Financing large scale oil gas projects preconditions and requirements for international funding
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22nd Kazakhstan International Oil&Gas Conference Almaty - 1 -2 October 2014. Financing large scale oil & gas projects: Preconditions and requirements for international funding. Richard Sentkar Senior Banker Energy & Commodities. The various players of the “commodity chain”

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Financing large scale oil gas projects preconditions and requirements for international funding

22nd Kazakhstan International Oil&GasConference

Almaty - 1-2 October 2014

Financing large scale oil & gas projects:Preconditions and requirements for international funding

  • Richard Sentkar

  • Senior BankerEnergy & Commodities


Financing large scale oil gas projects preconditions and requirements for international funding

The various players of the “commodity chain”

… and their respective financing requirements

Mainly Bank Debt

Structurally highly leveraged

No fixed assets

Mostly ST financing

Traders

  • Small traders

  • Large trading companies

  • Trading groups of large companies

Capital Markets + Bank Debt

Important fixed assets (LT)

Capital intensive

LT financing for Capex

ST financing for Opex

Transformers

  • Refineries

  • Smelters

Producers

  • Oil producers

  • Mining companies

Distributors

  • Bunkering

  • Wholesale

  • Terminals

Bank Debt + Capital Markets

Fixed assets with MT financing needs

Transportation

Logistics

Each category of players needs specific set of financing products.

Financing mainly provided by banks but also by Capital Markets

The mix between those 2 sources of financing will change.

2


Financing large scale oil gas projects preconditions and requirements for international funding

Current environment

  • Continuousincrease of production

    • World supply of oilfrom 87mb/d in 2011 to forecast of 100+ mb/d in 2035. + 15% over the period (IEA)

    • Unconventionaloil to increasefrom 4 mb/d to 15 mb/d, thusalmost x4, and representing 15% in 2035 instead of 5% today.

    • World supply of naturalgasfrom 3,400 bcm in 2011 to 5,000 bcm in 2035. + 47% over the period (IEA)

    • Unconventionalgasfrom 560 bcm in 2011 to 1,300 in 2035, thusalmost x2.5 and representing 26% in 2035 instead of 16% today.

  • Producersadapttheirstrategies – focus and costcutting

    • Majors have a more active strategy in costcutting and asset portfolio management. Theyneed to increase ROE, and are more selective.

    • Juniors continue to develop, based on good financingliquidity and purchase of assetsfrom majors.

  • Stronger impact of regional tensions and regulations

    • All stakeholders, governments, producers, financial institutions need to takeintoaccountgeopolitical tensions and sanctions, more than in the past

    • Someprojectsmightbedelayed for thatreason, besides pure technical issues.

3


Financing large scale oil gas projects preconditions and requirements for international funding

Main preconditions to financing

Key drivers and main questions addressed by banks

  • Compliance and Corporate & Social Responsibility

    • Stakeholdersneed to complywith international sanctions, regulations and laws. Pressure on Banks to reinforce Know Your Customer (KYC) process. Whatis new? bigger fines and guiltyplea.

    • Stakeholdersneed to care more about their image and communication

  • Sustainability and viability

    • Intrinsecstrength of the project: is the rational sound, are the assets and technical aspects economically viable over time ?

    • Exposure to externalfactors: mainlypolitical aspects thatcouldadverselyinterfere, need to anticipatemarketevolution

    • Delay in major projects have a real impact on credibility, costs and appetitefrominvestors and financialinsitutions

  • Access to liquidity

    • Even if liquidityisless of an issue thantwoyearsago, banksneed to complywith Basel III and withLiquidityCoverRatio

    • Liquidityiscurrently good over all, withmanyfunding sources possibilities

4


Financing large scale oil gas projects preconditions and requirements for international funding

DecisionProcess to finance major projects

Decisionprocessusuallyinclude:

  • Screening of the project

    • To identify the stakeholders, the main features of the project, and the projectenvironment

    • To decidewhetherfinancingthatprojectis acceptable and / ot in line with the currentstrategy of the bank

    • To determinewhatadditional information isneeded to go through the creditapprovalprocess

  • Comprehensive due diligence

    • To collect all possible factualelements on the project and on itsstakeholders

    • To run a proprietary model

    • To establish a preciserisk matrix, with pros and cons and mitigants

  • Final creditapprovalprocess

    • To finalize the credit application

    • To go throughdifferentcreditcommittees (2 minimum, 3 maximum)

5


Financing large scale oil gas projects preconditions and requirements for international funding

Key drivers

  • More Selectivity

  • Strong and DiversifiedLiquidity

  • OpportunisticRiskManagement

6


Financing large scale oil gas projects preconditions and requirements for international funding

Appendix

  • A New Paradigm: How to adjust to this new world?

  • Why hedging ?

  • Banks such as BNP Paribas remains at the centre of the New Paradigm

  • Financing small to middle size Kazakh producers

7


A new paradigm how to adjust to this new world

A New Paradigm: How to adjust to this new world?

  • Banks: increase the distribution of loans particularly to the non-banking sector.

    • Banks should continue to grant financings to accommodate client’s needs thanks to:

      • Their large client base

      • Their experience in structuring bespoke and standardised financing solutions for clients

      • Their capacity and track record to underwrite and then distribute

      • Their wide range of banking products (lending, hedging, advisory…)

      • Their capacity to monitor large portfolio

      • Their access to asset managers, investors, financing providers…

    • Banks should then distribute more loans

      • To other banks (syndication) and to non-banking sector (insurance, securitization, funds...)

      • To fulfil the ratios imposed by banking regulation while keeping part of each loan

      • While providing new investments opportunities to “financing providers” by offering them participation in those deals

  • “Non banking Financing providers”

    • Need to understand the underlying's risks and the specificities of the commodity sector

    • Need to accept an other type of return than the “investor-type” of return

8


Why hedging

Why hedging ?

  • Hedging should be considered as an insuranceto mitigate risks and makes it easier to meet economic and management objectives.Such objectives could include meeting budget targets for exporting countries, or financial ratios for companies, like Ebitda margins, Debt / Ebitda, Dividends.

  • 4 reasons to hedge:

    • To limit impact of price volatility on company’s cash flow

    • To protect company against variations

    • To provide more predictability to company’s management and stakeholders

    • To lock-in margin

  • There could be also some “new” reason:

    • Some banks participating in syndication or some investors ready to take part of the risk in a financing, do not want to take the price risk fluctuation and would like deals to be hedged.

    • Fundamentally, these are fixed income investors (pension funds, asset managers) who are seeking stable cash flows

    • The lower the market risk these investors are exposed to, the better the pricing offered to borrowers

9


Banks such as bnp paribas remains at the centre of the new paradigm

Banks such as BNP Paribas remains at the centre of the New Paradigm

  • Banks:

    • Are better positioned to understand & manage the market risk

    • Can offer to both borrowers and financing providers structured solutions combining lending, hedging and distribution because they are the natural conduit between borrowers and debt investors as we have a long standing history of working with both arms.

    • Banks are best positioned to help both borrowers & non-traditional lenders to capture those changes and adjust their models accordingly

    • Can structure a transaction that maximises the chances of success – delivering the right features for the right market conditions

  • BNP Paribas is very well positioned to play a leading role in this change:

    • 50 years of experience in the Commodity sector

    • # 1 bookrunner for syndicated loans in Europe by number and # 2 by volume*

    • Largely recognised expertise: # 2 “Best trade finance provider worldwide”**, “Aircraft Leasing Innovator of the Year”***

    • #1 for € denominated bonds; #6 for all International bondsⱡ

    • Oil & Gas Products House of the Year 2012 #

    • Credit Derivatives House of the Year 2012 ##

    • IFR Bank of the Year 2012

    • * Source: Dealogic 2012; ** Source: Euromoney; *** Source: Global Transportation Finance 2012, ⱡ Thompson Reuters, # Energy Risk Awards; ## Asia Risk Awards

10


Financing small to middle size kazakh producers

Financing small to middle size Kazakh producers

  • Financing solutions primarily rely on structured debt products, with tenors ranging from 3 to 5/7 years:

    • Pre-Export financing

    • RBL financing

  • Key factors of success:

    • Borrower at advanced stage of development: producing asset with minimum track record

    • Legal/political risk mitigated with production license already in place or guaranteed to be in place in a short period of time

    • Easy access to export routes (pre-requisite for PXF facility)

    • Financing documentation in foreign law

    • Minimum “offshorisation” requirements: including offshore collection / reserve accounts

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Financing small to middle size kazakh producers1

Financing small to middle size Kazakh producers

  • BNP Paribas has been consistently and actively supporting Kazakh oil & gas producers, with a 20 year track record in project financing in Kazakhstan.

  • Thanks to its unique country knowledge and oil & gas expertise, BNP Paribas has been a pioneer in providing financing solutions to medium to small size (5,000 bopd) Kazakh producers.

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