Benefits of Energy Price Stabilization

8th Africa Oil & Gas Trade and Finance Conference

Marrakech, April 28, 2004

Deutsche Bank

Not an official UNCTAD record

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Contents

Section

1 Energy price stabilization

2 Benefits of Hedging in Structured Finance

3 Current hedge environment

4 Credentials, Capabilities, and Contacts

Energy Price StabilizationSection 1

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Energy Price StabilizationOverview

Governments are affected by energy price movements through:

− Direct exposure: oil exporting countries or countries with regulated

domestic energy markets

− Indirect exposure : oil importing countries and countries with liberated

internal energy market

Governments tend to “manage” this in various ways:

− Passive

− Reactive through the creation of an energy fund

− Proactive through the implementation of a macro risk management

strategy

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Energy Price StabilizationOverview

Passive: at the mercy of the market

Reactive: at the mercy of change in economic policy making and

politicians

Proactive: use price risk management tools to mitigate the impact of

adverse energy price movements

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Proactive Strategic Risk Management

Strategic objective classically is “Management of Cash Flow uncertainty”

Two-step process needed in risk management

– Measure risk: quantify how oil prices adversely impact cash flows

– Change risk: if risk tolerance exceeded, hedges can alter profile

0%

1%

2%

3%

4%

5%

6%

USD CASH FLOW

PR

OB

AB

ILIT

Y %

"Expected" CASH FLOW

50% HEDGED

UNHEDGED

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Reasons to hedge : academic financial theory

Pure Economists view (Modigiliani-Miller):

In perfect financial markets (absence of taxes, no transaction costs,

constant investment and production policy , no bankruptcy costs, full

and symmetric information amongst market participants): Financial

structure (including hedging) is irrelevant to firm’s value.

Financial Economists reasons to hedge all focus on market

imperfections:

‒ Cost of funds : Optimization of investment policy / internally generated

cash flow

‒ Lowering probability of financial distress

‒ Reduction of expected taxes

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“Local” oil prices

"Local" Prices versus WTI Crude (relative scale, USD-base)

50%

70%

90%

110%

130%

150%

170%

190%

210%

230%

Jan-

87

Jan-

88

Jan-

89

Jan-

90

Jan-

91

Jan-

92

Jan-

93

Jan-

94

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

WTI GERMAN "Rheinschiene" SOUTH AFRICAN Derived Oil Price

Global nature of oil market will make any local pricing mechanism dependent on the international oil price

Even in local subsidized price environment, somebody (government) will ultimately carry international oil price risk

Benefits of Hedging in Structured FinanceSection 2

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DeutscheBank

(4) ReserveAccount

Crude OilDelivery

US$

US$

(7) US$

US$

(3) Notes

Oil Company Investors(1) The Issuer

(2) Forward sale ofCrude

OffshoreCollectionaccount

US$

(8) Hedge payout

(5) Crude OilPurchase Agreement

DesignatedBuyers

(6)MarketingAgreement

Transaction Diagram

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Structured Finance Basic Considerations

Typically an issuance secured by future commodity receivables involves an

issuer that generates offshore denominated receivables from sales/service

provided to offshore customers

When analyzing the probability of timely payments of both interest and

principal, the lenders and rating agencies will consider, specifically, the

factors listed below:

– The Borrower’s credit

– The Borrower’s ability to continue to provide services

– The type and importance of the service provided

– The nature of the receivables and payment terms

– The size and maturity of the issue

– The legal structure of the issue

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Structured FinanceRisk Assessment

Typically these structures mitigates the following risks:

– Price risk: The risk that adverse price movements will threaten the payments. The

price risk is mitigated by the hedge

– Delivery Risk: The risk that the Borrower will not make the scheduled deliveries of

natural gas

– Currency control risk: The risk that the Borrower will not have access to foreign

currency to make scheduled debt service payments. This risk is mitigated by the

pledge of offshore receivables to the lender

– Credit Risk: Risk that the Borrower will not be able to meet its debt payments

– Sales risk: The risk that the commodity produced is not sold. This is mitigated by

the designation of approved buyers

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Why Hedge Structured Finance Transactions

The decision not

to hedge is itself a

position taking or

speculative view

of the market.

Commodity producers and consumers are both exposed to substantial risk

should the price of their associated commodities move in an adverse

direction

Therefore, using financial hedging tools the borrower can:

– Minimize debt service coverage ratios

– Maximise borrowing leverage

– Reduce risk associated with volatile commodity markets

– Stabilise income stream

– Allow for more predictable and accurate forward planning

– Secure shareholder value

Any activity which minimises an inherent and volatile business risk is viewed

favourably by lending institutions. Generally ratings agencies view energy

risk management positively, especially when analysing cash flow volatility

Current Hedge EnvironmentSection 3

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10

14

18

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26

30

1999 2000 2001 2002 2003 2004

Average Brent oil price forecast at the start of the year

Outturn

USD/barrel

20

21

22

23

24

25

26

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17Price forecasts of the 17 analysts polled

Brent setttled at USD31.1/barrelwhen the Reuters oil price survey was released

Consensus

Average 2004 Brent priceAnalysts forecasts range and expected accuracy

Current average (Reuters Jan 2004 survey, spot price 31 USD/BBL) Brent

forecast is 24.70 USD/BBL

Studying analyst performance over last 5 years shows systematically bearish

“mean-reversion” based forecasts have underestimated realized prices by an

average 25%-35%, imply a “corrected” 32.40 USD/BBL Brent price

Credentials, Capabilities, and Contacts Section 4

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Example Publications

Daily

– Coal Report

– Energy Crack Report

– Metals Daily

– Natural Gas Report

– Relative Value in Base Metals

Weekly/Monthly

– Commodities Weekly

– CFTC Commitment of Traders

– Commodities Update

– EIA Weekly Outlook

– EIA Weekly Recap

– Energy Fundamentals Monthly

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Energy

Global crude and oil product market maker

24 hour trading capability

Regional natural gas market maker

Regional electricity market maker

Swaps and options capabilities

Commodity Credentials: Energy

European Power and Natural GasU.K. Based Trading

Correlation Trading European Weather (Carbon Credits)

Crude Oil

WTI Brent (IPE) Dated Brent Dubai Tapis Japanese Crude Cocktail Other Grades by agreement

Refined Products

Jet Fuel Gasoil / Diesel Fuel Oil Gasoline Naphtha LPG

Tenor Crude Oil: Up to 10 yrs Refined Products: Up to 5 yrs

Natural Gas US Natural Gas NYMEX and Basis

Coal & Freight Swaps & Options

Energy/CommodityDerivatives Houseof the Year

Winner

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Contacts

Structuring desk + 44 207 545 7893

Sales desk + 44 207 547 4305

Trading desk + 44 207 547 3874

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Disclaimer

The information herein is believed to be reliable and has been obtained from sources believed to be reliable, but we make no representation or warranty, express or implied, with respect to the fairness, correctness, accuracy, reasonableness or completeness of such information. In addition we have no obligation to update, modify or amend this communication or to otherwise notify a recipient in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. We therefore strongly suggest that recipients seek their own independent advice in relation to any investment, financial, legal, tax, accounting or regulatory issues discussed herein. Analyses and opinions contained herein may be based on assumptions that if altered can change the analyses or opinions expressed. Nothing contained herein shall constitute any representation or warranty as to future performance of any financial instrument, credit, currency rate or other market or economic measure. Furthermore, past performance is not necessarily indicative of future results.

This communication is provided for information purposes only. It is not an offer to sell, or a solicitation of an offer to buy, any security, nor to enter into any agreement or contract with Deutsche Bank AG or any affiliates. In addition, any subsequent offering will be at your request and will be subject to negotiation between us. It is not intended that any public offer will be made by us at any time, in respect of any potential transaction discussed herein. Any offering or potential transaction that may be related to the subject matter of this communication will be made pursuant to separate and distinct documentation and in such case the information contained herein will be superseded in its entirety by such documentation in final form.