Benefits of Energy Price Stabilization

1. Not an official UNCTAD record Benefits of Energy Price Stabilization 8th Africa Oil & Gas Trade and Finance Conference Marrakech, April 28, 2004 Deutsche Bank

2. Contents Section 1 Energy price stabilization 2 Benefits of Hedging in Structured Finance 3 Current hedge environment 4 Credentials, Capabilities, and Contacts

3. Energy Price StabilizationSection 1

4. 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

5. 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

6. 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

7. 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

8. “Local” oil prices • 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

9. Benefits of Hedging in Structured FinanceSection 2

10. Transaction Diagram

11. Structured FinanceBasic 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

12. 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

13. Why Hedge Structured Finance Transactions • 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 The decision not to hedge is itself a position taking or speculative view of the market.

14. Current Hedge EnvironmentSection 3

15. 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

16. Credentials, Capabilities, and ContactsSection 4

17. 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

18. Commodity Credentials: Energy • 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 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 Winner European Power and Natural Gas U.K. Based Trading Energy/ Commodity Derivatives House of the Year Correlation Trading European Weather (Carbon Credits) Coal & Freight Swaps & Options

19. Contacts Structuring desk + 44 207 545 7893 Sales desk + 44 207 547 4305 Trading desk + 44 207 547 3874

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