1private sector development oil & gas financing opportunities in the african development bank...
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1Private Sector Development
Oil & Gas Financing Opportunities in the
African Development Bank
Presentation by: Hassan H FARAHChief Investment Officer
Private Sector DepartmentAfrican Development Bank
11th African Oil and Gas, Trade and Finance Conference & Exhibition,23 May 2007, Kenyatta International Conference Centre Nairobi, Kenya
NOT AN OFFICIAL UNCTAD RECORDNOT AN OFFICIAL UNCTAD RECORD
2Private Sector Development
LEAD AGENCY FOR NEW PARTNERSHIP FOR AFRICA’S DEVELOPMENT (NEPAD) INFRASTRUCTURE PROGRAM
35 years experience in financing infrastructure projects
Infrastructure projects make up 35% of ADB total commitments
NEPAD and ADB have aligned visions and objectives
Well positioned to promote regional integration
Goals
Encouraging private sector involvement in infrastructure Encouraging regional co-operation by initiating,
developing and funding regional projects Acting as a conduit for funds mobilisation and Direct
Foreign Investment in Africa
Roles in NEPAD
Information source on economic, market, and institutional issues
Technical adviseror to NEPAD ADB is assisting NEPAD Steering Committee in the
preparation of a programme of infrastructure projects
4Private Sector Development
The Bank’s Private Sector Development Strategy identifies five focus areas
Creating an Enabling Environment
Strengthening Financial Systems
Building Competitive Infrastructure
Promoting the Development of Micro- Small- and Medium-Scale Enterprises
Promoting Trade
5Private Sector Development
PORTFOLIO OF PRIVATE SECTOR INVESTMENTS OF $300M
Oil & Gas, 14%
Mining, 6%
Agribusiness, 1%
Manufacturing, 1%
Health, 0.20%
Tourism, 2%
Financial Intermediation, 55%
Infrastructure, 12%
Infrastructure Funds, 9%
6Private Sector Development
AFRICA AND WORLD OIL
Africa accounts for 27.5 per cent of 171 billion barrels net increase in
world oil reserves in decade to 2004
Africa27%
Rest of world73%
1.57
0.3
0.35
0.99
1.61
1.93
2.51
0 0.5 1 1.5 2 2.5 3
Million bpd
Others
Sudan
Eq Guinea
Angola
Libya
Algeria
Nigeria
Africa Oil Production 2004
7Private Sector Development
AFRICA AND WORLD GAS
176160
6553
42
020
40
60
80100
120
140160
180
Trillion cu ft
Nigeria Algeria Egypt Libya Others
Africa: Natural Gas Reserves 2004World LNG Suppliers 2004
Indonesia18%
Malaysia15%
Qatar13%
Algeria13%
Nigeria7%
Trinidad8%
UAE7%
Others12%Australia
7%
8Private Sector Development
Risk sharing (e.g. Oil / Gas Projects)
Production
Gas Reserves
SeparationGas Treatment
Gas Transport(pipeline-360km)
Condensate
Gas Liquidsstorage
For export or local use
Liquefaction plant
LNG storageLoading Unloading
LNG storage
Regasification plant
Gas transmissionand distribution
SUBSURFACE DEVELOPMENT
SURFACE DEVELOPMENT
LIQUEFACTION, STORAGE AND LOADING
SHIPPING ENDUSER
UPSTREAM DOWNSTREAM
political risk
technical risk
commercialrisk
CHAIN OF PROJECTS
SECTION 5
9Private Sector Development
RISK SHARING PARTIES
Project Company
Sponsor
Operator
Lenders
Insurers
Offtaker Constructor
Buyer Government
SECTION 5
12Private Sector Development
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
14Private Sector Development
Case 2: Sasol Natural Gas Project
Success Factors Although extremely complex, well-structured to cover all creditor concerns and mitigate identified
risks
Lenders took comfort in the strength of the sponsor
Good collaboration between Sasol and governments of Mozambique and South Africa
Environmental compatibility
Equity options to government of Mozambique and South Africa
Two separate loans
Captive markets
Project economics was sound and technology tried and tested
Underlying contracts were very bankable
16Private Sector Development
LoansRisk Management
ProductsGuarantees
EquityQuasi-equity
LOANS AND GUARANTEES
17Private Sector Development
Floating rates are proposed in 53% of cases
Base Rate• 6-month LIBOR, EURIBOR, JIBAR• Fixed swap rate corresponding to the
amortization structure of the original repayment
Lending Rate Methodology (%)
Project Specific Risk Based SpreadLending Spread
+
Lending Rate
Loans Guarantees EquityQuasi-equity
18Private Sector Development
Currency specific
Maturities Pricing based on cost of funds plus lending spread Interest rate bases Front-end and commitment fees Pre-payment premium
Loans Guarantees EquityQuasi-equity Local currency loans can now be proposed
19Private Sector Development
Risk Management Products reduce client risk Loans Guarantees EquityQuasi-equity
AA
DD
BB
AA
DD
BB
BBOORRRROOWWEERR
BBOORRRROOWWEERR
CCOOUUNNTTEERRPPAARRTTYY
CCOOUUNNTTEERRPPAARRTTYY
Loans
Risk ManagementProductsInterest rate swapCurrency swapCommodity swapInterest rate cap and floor
Interest Rate,Commodity, Currency Risk
Interest rate swapCurrency swapCommodity swapInterest rate cap/floor
Borrower ’s credit risk rests with the Bank
20Private Sector Development
Risk Management Products
Bank is intermediary in all these transactions
Available for existing or new AfDB loans, not stand-alone
Market based products
Carried out on a cost pass through basis
Transaction fees between 1/8 - 3/8%
Loans Guarantees EquityQuasi-equity
21Private Sector Development
Guarantees are designed to help borrowers enhance financing possibilities
Hard currency denominated Available for both hard-currency and local-currency denominated
obligations Available for
Loans Debt instruments
LoansRisk Management
ProductsGuarantees
EquityQuasi-equity
22Private Sector Development
Loans Guarantees EquityQuasi-equitySeveral types of Guarantees can be proposed
covers non–repayment of all maturities of an underlying debt instrument for all risks
Full guarantee
covers only a portion of the underlying debt instrument against all risks. Used to extend/reinforce credit on longer maturities
Partial credit guarantee
offers protection against selected political risks. Typical risks covered are monetary convertibility risk, currency transfer risk, regulatory risk, expropriation risk, and the non-performance of contractual commitments by government or government agencies
Partial risk guarantee
Guarantee terms are similar to Loan terms
23Private Sector Development
Default zoneNo default zone
Borrower Lender
Bond or Loan Proceeds
Debt Services
Counter-guarantor(may be required)
Counter-guaranteeAgreement
ADB
Guarantee FeesGuarantee contract
ADB payments as per the guarantee agreement
Guarantee of third party loanGuarantee of bond issue, notes, etcPartial risk and credit guarantee
Loans Guarantees EquityQuasi-equity
24Private Sector Development
Equity is considered the primary responsibility of the sponsor but can be also proposed
Never the largest shareholder Maximum of 25% of issued capital Exit scheme required Mostly through dedicated investment funds
GuaranteesEquity
Quasi-equity
LoansRisk Management
Products
26Private Sector Development
The Bank’s competitive advantage can make a difference for your projects
Working with the African Development Bank is more than a financial decision.
It is a strategic decision.
Competitive, flexible and tailor-made financial products.
Can help open new markets through joint ventures and information sharing
Leader in financing infrastructure in Africa
Nepad leading agency
A safety umbrella for private investors
27Private Sector Development
ProcessConcept review• Review of information
memorandum
• Analysis of project context
Letter of Interest
Operations Committee
Investment Committee
Negotiation• Legal review (advisor)
• Term – sheet negotiation: milestones, security package
Term sheet Approval• Final presentation to the
board
Board approval
Loan agreement
Project Appraisal• Detailed review of project
• Technical review
• Risk assessment
Investment proposal
28Private Sector Development
A comprehensive business plan is necessary for application
MARKET Detailed marketing strategy, analysis of competition
TECHNICAL ASPECTS
Describe technical aspects, related risks
PROCUREMENT
Describe procurement process The bank has specific procurement guidelines Supplies must come from member countries
BACKGROUND
Project’s objectives and rationale Review the sector and how the project fits in the country’s development
objectives
29Private Sector Development
A comprehensive business plan is necessary for application
ENVIRONMENTAL ASPECTS
Describe the environmental impact, including the possible resettlement of communities
Describe mitigation strategies
CAPITAL STRUCTURE AND
MANAGEMENT
Describe the proposed or existing company, its capital structure Give information on management background, project supervision
processes and schedule
FINANCIAL AND ECONOMIC
EVALUATION
Provide details on cost estimates, financing needs from different partners Provide a complete financial evaluation, detailing the set of assumptions Carry out an economic evaluation, stating the assumptions used
RISK ANALYSIS Discuss risks involved as well as mitigation strategies