PRESENTATION TO THE AFRICA OIL & GAS FORUM

FINANCING LNG PROJECTS AND REFINERIES

PRESENTATION TO THE AFRICA OIL & GAS FORUM

FINANCING LNG PROJECTS AND REFINERIES

James L. Cuclis

December 1, 2004

AUSTIN BEIJING DALLAS DUBAI HOUSTON LONDON MOSCOW NEW YORK TOKYO WASHINGTON, D.C.

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INCREASED LNG DEMANDINCREASED LNG DEMAND

There has been dramatic increase in worldwide demand for LNG in last few years

Several factors are responsible: New gas-fired generation facilities; will comprise 30% of total

U.S. gas demand by 2025 Voracious “energy appetites” of East and South Asian

economies Production of natural gas in North America and Europe is

not expected to keep pace with demand Increased demand (and reduced U.S. and Canadian supply)

has pushed equilibrium price for natural gas in United States to $3-4 per mmbtu range

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INCREASED LNG DEMANDINCREASED LNG DEMAND

LNG now more cost competitive Improvements in liquefaction processes and technology Increased train and LNG tanker sizes and resulting

economies of scale Sharing of costly common facilities (e.g., ports) Competitive bidding for all aspects of EPC process Reduced U.S. gas supply has left pipeline capacity

available Atlantic Basin LNG production (particularly Western

Hemisphere production in Trinidad and prospectively Venezuela) has reduced transit time and costs

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UPSTREAM RESPONSE TO DEMANDUPSTREAM RESPONSE TO DEMAND

In response to demand, numerous LNG production projects announced or under construction, including several in West Africa: Nigeria LNG: Nigeria National Petroleum

Company, Shell and others; financing obtained for trains 4 and 5 for the Bonny LNG plant

Brass LNG: Nigeria National Petroleum Company, ENI, Conoco Philips and Chevron Texaco; proposed 10 mtpa facility

Equatorial Guinea LNG: GEPetrol and Marathon; proposed 3.4 mtpa facility for sale into U.S.

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LNG FINANCING:CAPITAL REQUIREMENTSLNG FINANCING:CAPITAL REQUIREMENTS

Capital costs for LNG projects are enormous as each project often requires development of entire LNG supply chain: Drilling of wells and construction of offshore platforms and

gathering systems

Construction of liquefaction facilities: the LNG trains themselves

Construction of related “common” facilities that can be utilized with one or more trains (e.g., ports, preprocessing facilities)

Construction of LNG tankers to transport cargoes from liquefaction facility to receiving terminal, with number of ships varying depending on distance to market

Construction of receiving/regasification terminal

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LNG FINANCING:OVERVIEW OF SOURCES LNG FINANCING:OVERVIEW OF SOURCES

Given enormous capital needs and political and commercial risks, LNG projects must call on a variety of financing sources. Focusing on liquefaction facilities, these include: Commercial banks Export credit agencies Multilaterals Capital markets Islamic financing sources

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LNG FINANCING:OVERVIEW OF SOURCES LNG FINANCING:OVERVIEW OF SOURCES

LNG tankers, receiving terminals and regasification facilities also may require their own separate financing Different asset classes draw on different financing

sources, e.g., banks with ship financing tradition and expertise

Financing sources for liquefaction facilities applicable to receiving terminals as well

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LNG FINANCING:EXAMPLES OF SOURCES LNG FINANCING:EXAMPLES OF SOURCES

Name of Project Bank ECA Multilateral Capital Markets

Egyptian LNG International and local tranches

European Investment Bank

Nigerian

LNG: Trains 4 and 5

International and local tranches

USExim, ECGD, SACE, NCM

African Development Bank

Oman LNG International and local tranches

USExim, ECGD, SACE, NCM

Equatorial Guinea LNG Yes USExim, SACE, Coface

RasGas I International and local tranches

USExim

ECGD, SACE,

Rule 144A Bond and refinancing bond

Qatargas II International and local tranches; Islamic tranche also expected

USExim, SACE

Atlantic LNG

(Train 1)

Yes USExim, OPIC

Sakhalin II Yes USExim,

JBIC, ECGD,

EBRD

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LNG FINANCING: COMMERCIAL BANKSLNG FINANCING: COMMERCIAL BANKS

Each source of financing has pros and cons Commercial Banks

Reduced capacity in project finance market due to banks leaving market and bank mergers

Enormity of LNG capital requirements may result in banks reaching internal industry and/or country limits

Experience in market Speed of execution and ease of obtaining

amendments and waivers but more intrusive ongoing involvement in project

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LNG FINANCING:ECASLNG FINANCING:ECAS

Export Credit Agency Backed Facilities Allow leveraging of bank lending capacity as banks

may not count ECA backed facilities against various limits

ECA “sourcing” requirements impose constraints on countries of origin of goods and services

Increased financing costs due to significant ECA insurance premiums

Typically slower execution (Rule of Thumb: one year from delivery of Info Memo)

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LNG FINANCING:MULTILATERALSLNG FINANCING:MULTILATERALS

Multilaterals Multilateral funding provides political risk umbrella

for other lenders Compliance with institutional policies Typically slower execution

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LNG FINANCING:CAPITAL MARKETS LNG FINANCING:CAPITAL MARKETS

Capital Markets Big risk: one cannot count on capital markets being

“open” at time project is anticipated to close; result is that fallback financing (on parallel path) may be needed with resultant cost impact

Only two LNG bonds to date: both on RasGas I: $1.2 billion in December 1996 and $662 million in March 2004

Due to nature of covenants and defaults, less ongoing intrusion in project

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LNG FINANCING:CERTAIN ISSUESLNG FINANCING:CERTAIN ISSUES

Complexities of multiple source financing Collateral sharing arrangements

Sharing exceptions Intercreditor arrangements

Who votes? how do they vote? veto rights? Creditor decision making points

Completion tests Amendments and waivers Remedies

“Pro rata” lending principle may need to accommodate sourcing requirements and delivery schedules

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LNG FINANCING:CERTAIN ISSUESLNG FINANCING:CERTAIN ISSUES

Need for long term sale and purchase contracts Traditionally LNG sold via long term sale and

purchase agreements which facilitated project financings

In U.S., gas typically purchased under shorter duration contracts

Will lenders accept shorter duration contracts and take volume risk?

Possible reliance on gas marketers

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LNG FINANCING:CERTAIN ISSUES LNG FINANCING:CERTAIN ISSUES

Project on project risk Gas production and gathering facilities, ships, and

receiving terminals must all be financed and achieve completion in synchronized manner

Intercreditor issues between lenders to various projects comprising the LNG supply chain

Common Facilities Sharing between projects and resulting intercreditor

(and interproject) issues Possibility of separate financing of common facilities

(and increased intercreditor complexity)

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LNG FINANCING:CERTAIN ISSUES LNG FINANCING:CERTAIN ISSUES

Facility expansion What say do lenders have re facility expansion and

associated debt incurrence

Insurance Availability and cost of sabotage and terrorism

insurance

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REFINERY FINANCING:KEY ISSUESREFINERY FINANCING:KEY ISSUES

Reserve, refinery construction and operating risks

Product off-take contract

EPC contracts

Financing alternatives Financing of “refinery margins”

“Tolling agreement” structure