Raising Finance for African Energy Projects Lessons from Nigeria

1. NOT AN OFFICIAL UNCTAD RECORD Raising Finance for African Energy ProjectsLessons from Nigeria Victor E. Eromosele General Manager – Finance (NAPIMS) Nigerian National Petroleum Corporation UNCTAD 10th African Oil & Gas Trade & Finance Conference Algiers, Algeria 3 April 2006 (c) V.E. Eromosele Nigerian Nat Petroleum Corp

2. Africa and World Oil • In the decade to 2004, Africa contributed 27.5 per cent to the increase in world oil reserves • Although Africa accounts for 11.4 per cent of world oil production, it recorded a 32 per cent growth in production over last decade compared with world’s average of 20 per cent • Nigeria, Algeria, Libya and Angola account for 76 per cent of Africa’s oil production • Oil from ageing fields and new deepwater terrains pose unusual challenges and require big budgets (c) V.E. Eromosele Nigerian Nat Petroleum Corp

3. Africa and World Gas • Although Africa accounts for 7.8 per cent of world natural gas reserves, it supplies 20 per cent of world LNG • Nigeria and Algeria by far top the gas reserves African league • The same is true of LNG supplies: Algeria is a world leader in fourth position and Nigeria is sixth • With Nigeria LNG Trains 4 and 5 commencing operations since fourth quarter 2005 and exporting since first quarter, Nigeria’s position is soon to change • Next to Qatar, Nigeria LNG is the world’s second fastest growing (c) V.E. Eromosele Nigerian Nat Petroleum Corp

4. Nigeria: Financing Energy Growth • Some $11bn would be needed for seven LNG trains to be installed in Nigeria by three entities in the next six years. The entities are Bonny-Island based Nigeria LNG, Brass LNG and Olokola LNG • NNPC projects that $34bn will be invested in Nigeria’s oil-related projects in the three years to 2008 • NNPC would through budgets and ‘carry arrangements’ fund part of this requirement. Majors would fund their share and invest in assets developed under PSCs. Where does the balance come from? • Third-party financing, with improved terms (c) V.E. Eromosele Nigerian Nat Petroleum Corp

5. Nigerian Energy Projects find Finance • Between 2002 and 2005, Nigeria has raised more than $3.3bn in financing four energy-related projects • Nigeria LNG award-winning 2002 deal opened the flood-gates • Varied markets have been tapped: export credit guarantees, international and local banks and multilateral and bilateral financial institutions (c) V.E. Eromosele Nigerian Nat Petroleum Corp

6. Case 1: Nigeria LNG Trains 4&5 (2002) • Raised: $1,060 million Senior debt for NLNG Trains 4&5 expansion in Bonny Island • Sources and structure: • Export credit guarantee cover $620m • 19 international banks (uncovered) $180m • 6 Nigerian banks $160m • African Development Bank $100m • Tenor: 6 to 8 years (door-to-door) • Gearing: D/(D+E): 50 percent (approx) • ECAs: ECGD of UK, SACE of Italy, US Exim and NCM of Holland • Key features: Strong sponsors (NNPC, Shell, Total and ENI). Brown field approach ensured high coverage ratios. Non-recourse. No completion guarantees and World Bank negative pledge-compliant. Credit worthy off-takers and gas suppliers. Offshore accounts. (c) V.E. Eromosele Nigerian Nat Petroleum Corp

7. Case 1: Nigeria LNG Trains 4&5 (2002) • Success Factors • Although extremely complex, well-structured to cover all creditor concerns and mitigate identified risks • Lenders took comfort from seniority over existing shareholder loans and ‘brown-field’ approach, which improved cover ratios • 59 per cent of uncovered $440 million portion provided by African sources: ADB and 6 local banks: “charity begins at home” • Project economics was sound and technology tried and tested • Underlying contracts were very bankable (c) V.E. Eromosele Nigerian Nat Petroleum Corp

8. Case 2: BGT LNG Vessels (2003) • Raised: $460 million Syndicated Loan for four new-build LNG vessels dedicated to NLNG Trains 4&5 • Sources and structure: • 19 international banks (uncovered) $455m • 1 Nigerian bank $5m • Tenor: 13 years (door-to-door) • Gearing: D/(D+E): 66 percent (approx) Key features • BGT is shipping subsidiary of Nigeria LNG, which has strong sponsors and transaction builds on previous successes • Longest tenor ever for Project with element of Nigerian risk • Attracted both project finance and shipping banks (c) V.E. Eromosele Nigerian Nat Petroleum Corp

9. Case 3: NNPC-Mobil NGL-II (2004) • Raised: $1,275 million debt for NNPC-Mobil NGL-II project using novel forward sale arrangement (FSA) and special purpose vehicle (SPV) • Sources and structure: • US OPIC cover $325m • Credit Suisse First Boston- uncovered $250m • 4 Nigerian banks (uncovered) $50m • Exxon Mobil (Co-lending) $650m • Tenor: 12 years (door-to-door) • Gearing: D/(D+E): 87 percent (approx) • The US Bilateral: Overseas Private Investment Corporation provided cover • Key features: Strong sponsors (NNPC, Exxon Mobil and Mobil Producing Nigeria). First major joint venture structured financing to benefit from FSA. Cash flow based security. Few financing parties. Brown field approach. Sponsor lending on pari-pasu basis. Closed within one year. (c) V.E. Eromosele Nigerian Nat Petroleum Corp

10. Forward Sale Structure (c) V.E. Eromosele Nigerian Nat Petroleum Corp

11. Case 3: NNPC-Mobil NGL-II (2004) • Success Factors • Few financing parties ensured fast-track execution of transaction and less protracted negotiations • Co-lending ensured commitment of other lenders • NNPC and Nigerian government support ensured that “true sale” opinion was accepted for the novel FSA structure • Creativity of financial adviser and willingness to try new approach • Ability to convince market that it really does not need hard asset security, resulting in a paradigm shift • Sound economics of project and positive environmental impact ensured that deal was done with a structure that did not breach World Bank negative pledge (c) V.E. Eromosele Nigerian Nat Petroleum Corp

12. Gas Attraction • Gas-related projects are amenable to financing • Gas is considered as an environmental-friendly, clean and efficient energy source, hence the projects do not attract undue NGO attention • Decision is easier as choice is usually between wasting a valuable asset and monetising it with environmental benefit such as gas flaring reduction • LNG business is characterised by long-term sale and purchase agreements (SPA) with credit worthy off-takers: this provides lenders with significant comfort in the event of default • LNG market and technology are fast-maturing, resulting in “commoditisation” and international bank markets are now familiar • Unlike power projects, no LNG project financing to date has recorded a significant default • Gas-prices have stabilised on the high end of the scale both in the US and in Europe • Several alternatives exist in financing LNG vessels (c) V.E. Eromosele Nigerian Nat Petroleum Corp

13. Case 4:NNPC-MPN Satellite Oil Field - SOF1 (2005) • Raised $600m using FSA/SPV structure for the first time in Nigeria oil industry • Sources and structure • Syndicate of International Bank $270m • 5 Nigerian Banks $90m • Exxon Mobil Co-lending $240m • Success factors • Creative financial adviser, Use of FSA, NNPC and Nigerian govt acceptance of structure, sponsor co-lending, no hard asset security • Unique Feature: Use of Nigerian banks to fund two primer fields to secure cheap financing for three phase-1 satellite oil fields (c) V.E. Eromosele Nigerian Nat Petroleum Corp

14. Re-cap: Successful Energy-related Deals • Oil: $600m NNPC-MPN Satellite Oil Field-I (SOF1) closed Dec 2005 • LNG: $1.06bn NLNG+ closed Dec 2002 • Gas: $1.275m NNPC-MPN NGL-II closed Sep 2004 • Gas Transport: $460m BGL vessels 11-14 closed Mar 2003 to be refinanced 2006 • Power: $450m Okpai IPP (Equity funded by NNPC/Agip joint venture) commissioned 2005 (c) V.E. Eromosele Nigerian Nat Petroleum Corp

15. Nigerian Energy-related Deals waiting • LNG: Brass LNG in phase 2 financial advisory post-FEED • LNG: Olokola LNG financial advisers changing batons • Gas: NNPC-Shell et al considering Gbaran-Ubie gas supply to NLNG for external financing • Oil & Gas Services: Innovative $300m Nigerian Content Support Fund (NCSF) under development (c) V.E. Eromosele Nigerian Nat Petroleum Corp

16. Learning Lessons for future Success • Simplicity: Future LNG financing, even green-fields, need not be as complex as NLNG+. Need to find easier ways to mitigate risks. Fewer agreeable parties and sympathetic lawyers help deals. • Speed: NNPC-MPN NGL-II project and lately, the NNPC-MPN Satallite Fields project suggest that deals can be started and finished within a year. Can lawyers shorten the list of Condition Precedents (CPs) for drawdown? • Soft Market: We must take advantage of an international bank market that is now keen about Nigeria and extract better terms e.g. NNPC majority holding (as was done in the Satellite Fields deal) • Pricing: With US’ One-year LIBOR at 5.1 per cent, we must in future deals strongly negotiate down “Nigerian risk premium,” particularly after settling Paris Club and BB_ rating • Tenor: For the right projects, tenors of up to 12-13 years are achievable for Nigerian risk. • Charity begins at home: With 25 large Nigerian banks, better, bigger deals can be done (c) V.E. Eromosele Nigerian Nat Petroleum Corp

17. Final Thought • Lenders to gas and power projects would always seek all the comfort they can get. Remember: “A bank is a place, That will lend you money if You can prove you don’t need it” -Bob Hope (1959) • The burden of proof is squarely ours. May we rise to the challenge by devising better templates of success. (c) V.E. Eromosele Nigerian Nat Petroleum Corp

18. Thank you for your rapt attention (c) V.E. Eromosele Nigerian Nat Petroleum Corp