e&p financing : lenders’ perspective december 10, 2004

E&P Financing : Lenders’ perspective

December 10, 2004

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Agenda

ICICI Bank experience

Introduction

Monetisation process

Structure & key contracts

International scenario

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Abandon

Year 25+

License issued

Set up consultation process

Conduct seismic prog. & analysis ($10-20

mn.)

Plan for exp. drilling

Exploration drilling ($ 40-80 mn/well)

Evaluation drill results

Delineation drilling ($ 30-50 mn./well)

Pre-development ($ 100 mn.)

Development phase ($ 3 bn.)

Production

Year 5 Year 9 Years 14-25+

Year 1

Introduction

Life cycle

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Introduction

E&P project characteristics - phases

Exploration phaseMulti-stage process of assessment of

reservesContinuous assessmentFinancing mainly from equity.

Development phasePhased development based on

prospect valueDebt financing based on reserve

certification Production phase

Different stages – primary, secondary, tertiary

Monetisation based on production history

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Introduction

E&P financing

Exploration

Appraisal

Development

Primary Production

EOR Production

%

Deb

t

Abandonment

% equity

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Introduction

Probable Financing options

Exploration stage Equity financing Mezzanine financing

Development stage Plain vanilla Lease finance Suppliers’ credit Structured financing

Production stage Corporate debt Securitisation

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Agenda


Introduction




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Structure

UJV Equity

Debt

Offtaker

Lessor

O &M operator

Contractors

Repayments

Debt

Dividend

Investment

Project

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Production sharing agreement

Mother Agreement b/w GOI and UJV partners License tenure - phase wise Indicates work programme commitment Terms for recovery of cost & sharing of

profit Cost oil, Profit oil and Investment multiple

concept Other details

Operations & managementSale, price, taxes, royalty, duties etc.

Assignment of interest Prior written consent from GoI required Encumbrance subordinate to other UJV

partners

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Joint operating agreement

Agreement governing the operations of UJV: Management of UJV operations Responsibilities of Operator and other

partners Work programme and budgets Sale – gas & oil Cash expense - default rate from due

date Transfer of interest

Transferee rights only after govt. approval

Within a specific period

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Agenda


Introduction




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Key details

Future receivables of oil/gas on cashflow basis Cashflow is residual as it is after the

opex, levies and taxes have been appropriated

Totally dependent on estimate of underground reserves hence emphasis on Independent evaluation of reserves by

certified agency Over collateralisation Minimum reserve tail of 25%

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Lenders’ risk perception & mitigants

Reserve risk Estimates by reputed independent valuer Proven reserves (3P) Regular certification

Price Take or pay Historic behavior Tranching of debt to cater to different

investors Demand-supply balance Hedging mechanism Sensitivity

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Off-take Credit worthy off-taker Multiple off-takers DSRA maintenance for small time

disruption Production risk

Rate monitoring by Lenders’ Engineer Increase in production rate lead to

accelerated repayment Sensitivity

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Capex and Opex risk Independent Engineers’ certification Past history Reputed contractor & LD clauses Undertakings

Operator performance Reputed operator with previous

experience Key personnel experience

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Currency exchange USD denominated FC sources to be matched or more than

FC requirement Sensitivity

Environmental Environmental clearance Adequate plan for control of

environmental damage Lenders’ engineer monitoring

Regulatory Approvals Dispute resolution mechanism

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Key lending terms

Reserve estimation by reputed independent valuer

Amount Discounted at lenders’ yield expectation Based on loan life ratio and reserve life

ratio Security

Exclusive charge of receivables. Exclusive charge of right, title and

interest of borrower under the project documents.

Assignment of insurance policies. Tenor

Based on reserve tail

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Key lending terms

Acceleration of payment Cumulative production in excess Underground reserve is less than base

plan assessment Event of default

Reset of maturity in the event of low reserves

Step in rights Substitution rights

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Key lending terms

Events of default Fall in production & drawal from liquidity

a/c Withdrawal of operator without approval Sale of other UJV parties share without

knowledge Payment of operating expense repeatedly

from reserve account Payment of capital expense from reserve

account not regularised within reasonable time

Consequence of Event of default Enforce security Balance receivables to be trapped in

escrow a/c.

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Agenda


Introduction




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Project structure

Off-taker

U JV for oil & gasExploration

Partner130%

Capex/ Opex

Supply of oil & gas

Payment for oil & gas

Partner240% Capex

/ Opex

Capex/ OpexPartner 3 (30%)/

operator

Technology

Cross charge over other parties' share of oil and gas

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Key details

Amount - Rs. 12.00 billion Instrument in two different tenor - 15

yrs & 5 yrs Security

Exclusive charge of receivables, project documents, subject to the cross charges.

Assignment of insurance policies. Reserve estimation by reputed

independent valuer Critical ratios

Loan life ratio - 1.42, Reserve life ratio - 1.72

Reserve tail - 26%

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Deal diagram

FDs/Inv

Trust

T & R A/c

Borrower A/c

Investors

Borrower

Operator

IOCL/GAIL

Liq. A/c

Debt service

Shortfall

Topping up of shortfall

Interest income

Pledge

Opex/Capex in the event of default overflow

overflow

Receivables

Supply of oil & gas

Undertaking to pay capex

Sale of receivable

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Agenda


Introduction




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International Scenario

Plain vanilla financing

Ravva field development financing Debt at high cost Debt: Equity ratio of around 1.75:1

Partner A - Fund requirement of $68 million Debt of $43 million Equity of $25 million

Partner B - Fund requirement of $62 million Debt of $40 million Equity of $22 million

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Bonds

International market access requires rating

Risk mitigation can pierce the sovereign rating eg. Petozuata’s (JV b/w Conoco and Pdvsa)

Key features of the transaction were… Pdvsa had never delayed or defaulted on

payments Central Bank to make foreign exchange

available, even ahead of the central government itself.

A U.S.-dollar offshore rotating account that was always fully funded before funds transferred to Central Bank.

Revenue - USD denominated and paid to an offshore trustee

Completion support

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Bonds

Conoco committed to buy all of the project output at market price

Right to sell to third parties Adviser bank to buy down debt to

maintain modeled debt-service coverage ratios if project missed its design capacity targets

6-month debt service reserve Collateralisation of all project cash, and

cash limits held in operating accounts Bond issue in three-tranche offering:

$300 million - 12-year, $625 million-18-year and a $75 million- 25-year, bullet.

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Suppliers’ credit

Internationally funds provided by financiers based on the reputation of the contractors

Reputed contractors minimises the construction risk

Further insurance covers provides for risk mitigation

Mitsubishi Corporation in consortium with JBIC and BNDES (Brazilianbank) provided such finance for Petrobras, Brazil

Contractor - Kellog & Brown Roots Amount - $2500 million Insurance by MITI/MIGA

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Lease finance

Equipment for development of oilfields such as platforms and rigs are lease financed.

Lessor needs continuing income say over 5- 15 years to take tax shelter.

Generally, L/C or guarantee is provided to the lessor to cover lease payment.

Different types: Captive, leveraged, wrap, double-dip.

Mitsubishi Corporation arranged for Japan Vietnam Petroleum Corporation (JVPC) for Rang Dong offshore development unit.

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Structured finance

Full debt financing High cost funding Lenders takes long term view on price

movements and leverage such expertise

Lender can enjoy upside in price post development

Some examples: Prepayment of oil

Direct, indirect and local loop Assignment of definite receivables to an

account Borrowing base finance

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Guarantee

International institution like EXIM gives guarantee.

Usually a counter guarantee is required.

In Angola, for Cabinda Oil field, US EXIM gave guarantee to Societe Generale for US$ 88.6 million loan to Sonangal, national oil company Offshore oil operations for nearly 40

years. Sale proceeds through an offshore

escrow account. A repayment guarantee by Central Bank.

ICICI may extend counter guarantee

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Thank You

e&p financing : lenders’ perspective december 10, 2004

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