Dramatic stock price declines Shareholder litigation Management scrutiny Possible financial statement restatement Possible disgorgement of bonuses under Sarbanes-Oxley Remedial measures Companies should treat reserve reporting similarly to financial reporting with appropriate controls and review procedures Consider creating independent review of reserve reporting through use of audit or similar committee and more extensive involvement by independent engineers Periodic compliance reviews and booking procedures should include review of compliance with current SEC reserve reporting and engineering positions Shell case: Broaden review scope of existing reserves committee; redefine duties and reporting lines of middle management; dedicate more staff to internal audit of reserves; remove reserve replacement goals from management scorecard; revise company reserve booking guidelines; enhance audit reviewsIncreased focus on reserve estimates Recent announcements � Shell, El Paso and others Recent press � Wall Street Journal, The Economist Sarbanes-Oxley initiatives � focus on controls Market reaction Congressional inquiries and increased regulation Reserve writedown consequences Dramatic stock price declines Shareholder litigation Management scrutiny Possible financial statement restatement Possible disgorgement of bonuses under Sarbanes-Oxley Remedial measures Companies should treat reserve reporting similarly to financial reporting with appropriate controls and review procedures Consider creating independent review of reserve reporting through use of audit or similar committee and more extensive involvement by independent engineers Periodic compliance reviews and booking procedures should include review of compliance with current SEC reserve reporting and engineering positions Shell case: Broaden review scope of existing reserves committee; redefine duties and reporting lines of middle management; dedicate more staff to internal audit of reserves; remove reserve replacement goals from management scorecard; revise company reserve booking guidelines; enhance audit reviews

13. Volumetric Production Payments � a US structure What is it? A monetization of reserves Definition: A non-operating, non-expense bearing limited term ORRI real property interest Similar to a forward sale Production payments denominated in either dollars or volumes have long served the oil and gas industry as financing tools. Production payments enable oil and gas producers to monetize their proven reserves, thus providing a greater level of liquidity. Using a volumetric production payment (VPP) in the disposition of an oil and gas producing property may provide parties to the transaction with advantages in certain circumstances In a dollar-denominated production payment, the holder provides the producer with an up-front cash payment and in return receives periodic cash payments based on production until the principal and interest specified in the production payment agreement are satisfied. Because principal and interest are payable solely from production obtained from designated fields, reserve risk and production risk are shifted to the holder of the production payment. Price risk on the oil and gas commodity remains with the producer, however, as lower commodity prices mean more production will be needed to satisfy the principal and interest obligations. For accounting purposes, a dollar-denominated production payment is generally considered a borrowing. A VPP can be a creative solution to economic, accounting, and tax issues associated with oil and gas producing property disposition transactions For federal income tax purposes, a production payments is a right to a specified share of the production from oil and gas in place (if, as, and when produced) or the proceeds therefrom. The holder of the production payment is entitled to the specified volumes free and clear of the costs of operating the oil and gas property Possible benefits Sellers Buyers OtherWhat is it? A monetization of reserves Definition: A non-operating, non-expense bearing limited term ORRI real property interest Similar to a forward sale Production payments denominated in either dollars or volumes have long served the oil and gas industry as financing tools. Production payments enable oil and gas producers to monetize their proven reserves, thus providing a greater level of liquidity. Using a volumetric production payment (VPP) in the disposition of an oil and gas producing property may provide parties to the transaction with advantages in certain circumstances In a dollar-denominated production payment, the holder provides the producer with an up-front cash payment and in return receives periodic cash payments based on production until the principal and interest specified in the production payment agreement are satisfied. Because principal and interest are payable solely from production obtained from designated fields, reserve risk and production risk are shifted to the holder of the production payment. Price risk on the oil and gas commodity remains with the producer, however, as lower commodity prices mean more production will be needed to satisfy the principal and interest obligations. For accounting purposes, a dollar-denominated production payment is generally considered a borrowing. A VPP can be a creative solution to economic, accounting, and tax issues associated with oil and gas producing property disposition transactions For federal income tax purposes, a production payments is a right to a specified share of the production from oil and gas in place (if, as, and when produced) or the proceeds therefrom. The holder of the production payment is entitled to the specified volumes free and clear of the costs of operating the oil and gas property Possible benefits Sellers Buyers Other

14. 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 Definition of MLPs Individual investors buy ownership interests, or units, in the partnership similar to purchasing shares of stock in a corporation A potential unitholder can go through a broker to purchase units When an investor buys a unit in an MLP, he or she becomes a limited partner Benefits: No Federal income tax Units traded like equity Cash distributions in lieu of equity Qualification criteria: Partnership must receive 90% of income from �qualifying sources� (including natural resource activities) Owned traditionally by retail investors Institutional investors and pension funds cannot own Structure bids up M&A prices - 6.0x-8.5xDefinition of MLPs Individual investors buy ownership interests, or units, in the partnership similar to purchasing shares of stock in a corporation A potential unitholder can go through a broker to purchase units When an investor buys a unit in an MLP, he or she becomes a limited partner Benefits: No Federal income tax Units traded like equity Cash distributions in lieu of equity Qualification criteria: Partnership must receive 90% of income from �qualifying sources� (including natural resource activities) Owned traditionally by retail investors Institutional investors and pension funds cannot own Structure bids up M&A prices - 6.0x-8.5x

15. High crude oil price make marginal fields attractive Some blocks considered to be marginal by majors are in reality not so marginal because of current crude oil environment Local companies able to get financing French banks Reserve-based loansSome blocks considered to be marginal by majors are in reality not so marginal because of current crude oil environment Local companies able to get financing French banks Reserve-based loans

16. Rising importance of gas in Africa Global LNG trade is expected to benefit from substantial increase over the next couple of years Substantial export capacity increase is planned in the Middle East and Asia Pacific for 2006 Major South American projects are scheduled to come on stream in 2007/8 Reasons for increased gas exploration in Africa: 1. International gas demand via LNG providing new export routes (Almost 50 new receiving terminals have been announced, yet it is far from clear how many will be built) 2. Local gas demand for power generation, as awareness develops that unstable power supplies are crippling economic and industrial development (and as high oil prices make local diesel generation even more expensive) 3. Potential development of local transportation infrastructure providing previously unavailable export routes within Africa (e.g. Chad/Cameroon pipeline; Pande (Mozambique)/S Africa pipeline) 4. Specifically zero-flaring targets in Nigeria, but generally an increasing recognition in the region of environmental concerns (plus pressure from agencies such as the World Bank) 5. Sheer size of African gas reserves (e.g. Nigeria has probably 9thlargest gas reserves in the world) - a lot of stranded gas reserves in Africa are now becoming economical because of the current gas price [note this argument is weak because Henry Hub indicates falling gas prices going forward]Global LNG trade is expected to benefit from substantial increase over the next couple of years Substantial export capacity increase is planned in the Middle East and Asia Pacific for 2006 Major South American projects are scheduled to come on stream in 2007/8 Reasons for increased gas exploration in Africa: 1. International gas demand via LNG providing new export routes (Almost 50 new receiving terminals have been announced, yet it is far from clear how many will be built) 2. Local gas demand for power generation, as awareness develops that unstable power supplies are crippling economic and industrial development (and as high oil prices make local diesel generation even more expensive) 3. Potential development of local transportation infrastructure providing previously unavailable export routes within Africa (e.g. Chad/Cameroon pipeline; Pande (Mozambique)/S Africa pipeline) 4. Specifically zero-flaring targets in Nigeria, but generally an increasing recognition in the region of environmental concerns (plus pressure from agencies such as the World Bank) 5. Sheer size of African gas reserves (e.g. Nigeria has probably 9thlargest gas reserves in the world) - a lot of stranded gas reserves in Africa are now becoming economical because of the current gas price [note this argument is weak because Henry Hub indicates falling gas prices going forward]

17. Changing global consumption patterns

18. Conclusions

20. Reserve abundant net exporting nations