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.

INCREASED 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
2

INCREASED 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
3

UPSTREAM 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.
4

LNG 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
5

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

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

LNG FINANCING: EXAMPLES OF SOURCES

Name of Project Egyptian LNG Bank International and local tranches International and local tranches USExim, ECGD, SACE, NCM ECA Multilateral European Investment Bank African Development Bank Capital Markets

Nigerian LNG: Trains 4 and 5 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, USExim, SACE

Rule 144A Bond and refinancing bond

Qatargas II

International and local tranches; Islamic tranche also expected Yes

Atlantic LNG (Train 1)

USExim, OPIC

Sakhalin II

Yes

USExim, JBIC, ECGD,

EBRD

LNG 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

LNG 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)
10

LNG FINANCING: MULTILATERALS

Multilaterals

Multilateral funding provides political risk umbrella for other lenders Compliance with institutional policies Typically slower execution

11

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
12

LNG FINANCING: CERTAIN ISSUES

Complexities of multiple source financing

Collateral sharing arrangements

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

Intercreditor arrangements

Completion tests Amendments and waivers Remedies

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

13

LNG 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

14

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)
15

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

16

REFINERY FINANCING: KEY ISSUES

Reserve, refinery construction and operating risks Product off-take contract EPC contracts

Financing alternatives

Financing of refinery margins Tolling agreement structure

17