Project Financing in Saudi Arabia

1. Project Financing in Saudi Arabia Continuing the Momentum David Cole Head of Project Finance EMEA Dammam, 20th November 2006

2. Fundamentals of the Kingdom of Saudi Arabia • SAMA’s foreign reserves : expected to be more than US$ 220 billion in 2006 • No governmental external debt • Net external asset position of more than 90% of GDP by end-2006 • The largest population and the biggest GDP of the GCC i • The most important player in the oil sector (production & reserves) • Ongoing socio-economic and political reforms • Stable exchange rate for Saudi Riyal • Successive upgrades of the sovereign ratings Sources : i IMF ii BP Statistics Impressive National Figures … Population 2005 24 million i GDP 2006e US$ 363 billion i 22% of proven oil reserves worldwide ii 13.5% of oil production worldwide ii 1 US$ = 3.75 SAR … Combined with a Positive Economic Environment

3. Investment and Economic Environment of the Kingdom • Over the last decade, KSA has successfully undertaken a program of structural reforms • This have been evidenced by the restructuring and formation of facilitative institutions … • Supreme Economic Council (SEC) – August 1999 • Supreme Council for Petroleum and Minerals – January 2000 • The Saudi Arabian General Investment Authority – April 2000 • Saudi Electricity Company (SEC) – April 2001 • Saudi Electricity Regulating Authority (SERA) – November 2001 • Capital Market Authority (CMA) – July 2004 • … and the introduction of new laws, resolutions … • The new investment law (April 2000) • Opening more sectors to foreign investors : • Mobile telephone services (March 2003) • Insurance (February 2003) • Capital market law (June 2003) • The new insurance law (July 2003) • Anti-Money laundering law (August 2003) • Bilateral trade agreement with EU (August 2003) • New income tax law (January 2004) • KSA joined the WTO (December 2005) • … and a progressive privatisation programme across the industrial spectrum encompassing telecom, power, railways, water … Recent Reforms, Restructuring, Laws and Resolutions Saudi Arabian General Investment Authority (SAGIA) Date of Creation April 2000 Mission “To create a pro-business environment, provide comprehensive services to investors and foster investment opportunities in energy, transportation and knowledge-based industries.”

4. Investment and Economic Environment of the Kingdom • Globally, these reforms have encouraged the development of the private sector and enhanced the attractiveness of the Kingdom for financiers, further reinforcing the confidence of international financial institutions in Saudi Arabia Reforms and Economic Environment • Since 2002, an outstanding and sustained surge in oil prices, combined with higher oil production has fuelled the growth of the KSA’s economy • This has facilitated directly to the employment of broader Project Finance initiatives in sectors beyond their traditional area of focus (oil & gas, petrochemicals) to include power and water and, in due course, infrastructure KSA Oil Production • Average 1992 – 2002 : 9,201,000 bpd • Average 2003 – 2005 : 10,615,000 bpd (+15%) Oil Prices • Average 1992 – 2002 : 24.30 US$ 2005 • Average 2003 – 2005 : 41.57 US$ 2005 (+71%) Sources : BP Statistics & BNPP

5. Project Financing Growth • Globally, Project Finance loans in 2005 reached : • About $23 billion in the Oil & Gas sector • About $7 billion in the Petrochemicals sector • Project finance bonds for the Oil & Gas industry reached c. $10 bn in 2005 Unprecedented Oil & Gas Debt Volumes on the Back of High Oil Prices Source: ProjectWare, 2006 – Global Project Finance in Oil & Gas

6. Project Financing Growth • The traditional oil and gas industries remain predominant in the GCC but industrial development associated with the oil and gas industries is moving downstream • Access to low-cost feedstock has fuelled expansion in petrochemical facilities, steel and aluminum production • Continued growth of independent power to meet rising power and water demand Middle East – GCC Project Finance Activity – 2006 set for a Record Year Project Finance Loans in the GCC 99 - 06 Project Finance Loans in the GCC 05 - 06 Source: Thomson Financial – 2006

7. Project Financing Growth • Improvements in external country risk ratings • Availability of feedstock • Cost competitiveness of production • Continued emergence of China and India as key export markets • Have underpinned a significant increase in investment in new production capacity and firmly confirmed the GCC’s position as integral to the development of the global market Catalysts for Growth

8. Petrochemicals • The cornerstone of Middle East production • 70% of forecast increases in global production capacity between 2005 and 2010 are to be built in the Middle East • Concentration in Saudi Arabia • More than 15 petrochemical projects have been announced in the press in recent months Saudi Arabia Source : International Press and BNPP

9. Refinery • An investment program of US$ 50 billion has been put in place by Saudi Arabia to boost its national and international refining capacity from 4 million bpd to 6.4 million bpd. This scheme includes notably: • Two export refineries of 400,000 bpd to be developed by Saudi Aramco with foreign partners : • Yanbu export refinery with ConocoPhillips • Jubail export refinery with Total • The expansion of two existing refineries (Yanbu and Ras Tanura) by 100,000 bpd each • Expansion of existing refineries in China (together with Exxon and Sinopec) • Hybrid projects (refinery and petrochemical) have emerged as one of the most efficient way to develop the national oil production on a long term basis: • PetroRabigh: Saudi Aramco & Sumitomo • Ras Tanura: • upgrade of the existing 550,000 bpd refinery (probably +100,000 bpd) • a new petrochemicals complex, which will have a 1.2 million-tonne-a-year (t/y) ethane/naphtha steam cracker as its central element and 28 downstream different process units Ambitious Expansion Plans

10. Power and Water Overview • Last decade has witnessed the emergence of well defined and accepted private power models in the Gulf • Only Dubai and Kuwait remain wedded to a Government funded EPC contract process • Similar (but distinct) templates have emerged in UAE (Abu Dhabi, Fujeirah), Oman, Qatar and more recently Bahrain and Saudi Arabia • Recognition of realisation of economies of scale through parallel production of power and water • Initial investor attention in the Kingdom arose through smaller plants designed to support industrial projects • Sadaf • Tihama Cogeneration programme (Saudi Aramco) A Continuing Evolution in the Middle East Saudi Arabia

11. Power and Water Overview • Saudi Water and Electricity Company • Shuaibha IWPP : 900 MW, 194 million gallons per day • Shuqaiq IWPP : 850 MW, 40 million gallons per day • Ras Al Zour IWPP : 3000 MW, 220 million gallons per day • Marafiq • Jubail IWPP : 2750 MW, 176 million gallons per day • Ma’aden • Captive plants for its fertiliser complex (150 MW) and its aluminium smelter (1800 MW) Today power and water are part of a broader privatisation initiative sponsored within the Kingdom

12. Power and Water • Prerequisites for Investment – Equity and Debt • Solid fundamentals over the long term • Equitable risk allocation and provision of rate of return commensurate with risks taken • Strong and consistent Government support • Well structured capacity driven deals at competitive market prices with defined cash flows • Adherence to law and sanctity of contracts • Developing regulatory framework • Limited currency risk • Consistent risk allocation - Traditional project finance structures employed given: • Utilisation of Capacity and Energy fee model • Long term Government supported offtake • Absence of market risk • Retention of fuel supply risk by host Government • Definition of political Force Majeure / Government risk events and protection of deemed capacity payments • Transfer of construction and operational risk (availability and costs) to the private sector together with time relief for natural Force Majeure • Responsibility for financing borne by private sector A Lender’s Perspective

13. Power and Water • Financing Market Trends • Considerable increase in size of transactions to accommodate underlying and forecast demand growth • Acceptance of longer tenors reflecting increased confidence in IWPP programmes and improved country credit ratings • Declining margins evidencing increased market liquidity • Development of club deals as opposed to fully underwritten transactions favored by certain developers • Emergence of aggressive funding support from several Government agencies • Increased shift towards international as opposed to regional investors A Lender’s Perspective

14. Other Sectors Saudi Arabia Mining Comp. Ma’aden Mission "To be a profitable, publicly owned, international mining company, while maintaining the utmost concern for human resources, health, safety, environmental and social issues“ Projects Az Zabirah Aluminum Project Phosphate Project Zarghat Magnesite Project Az Zabirah Kaolin Project • Mineral non hydrocarbon - development of the mining industry : gold, steel, magnesium, phosphate, sulfur, bauxite • Metal • Established regional precedents for metals processing • Competitive cost of power • Aluminium & Bauxite developments • Steel • Development of infrastructure (railway, port, airport …) • Minerals railway • Saudi Landbridge • Makkah - Medina Rail Link • Jeddah terminals upgrade • Medina expansion • Dammam - new berths & container handling capacity • Jeddah port expansion

15. Small and Medium Sized Enterprises • Benefits • More labour intensive per $ of capital investment • Permits maximisation of 'multiplier' effect for economic growth • Transition from import substitution to development of export capabilities • Challenges • Erosion / dilution of feedstock cost advantage as move further downstream • Differential export pricing for raw materials from major producers • Enhanced competition in global market place • Necessity for delivery of higher quality products in developed European markets • Financing • Strong support from SAGIA through creation of special economic zones • Historic pivotal role of agencies such as SIDF in nurturing industrial development - various initiatives to support SMEs, impartiality to foreign owned companies • Potentially higher returns and shorter maturities will find favour with local banking community Further development of downstream industries / enhanced growth of small and medium sized enterprises in the private sector

16. Financing the Growth • Traditionally funded on a corporate basis from retained earnings with funds availability dictated by cyclicality of oil prices and Government’s management of the economy • Limited opportunities for external investors / debt providers • However liberalization of the gas sector commenced in 2003 with the upstream development agreements with international oil companies for exploration of gas and condensates whilst future plans call for the development of a district gas supply network for indstrial and domestic consumers • Investments similarly dependent on cyclicality of product pricings, international cost competitiveness and demand / supply fundamentals but with opportunities for participation by investors from both equity and debt perspective • Commercial Banks – local, regional and international • Specialised agencies / funds – PIF, SIDF • Export credit agencies • Institutional investors through private placements, local and international bond issues • Public through IPOs Upstream Downstream

17. Financing the Growth $1 500 million for Middle East and North Africa • Even considering the industry’s proven ability to self-finance at current and projected oil prices … • … debt markets will remain critical in the face of the sheer scale of investments planned • About $1.5 trillion, or $56 billion per year, of investment is needed to expand capacity and replace ageing facilities • Oil and gas account for around 70% of this amount, the power sector accounts for the balance Total MENA Energy Investment, 2004-2030

18. Overview of Recent Saudi Petrochemical Financings • Support of ECAs & national agencies – the Public Investment Fund (PIF) and Saudi Investment Development Fund (SIDF) are critical in supplementing commercial bank liquidity for large Saudi projects Commercial Banks, ECAs and Government Agencies at the Forefront Source : BNPP and Dealogic

19. Overview of Recent Saudi Petrochemical Financings Geographic Distribution of Recent Saudi Petrochemical Financings Large Commercial Debt Tranches • International, regional and Saudi commercial banks have provided both conventional and Islamic project finance debt Source : BNPP and Dealogic

20. Commercial Banks: Providers of both Conv. and Islamic Debt • International, GCC and Saudi Commercial banks are the main providers of both • Conventional project finance debt and Islamic project finance debt • Commercial banks have recently provided • Rabigh - over $2.0bn, including $350 MM of Islamic debt (c. 60% of the $600 MM Islamic tranche); and • Yansab - $1.6bn, including c. $720 MM of Islamic debt (85% of the $847 MM Islamic tranche) • In recent Saudi financings, international banks have been the major contributor of conventional debt (c. 70%) and also a significant provider of Islamic debt (c. 25%) • Both regional and international banks are increasingly comfortable with Islamic financing and are ready to have their entire commitment allocated to an Islamic facility Source : BNPP and Dealogic

21. Islamic Banks • Significant expansion in number of Islamic financial institutions operative in the Gulf • Reflective of growing demand from retail customers for Shar’iah compliant products • Consumer asset portfolios (car financing, credit cards, mortgages) of most Saudi Banks have become predominantly Islamic But • Limited appetite for major project financings • Retail banking business generally attracts higher returns • Often balance sheet size does not readily accommodate large financing commitments required by major projects • Dependence on retail deposits and short term bank borrowings for funding needs inconsistent with long maturities sought for major project financings Rapid Growth, Constrained Appetite

22. Future Challenges • Significant further investment required • Increasing size of projects • Shortage of financially robust and technically viable EPC contractors • Further escalation in commodity / raw material prices, compounding increases seen in engineering, procurement and construction costs • Increases in project ‘breakevens’ reducing flexibility to manage future downturns in product pricings • Weakening of contractual terms – levels of liquidated damages, caps on liabilities, guarantees available, minimum performance specifications, completion testing regimes • Acceptance of multiple EPC contracts with no wrap thereby increasing interface risks between contracts; loss of single lump sum turnkey contract, a traditional cornerstone of non recourse project financing • Growth of ‘convertible’ lump sum contracts where contracts and detailed engineering awarded on a cost reimbursable basis and then converted to a lump sum turnkey once a large element of engineering is complete

23. Future Challenges But • Investing and financing community have accepted this changing (and increasing) risk profile and lending structures have accommodated through: • Increase in loan maturities for petrochemical projects from the 8 - 10 years (of the 1990s) to 15 years • Acceptance of lower debt : equity ratios by sponsors, increasingly closer to 60:40 than 70:30 • Greater assumption of price risk notwithstanding wide divergence of consultants’ long term price forecasts • Often focus on oil price scenarios rather than GDP growth projections • Often assume prices follow inflation rather than are determined by demand / supply fundamentals

24. Future Challenges • Independent Consultants and the financing community have significantly increased their long term base case assumptions – from $25 last year to $35/40 currently Oil Forecast, a Major Unknown • Oil prices forecasts • Peak Oil ? • Elasticities of supply and demand ? • Lack of spare capacity ? • OPEC influence ? • Geopolitical shock ? • Speculation ? • Different market views persist in respect of • Structural rise • Continued cyclicality Average Annual Prices in US$ 2005 Sources : BP Statistics & BNPP

25. Future Challenges Long Term Polyethylene HDPE Price Asia – Which One to Choose ?

26. The Pricing Paradox • Notwithstanding the increasing average size of projects and the greater risk profile assumed • The price of debt has continued to decrease ! Oil & Gas Project Finance in Europe and Middle East Source: Thomson Financial - 2006

27. Financing Conclusion • Significant financing liquidity, particularly from international banks, has to date successfully met huge investments needs and absorbed ballooning project costs • Declining fees and margins have meant retail participation increasingly do not meet internal return requirements for those lenders with higher funding costs • Consequently larger arranging groups have become more common with less funds attracted from retail distribution – lending syndicates now reflect an ‘inverted pyramid’ • Increased focus from lenders committing large amounts on securing future asset flows and fee income from overall client /project sponsor relationships • Saudi Arabia and its petrochemical financing needs have successfully taken the baton from Qatar and the expansion of its LNG industry

28. Financing Conclusion • No significant contraction in liquidity foreseen, although certain institutions may become increasingly selective with greater focus on yield or relationship return • Potential emergence of new lenders from Asia • Regional and Islamic lenders may increasingly focus on sectors offering higher yields – private petrochemicals, downstream industries • Portfolio diversification will enhance the attractiveness of infrastructure and mineral sectors • Continued appetite of export credit agencies in the provision of both traditional and ‘untied’ financial support will supplement liquidity pools and restrict upward drift in pricing In the Short Term

29. Financing Conclusion • If financing needs are to be satisfied, then there needs to be further development in international and regional capital markets • 144A Bond Market : a complementary source of funding to traditional sources ? • Potentially long term maturities (20 years +) available • Recent issuances from the region (cf Qatar) for project related borrowers • Large amount, international issuance • More readily applicable to expansion projects rather than greenfield development • Key issues : • Addressing construction / completion risk • Repayment profiles and project economics may restrict application to all sectors • Investment grade rating required In the Long Term

30. Financing Conclusion • Sukuk: a further potential diversification of source of funding • Significant increase in recent years in the number of regional sukuk issuances and transaction sizes • Investors and international banks increasingly comfortable with sukuk structures • Progression from sovereign to corporate issuance • Attractive to local market in terms of yield and shariah compliance • No requirement for rating • Key Issues • Maturities to date (7 years) incompatible with project requirements • Structuring consideration necessary to accommodate phased drawdown and amortisation; provision of completion support • Development of secondary market • Need to penetrate broader public investor base beyond local and regional bank market if true liquidity pool to be increased In the Long Term