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Financing LNG Financing LNG Growth Growth

Learning from Nigeria’s Learning from Nigeria’s SuccessSuccess

Victor E. EromoseleVictor E. EromoseleGeneral Manager – Finance General Manager – Finance

Nigeria LNG Limited Nigeria LNG Limited

UNCTAD 11UNCTAD 11thth African Oil & Gas Trade & Finance Conference African Oil & Gas Trade & Finance Conference Nairobi, KenyaNairobi, Kenya23 May 200723 May 2007

NOT AN OFFICIAL UNCTAD RECORD

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Africa and World Gas Africa and World Gas Africa accounts for 14 per cent of the Africa accounts for 14 per cent of the

world’s natural gas reserves and a world’s natural gas reserves and a major contributor to growth in the major contributor to growth in the last decadelast decade

Interestingly, Qatar (3Interestingly, Qatar (3rdrd) and Nigeria ) and Nigeria (6(6thth) are the two LNG producers listed ) are the two LNG producers listed among the world’s top-7 by gas among the world’s top-7 by gas reserves – an indication of future reserves – an indication of future potentialpotential

In the case of Nigeria, natural gas In the case of Nigeria, natural gas production grew three-fold in seven production grew three-fold in seven years from 1998 driven by zero-gas years from 1998 driven by zero-gas flaring policy, fiscal incentives, LNG flaring policy, fiscal incentives, LNG demand and non-incidental NAG demand and non-incidental NAG discoveriesdiscoveries

More importantly, Africa accounts for More importantly, Africa accounts for about 22 per cent of world LNG trade, about 22 per cent of world LNG trade, the gas growth enginethe gas growth engine

Algeria, Nigeria and Egypt are the Algeria, Nigeria and Egypt are the leading contributors from Africaleading contributors from Africa

The continent’s contribution to LNG The continent’s contribution to LNG set to grow when one considers the set to grow when one considers the pipeline of new projects: three in pipeline of new projects: three in Nigeria, one in Egypt, Angola and Nigeria, one in Egypt, Angola and Equatorial GuineaEquatorial Guinea

Nigeria LNG is set to move at least Nigeria LNG is set to move at least two notches up the world LNG league.two notches up the world LNG league.

Gas flaring in Nigeria reduced from Gas flaring in Nigeria reduced from 68 per cent in 2000 to 38 per cent in 68 per cent in 2000 to 38 per cent in 2005.2005.

2005 World LNG Trade by Country

Indonesia16%

Malaysia14%

Qatar14%Australia

8%

Egypt3%

Others9%Algeria

13%

T&T7%

Nigeria6%

Oman5%

Brunei5%

0 10 20 30 40 50

Trillion cu. metres

USA

Nigeria

UAE

S/Arabia

Qatar

Iran

Russia

Top-7: World Gas Reserves 2005

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World LNG Trade set to World LNG Trade set to GrowGrow Driven by favourable fundamentals, Driven by favourable fundamentals,

the world LNG trade is forecast to the world LNG trade is forecast to grow by 7 per cent p. a., boosting its grow by 7 per cent p. a., boosting its share of natural gas (NG) business to share of natural gas (NG) business to 38 per cent from 26 per cent in 200538 per cent from 26 per cent in 2005

Demand for gas as a clean, efficient Demand for gas as a clean, efficient source of energy has grown source of energy has grown significantly in US, Asia and Europe, significantly in US, Asia and Europe, while liquefied natural gas (LNG) has while liquefied natural gas (LNG) has emerged “an essential vector for emerged “an essential vector for world gas expansion”world gas expansion”

LNG is a convenient and economic LNG is a convenient and economic way of developing stranded gas way of developing stranded gas resources and monetising otherwise resources and monetising otherwise flared gas flared gas

Henry Hub spot average LNG market Henry Hub spot average LNG market price in 2005 was thrice that of 2002. price in 2005 was thrice that of 2002. Rising price has encouraged new Rising price has encouraged new investment, improved profitability investment, improved profitability and shortened payback periodand shortened payback period

‘‘Commoditisation’ phenomenon is Commoditisation’ phenomenon is changing the way LNG is sold and changing the way LNG is sold and flexibility is fuelling business growthflexibility is fuelling business growth

Huge LNG production increases Huge LNG production increases planned in Qatar, Nigeria and othersplanned in Qatar, Nigeria and others

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38

0

5

10

15

20

25

30

35

40

Percentage of NG business

2005 2020

LNG Trade forecast to Grow by 7 per cent per annum

Henry Hub Spot LNG Price Trend

0

1

2

3

4

5

6

7

8

9

10

1999 2000 2001 2002 2003 2004 2005 2006 2007

US $ per thousand BTU

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Nigeria LNG: Nigeria LNG: A tale of dramatic growthA tale of dramatic growth

Nigeria LNG plant is among the Nigeria LNG plant is among the fastest growing in the world, fastest growing in the world, despite a history of nearly three despite a history of nearly three decades on the drawing boarddecades on the drawing board

First LNG shipment was in First LNG shipment was in October 1999October 1999

NLNG’s Bonny Island five-train NLNG’s Bonny Island five-train plant has since grown into plant has since grown into Africa’s Africa’s “largest single industrial “largest single industrial site”site”

Q4 2005 and Q2 2006, Trains 4 Q4 2005 and Q2 2006, Trains 4 and 5 respectively commenced and 5 respectively commenced operationsoperations

At the end of 2006, the five-train At the end of 2006, the five-train complex produced some 18 complex produced some 18 million tpa of LNG million tpa of LNG

In 2000, NLNG had two trains In 2000, NLNG had two trains that produced only six million that produced only six million tpa, and Train-3 was added in tpa, and Train-3 was added in 20032003

By 2008, the six-train complex By 2008, the six-train complex would be producing some 22 would be producing some 22 million tpa million tpa

2

3

5

6

0

1

2

3

4

5

6

Train

2000 2003 2006 2008

NLNG Success Trail: LNG Trains in Operation

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Nigeria LNG: Nigeria LNG: Growth in perspectiveGrowth in perspective

To put NLNG’s growth in To put NLNG’s growth in perspective, consider that perspective, consider that production in 2007 triples 2001 production in 2007 triples 2001 level and doubles 2004 levellevel and doubles 2004 level

Hence, it took NLNG, 17 months Hence, it took NLNG, 17 months (Ave: 6 p.m.) to achieve its first 100 (Ave: 6 p.m.) to achieve its first 100 shipments and only 58 months (Ave: shipments and only 58 months (Ave: 15+p.m.) to achieve the next 900 15+p.m.) to achieve the next 900

Looking ahead, if NLNG executes its Looking ahead, if NLNG executes its planned expansion, by 2013, planned expansion, by 2013, production would have reached 30 production would have reached 30 million tpa or 66 per cent larger million tpa or 66 per cent larger than today’s levelthan today’s level

At 8.5 million tpa, Train 7 is At 8.5 million tpa, Train 7 is planned to be the world’s largest planned to be the world’s largest single train single train

Indeed, “energy runs on finance.” Indeed, “energy runs on finance.” Without finance, both growth Without finance, both growth achieved and that planned would achieved and that planned would just not happenjust not happen

The rest of the paper discusses The rest of the paper discusses financing lessons that might benefit financing lessons that might benefit other similar African projectsother similar African projects

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18

22

30

0

5

10

15

20

25

30

Production in million TPA

2001 2004 2007 2010 2013

NLNG and Growing Production

1000

100

50

0 200 400 600 800 1000

LNG Cargoes

Dec 2006

Feb 2001

Aug 2000

NLNG Shipment Milestones

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Success Lessons:Success Lessons:Getting right Debt-Equity Getting right Debt-Equity

MixMix

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 Cut your coat according to your pocket ‘‘Sponsor power’ affects gearingSponsor power’ affects gearing

Nigeria LNG Shareholding

NNPC49

Shell25.6

Total15

ENI10.4

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Nigeria’s Projects find Nigeria’s Projects find FinanceFinance

Between 2002 and 2006, Nigeria raised more than $3.5bn (net Between 2002 and 2006, Nigeria raised more than $3.5bn (net of re-financing) for four oil and gas projects and refinancingof re-financing) for four oil and gas projects and refinancing

It is noteworthy that Nigeria LNG’s award-winning 2002 deal It is noteworthy that Nigeria LNG’s award-winning 2002 deal opened the flood-gates. ($1.74 billion raised related to Nigeria opened the flood-gates. ($1.74 billion raised related to Nigeria LNG and its shipping subsidiary, BGT)LNG and its shipping subsidiary, BGT)

Varied markets have been tapped: export credit guarantees, Varied markets have been tapped: export credit guarantees, international and local banks and multilateral and bilateral international and local banks and multilateral and bilateral financial institutionsfinancial institutions

1060

625

650

460

360

240

680

0 200 400 600 800 1000 1200

Million US Dollars

NLNG: T4&5 (2002)

NGL-II Ext (2004)

NGL-II Colend (2004)

BGT-Vs11-14 (2003)

SOF-I Ext (2005)

SOF-I Colend (2005)

BGT-Refinance (2006)

Nigeria's Successful Deals: 2002-2006

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Case 1: Nigeria LNG Trains Case 1: Nigeria LNG Trains 4&5 (2002)4&5 (2002)

RaisedRaised: $1,060 million Senior debt for : $1,060 million Senior debt for NLNG Trains 4&5 expansion in Bonny NLNG Trains 4&5 expansion in Bonny IslandIsland

Sources and structureSources and structure:: Export credit guarantee cover Export credit guarantee cover

$620m$620m 19 international banks (uncovered) 19 international banks (uncovered)

$180m$180m 6 Nigerian banks 6 Nigerian banks

$160m$160m African Development Bank African Development Bank

$100m$100m TenorTenor: 6 to 8 years (door-to-door): 6 to 8 years (door-to-door) GearingGearing: D/(D+E): 50 percent : D/(D+E): 50 percent

(approx)(approx) ECAsECAs: ECGD of UK, SACE of Italy, US : ECGD of UK, SACE of Italy, US

Exim and NCM of HollandExim and NCM of Holland Key featuresKey features: Strong sponsors : Strong sponsors

(NNPC, Shell, Total and ENI). Brown (NNPC, Shell, Total and ENI). Brown field approach ensured high coverage field approach ensured high coverage ratios. Non-recourse. No completion ratios. Non-recourse. No completion guarantees and World Bank negative guarantees and World Bank negative pledge-compliant. Credit worthy off-pledge-compliant. Credit worthy off-takers and gas suppliers. Offshore takers and gas suppliers. Offshore accounts. accounts.

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Case 1: Nigeria LNG Trains Case 1: Nigeria LNG Trains 4&5 (2002)4&5 (2002)

Success FactorsSuccess Factors Although extremely Although extremely

complex, well-structured to complex, well-structured to cover all creditor concerns cover all creditor concerns and mitigate identified risksand mitigate identified risks

Lenders took comfort from Lenders took comfort from seniority over existing seniority over existing shareholder loans and shareholder loans and ‘brown-field’ approach, ‘brown-field’ approach, which improved cover ratioswhich improved cover ratios

59 per cent of uncovered 59 per cent of uncovered $440 million portion $440 million portion provided by African sources: provided by African sources: ADB and 6 local banks: ADB and 6 local banks: “charity begins at home” “charity begins at home”

Project economics was Project economics was sound and technology tried sound and technology tried and testedand tested

Underlying contracts were Underlying contracts were very bankablevery bankable

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Case 2: BGT LNG Vessels Case 2: BGT LNG Vessels (2003/2006)(2003/2006)

RaisedRaised: $460 million Syndicated Loan : $460 million Syndicated Loan for four new-build LNG vessels for four new-build LNG vessels dedicated to NLNG Trains 4&5. dedicated to NLNG Trains 4&5. Refinanced in 2006.Refinanced in 2006.

Sources and structureSources and structure:: 19 international banks (uncovered) 19 international banks (uncovered)

$455m$455m 1 Nigerian bank 1 Nigerian bank

$5m$5m TenorTenor: 13 years (door-to-door): 13 years (door-to-door) GearingGearing: D/(D+E): 66 percent : D/(D+E): 66 percent

(approx)(approx)Key featuresKey features

BGT is shipping subsidiary of Nigeria BGT is shipping subsidiary of Nigeria LNG, which has strong sponsors and LNG, which has strong sponsors and transaction builds on previous transaction builds on previous successessuccesses

Longest tenor ever for Project with Longest tenor ever for Project with element of Nigerian riskelement of Nigerian risk

Attracted both project finance and Attracted both project finance and shipping banksshipping banks

Refinancing raised $680 million and Refinancing raised $680 million and trimmed 70 per cent of the 2003 pricingtrimmed 70 per cent of the 2003 pricing

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Gas AdvantageGas Advantage Gas-related projects are Gas-related projects are

amenable to financingamenable to financing Gas is considered as an environmental-Gas is considered as an environmental-

friendly, clean and efficient energy friendly, clean and efficient energy source, hence the projects do not attract source, hence the projects do not attract undue NGO attentionundue NGO attention

Decision is easier as choice is usually Decision is easier as choice is usually between wasting a valuable asset and between wasting a valuable asset and monetising it with environmental benefit monetising it with environmental benefit such as gas flaring reductionsuch as gas flaring reduction

LNG business is characterised by long-LNG business is characterised by long-term sale and purchase agreements (SPA) term sale and purchase agreements (SPA) with credit worthy off-takers: this provides with credit worthy off-takers: this provides lenders with significant comfort in the lenders with significant comfort in the event of defaultevent of default

LNG market and technology are fast-LNG market and technology are fast-maturing, resulting in “commoditisation” maturing, resulting in “commoditisation” and international bank markets are now and international bank markets are now familiarfamiliar

Unlike power projects, no LNG project Unlike power projects, no LNG project financing to date has recorded a financing to date has recorded a significant defaultsignificant default

Gas-prices have stabilised on the high end Gas-prices have stabilised on the high end of the scale both in the US and in Europeof the scale both in the US and in Europe

Several alternatives exist for financing Several alternatives exist for financing LNG vesselsLNG vessels

Green fields are more difficult to finance Green fields are more difficult to finance but with creativity the gas advantage but with creativity the gas advantage trump card can be playedtrump card can be played

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Planned African LNG Projects Planned African LNG Projects that may require financing that may require financing

NIGERIA:NIGERIA: NLNG Train7 contemplated to produce 8.5 million tpa of LNG by NLNG Train7 contemplated to produce 8.5 million tpa of LNG by

20122012 Possible Refinancing of the NLNG T4&5 (2002) deal under Possible Refinancing of the NLNG T4&5 (2002) deal under

consideration. Rating financial adviser appointed.consideration. Rating financial adviser appointed. Brass LNG plans two-train 10 million tpa plant to start production Brass LNG plans two-train 10 million tpa plant to start production

2011. In phase 2 financial advisory post-FEED. Awaiting FID2011. In phase 2 financial advisory post-FEED. Awaiting FID Olokola (OK) LNG plans four-train 22 million tpa plant to start Olokola (OK) LNG plans four-train 22 million tpa plant to start

production 2011. Financial advisers changed batonsproduction 2011. Financial advisers changed batons ANGOLA: ALNG Train 1 planned to produce 5 million tpa by 2012ANGOLA: ALNG Train 1 planned to produce 5 million tpa by 2012 EQUATORIAL GUINEA: FID in 2007 for Bioko Island T2 plant to EQUATORIAL GUINEA: FID in 2007 for Bioko Island T2 plant to

produce 4.4 million tpaproduce 4.4 million tpa EGYPT: Segas (Demeitta) in discussion. ELNG (Idku) Train 3 EGYPT: Segas (Demeitta) in discussion. ELNG (Idku) Train 3

plannedplanned LIBYA: Marsa El-Brega LNG plans additional 2.3 million tpa LIBYA: Marsa El-Brega LNG plans additional 2.3 million tpa

production by 2011production by 2011

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Learning Lessons for future Learning Lessons for future SuccessSuccess SimplicitySimplicity: Future LNG financing, even green-fields, need not be : Future LNG financing, even green-fields, need not be

as complex as NLNG+. Need to find easier ways to mitigate as complex as NLNG+. Need to find easier ways to mitigate risks. Fewer agreeable parties and sympathetic lawyers help risks. Fewer agreeable parties and sympathetic lawyers help deals.deals.

SpeedSpeed: NNPC-MPN NGL-II project and lately, the NNPC-MPN : NNPC-MPN NGL-II project and lately, the NNPC-MPN Satallite Fields project suggest that deals can be started and Satallite Fields project suggest that deals can be started and finished within a year. Can lawyers shorten the list of Condition finished within a year. Can lawyers shorten the list of Condition Precedents (CPs) for drawdown?Precedents (CPs) for drawdown?

Soft MarketSoft Market: We must take advantage of an international bank : We must take advantage of an international bank market that is now keen about Africa and Nigeria and extract market that is now keen about Africa and Nigeria and extract better terms e.g. NNPC majority holding (as was done by BGT)better terms e.g. NNPC majority holding (as was done by BGT)

PricingPricing: With US’ Six-month US LIBOR at 5.3 per cent, we must : With US’ Six-month US LIBOR at 5.3 per cent, we must in future deals strongly negotiate down “Nigerian risk in future deals strongly negotiate down “Nigerian risk premium,” particularly having settled debt to Paris and London premium,” particularly having settled debt to Paris and London Clubs and obtained BBClubs and obtained BB__

rating rating TenorTenor: For the right projects, tenors of up to 12-13 years are : For the right projects, tenors of up to 12-13 years are

achievable for Nigerian risk. achievable for Nigerian risk. Charity begins at homeCharity begins at home: With 25 large Nigerian banks, better, : With 25 large Nigerian banks, better,

bigger deals can be done. New institutions such as African bigger deals can be done. New institutions such as African Development Fund need to be tappedDevelopment Fund need to be tapped

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Final ThoughtFinal Thought

Lenders to LNG projects would always seek all the comfort they can get. Remember:

““A bank is a place,A bank is a place,

That will lend you money ifThat will lend you money if

You can prove you don’t need itYou can prove you don’t need it””

-Bob Hope (1959)-Bob Hope (1959) The burden of proof is squarely ours. May we rise to The burden of proof is squarely ours. May we rise to

the challenge by devising better templates for the challenge by devising better templates for success.success.

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