Financing LNG Growth Learning from Nigeria’s Success

1. NOT AN OFFICIAL UNCTAD RECORD Financing LNG Growth Learning from Nigeria’s Success Victor E. Eromosele General Manager – Finance Nigeria LNG Limited UNCTAD 11th African Oil & Gas Trade & Finance Conference Nairobi, Kenya 23 May 2007

2. Africa and World Gas • Africa accounts for 14 per cent of the world’s natural gas reserves and a major contributor to growth in the last decade • Interestingly, Qatar (3rd) and Nigeria (6th) are the two LNG producers listed among the world’s top-7 by gas reserves – an indication of future potential • In the case of Nigeria, natural gas production grew three-fold in seven years from 1998 driven by zero-gas flaring policy, fiscal incentives, LNG demand and non-incidental NAG discoveries • More importantly, Africa accounts for about 22 per cent of world LNG trade, the gas growth engine • Algeria, Nigeria and Egypt are the leading contributors from Africa • The continent’s contribution to LNG set to grow when one considers the pipeline of new projects: three in Nigeria, one in Egypt, Angola and Equatorial Guinea • Nigeria LNG is set to move at least two notches up the world LNG league. • Gas flaring in Nigeria reduced from 68 per cent in 2000 to 38 per cent in 2005.

3. World LNG Trade set to Grow • Driven by favourable fundamentals, the world LNG trade is forecast to grow by 7 per cent p. a., boosting its share of natural gas (NG) business to 38 per cent from 26 per cent in 2005 • Demand for gas as a clean, efficient source of energy has grown significantly in US, Asia and Europe, while liquefied natural gas (LNG) has emerged “an essential vector for world gas expansion” • LNG is a convenient and economic way of developing stranded gas resources and monetising otherwise flared gas • Henry Hub spot average LNG market price in 2005 was thrice that of 2002. Rising price has encouraged new investment, improved profitability and shortened payback period • ‘Commoditisation’ phenomenon is changing the way LNG is sold and flexibility is fuelling business growth • Huge LNG production increases planned in Qatar, Nigeria and others

4. Nigeria LNG: A tale of dramatic growth • Nigeria LNG plant is among the fastest growing in the world, despite a history of nearly three decades on the drawing board • First LNG shipment was in October 1999 • NLNG’s Bonny Island five-train plant has since grown into Africa’s “largest single industrial site” • Q4 2005 and Q2 2006, Trains 4 and 5 respectively commenced operations • At the end of 2006, the five-train complex produced some 18 million tpa of LNG • In 2000, NLNG had two trains that produced only six million tpa, and Train-3 was added in 2003 • By 2008, the six-train complex would be producing some 22 million tpa

5. Nigeria LNG: Growth in perspective • To put NLNG’s growth in perspective, consider that production in 2007 triples 2001 level and doubles 2004 level • Hence, it took NLNG, 17 months (Ave: 6 p.m.) to achieve its first 100 shipments and only 58 months (Ave: 15+p.m.) to achieve the next 900 • Looking ahead, if NLNG executes its planned expansion, by 2013, production would have reached 30 million tpa or 66 per cent larger than today’s level • At 8.5 million tpa, Train 7 is planned to be the world’s largest single train • Indeed, “energy runs on finance.” Without finance, both growth achieved and that planned would just not happen • The rest of the paper discusses financing lessons that might benefit other similar African projects

6. Success Lessons:Getting right Debt-Equity Mix • Nigeria LNG succeeded because it has strong and reputable shareholders: NNPC (49%), Shell (25.6%), Total (15%) and ENI (10.4%) • Success begets success. That is true for both equity and debt • Effectively only one of six trains benefited from third-party debt as shareholders were willing to bear the financing burden by providing subordinated debt and permitting internally-generated fund to be ploughed back. • Nigeria LNG obtained financing mileage from its ‘brown-field’ status • Lesson: • Cut your coat according to your pocket • ‘Sponsor power’ affects gearing

7. Nigeria’s Projects find Finance • Between 2002 and 2006, Nigeria raised more than $3.5bn (net of re-financing) for four oil and gas projects and refinancing • It is noteworthy that Nigeria LNG’s award-winning 2002 deal opened the flood-gates. ($1.74 billion raised related to Nigeria LNG and its shipping subsidiary, BGT) • Varied markets have been tapped: export credit guarantees, international and local banks and multilateral and bilateral financial institutions

8. 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.

9. 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

10. Case 2: BGT LNG Vessels (2003/2006) • Raised: $460 million Syndicated Loan for four new-build LNG vessels dedicated to NLNG Trains 4&5. Refinanced in 2006. • 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 • Refinancing raised $680 million and trimmed 70 per cent of the 2003 pricing

11. Gas Advantage • 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 for financing LNG vessels • Green fields are more difficult to finance but with creativity the gas advantage trump card can be played

12. Planned African LNG Projects that may require financing • NIGERIA: • NLNG Train7 contemplated to produce 8.5 million tpa of LNG by 2012 • Possible Refinancing of the NLNG T4&5 (2002) deal under consideration. Rating financial adviser appointed. • Brass LNG plans two-train 10 million tpa plant to start production 2011. In phase 2 financial advisory post-FEED. Awaiting FID • Olokola (OK) LNG plans four-train 22 million tpa plant to start production 2011. Financial advisers changed batons • ANGOLA: ALNG Train 1 planned to produce 5 million tpa by 2012 • EQUATORIAL GUINEA: FID in 2007 for Bioko Island T2 plant to produce 4.4 million tpa • EGYPT: Segas (Demeitta) in discussion. ELNG (Idku) Train 3 planned • LIBYA: Marsa El-Brega LNG plans additional 2.3 million tpa production by 2011

13. 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 Africa and Nigeria and extract better terms e.g. NNPC majority holding (as was done by BGT) • Pricing: With US’ Six-month US LIBOR at 5.3 per cent, we must in future deals strongly negotiate down “Nigerian risk premium,” particularly having settled debt to Paris and London Clubs and obtained 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. New institutions such as African Development Fund need to be tapped

14. Final Thought • Lenders to LNG 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 for success.

15. Thank you for your rapt attention