DRAFT

1. NOT AN OFFICIAL UNCTAD RECORD Merrrill Lynch Securing Revenues in a Volatile Crude Market April 4th, 2006 CONFIDENTIAL DRAFT

2. Table of Contents Securing Revenues in a Volatile Crude Market 1. Oil Market Outlook 2. Securing Oil Revenues 3. Securing Revenues from Energy Distribution

3. 1. Oil Market Outlook

4. Historical and Forward IPE Brent Curves Global Market for Crude Oil High Marginal Cost Oil Fields : Oil Sands (1) Oil Market Outlook Oil Price Outlook: Short Term Support, Long Term Threat • Strong demand (particularly in Asia and South America) combined with bottlenecks in the refining sector (due to lack of investment) and a fundamental shift in oil production (from sweet/light to sour/heavy) have driven oil prices higher over the past 3 years • After 2007, forces driving oil prices lower might become dominant: • Upstream and downstream investments coming on-line in 2008 • Chinese economic growth slow down • Risk of pandemics such as Avian Flu • Iraqi oil production recovering from current low levels • Development of a global gas market with the LNG production coming on-line • As seen during the oil shocks in the 1970’s, fear of a long term high oil price environment will stimulate • Development and production of high marginal cost oil fields (Venezuela, Canadian Oil sands) where majors are already making heavy investments • Investment in alternative technologies such as electric engines, fuel cells, hydrogen propulsion Oil Sands Canada’s Reserves: Oil Sands: 163 mmbbls Conventional: 16 mmbbls Conventional ____________________ (1) Source: Alberta Department of Energy and Oil and Gas Journal. 1

5. Paying for Decades of Underinvestment Oil Market Outlook Boom and Bust of Commodity Markets: Cause, Effect & Remedies Average Construction Lead-Times for Major Commodity Supply Infrastructure Projects(1) • Low investment returns have led to a lack of capital flowing into the industry over the last decades (instead chasing more ‘desirable’ sectors, such as pharma, technology, telecoms) • As a result, we are looking at a chain of bottlenecks throughout the industry … • Exploration • Transportation • Refining • Labour • Etc … • … requiring high and sustained prices to justify investment Ship (dry bulk) 1-2 years Ship (wet) 2 years Refinery Upgrade 2-3 years New Refinery 5-7 years Oil Pipeline 5-7 years Oil Field (existing area) 2-3 years Oil Field (new area) 7-10 years Copper Smelter 3-4 years New Copper Mine 5-6 years In any case many of these bottlenecks will take a long time to fix • ____________________ • Merrill Lynch Commodity Research 2

6. Unconventional Low Margin Product Coming Online Unconventional Crude Production Oil Market Outlook High Forward Oil Price Environment as a Potential Threat The high forward oil price environment is stimulating production in unconventional oil which poses a threat to conventional producers • The current high forward oil price environment encourages the production of low margin product • Canadian Oil Sands • Venezuela Heavy Oil • Even at low margins, Unconventional Oil represents a clearthreat to convention oil producing nations • The elevated forward curve allows low margin producers to lock in profit and potentially steal North American market share • High oil prices are stimulating increased investment in technology to efficiently extract unconventional oil • This flood of new crude will ultimately place downward pressure on commodity prices kboed 3

7. Current Inelasticity of Demand is not Sustainable in the Long Term Oil Market Outlook Long Term High Oil Prices Will Lead to a Softening in Demand • To date, global demand has proven to be highly resilient to the steady growth in oil prices • However, the fact that demand has failed to slow down despite the high prices does not mean that demand is price-insensitive in the long-run • As seen during the oil shocks in the 1970’s, fear of a long term high oil price environment will stimulate conservation efforts and fuel investment in environmentally friendly technologies such as: • Gas / Electric hybrid engines • Fuel Cells • Hydrogen propulsion • Gas fired Vehicles • The ultimate effect will be long term price elasticity of demand as consumers look to return disposable income from fuel expense to their pockets The current growth in oil demand despite rising prices is unsustainable in the long term Fear of an extended period of high commodity prices will drive investment in alternative technology 4

8. Increasing Inelasticity of Gasoline Demand(1)… …Leading to Higher Fuel Efficiencies Oil Market Outlook High Demand will Lead to Increased Efficiency and Substitution US gasoline demand has become more price inelastic over time A shift from SUVs to hybrid vehicles in the US could result in phenomenal energy savings ____________________ (1) Rolling regression coefficient on a 100-month window where the latest data point signals current price elasticities of gasoline demand, as estimated over the past 100 month 5

9. Overlap in the End Use of Oil and Gas Overlap in the End Use of Oil and Gas may Lead to Substitution Growth of Global LNG Fleet Oil Market Outlook Fuel Substitution: Relative Value in Natural Gas vs. Crude Oil Though it may be unlikely that the oil and gas price divergence will persist into the long term, should it occur, a significant amount of switching out of oil and into gas would be expected • Long dated crude oil prices have nearly doubled over the past 12 months, but long dated gas prices have not kept up • The emerging LNG market which is poised to increase substantially on both sides of the Atlantic will likely lead to an LNG spot market and … • Environmental reforms will increase pressure to take advantage of the disconnect in oil and gas prices as high pollution industries such as the power generation sector seek cleaner burning fuels • Any further divergence in oil and gas prices will accelerate the pace of demand adjustment 6

10. 2. Securing Oil Revenues

11. Cost and Access to Capital Markets Highly Correlated to Oil Prices… Credit Spreads vs. Oil Price Credit Spread of Russia and Borrower (bps) vs Oil Price (Brent $/bbL) Credit Spread of Borrower (bps) vs Oil Price (Brent $/bbL) Securing Oil Revenues Oil Price and Borrowing Cost • Over the past 7 years, oil producing countries have faced both historically low and historically high oil price environments • The volatility creates challenges to policy makers and jeopardizes sustainable and stable economic growth • Currently oil producing countries are enjoying low credit spreads resulting from high oil prices, and this translates into cheap and ample access to Capital Markets • However, 7 years ago these same countries were facing capital outflows, limited access to capital markets, and high borrowing costs (wide credit spreads) mostly as a result of historically low oil prices… Source: Merrill Lynch 7

12. Client issue Oil Linked Notes (OLNs) and receive Issuance Proceeds from Investors Investors may choose to keep indexation to oil price or swap out price exposure with Merrill Lynch Investors may require security over the Producing Assets against the possibility of default by Client Client continue to sell oil in the market as usual: Merrill Lynch may act as an offtaker for the transaction in order to improve credit quality of offtakers and potentially transaction rating Client make debt service payments to Investors fluctuate in conjunction with movements in oil prices: Lower debt service when oil price is low Higher debt service when oil price is high Greater ability to meet payments Ongoing Transaction Flows Description Flows At Issuance Securing Oil Revenues Oil Linked Financing Client Producing Assets 1 100% Ownership 2 ($) Issuance Proceeds 1 OLNs 2 3 3 Investors Merrill Lynch Oil Price Swap (optional) Security (optional) 4 4 Oil 5 ML/ Customers Client Producing Assets Oil 4 ($) Payment for Oil ($) Oil Linked Payments 5 Investors 8

13. Illustration of Credit Spread vs. Oil Price Coupon Linked to Oil Price Indicative Terms and Conditions / Sample Securing Oil Revenues Coupon Linked to Oil Price • Client issue USD bullet bond with 5-year maturity for which credit spread is indexed to oil price • Oil price indexation results in credit spread subsidy in low oil price environment • Investor will receive enhanced coupon payment in high oil price environment but this will be capped allowing Client to participate above this level Issuer: Client Principal Amount: USD 300,000,000 Effective Date: March 2006 Maturity Date: X years after Effective Date Interest Rate: 12M USD LIBOR - 50bppa + Oil Spread Oil Spread 95bp p.a.×Max [Oil Price – USD 65/ bbl, 0] capped above USD 70/bbl at 425bppa Volume equivalent: 2,885,000 bbls per annual Coupon Period Oil Price: Annual average of PLATTS mid prices for Dated Brent crude oil * Assumes Client standard funding at 100 bppa 9

14. Principal Linked to Oil Price Illustration of Amortisation vs. Oil Price Indicative Terms and Conditions / Sample 95 $17 85 $16 75 $15 65 Amortisation Payment ($MM) 55 $14 45 $13 35 $12 25 25 30 36 41 46 51 57 62 67 72 78 83 88 Oil ($/bbl) Oil Amortisation Payments Standard Payment Oil Price Securing Oil Revenues Principal Linked to Oil Price • Client issues USD amortising bond with 5-year maturity for which amortisation payments are indexed to oil price • Credit spread over LIBOR will be reduced due to inherent credit mitigation of oil price risk • Amortisation payments will be reduced in low crude price environment Issuer: Client Principal Amount: USD 300,000,000 Effective Date: March 2006 Maturity Date: 5 years after Effective Date Interest Rate: 3M USD LIBOR + 75 bppa Tranches: XXX quarterly linear amortisation payments Amortisation Payment: Standard Amortisation + Oil Amortisation Standard Amortisation: USD 15,000,000 Oil Amortisation: Volume x { Max [Oil Price - $78/bbl, 0] - Max [Oil Price - $100/bbl, 0] - Max [$55/bbl – Oil Price, 0] + Max [$40/bbl – Oil Price, 0] } Volume: 100,000 bbl per quarterly Coupon Period Oil Price: Quarterly average of PLATTS mid prices for Dated Brent crude oil * Assumes Client standard funding at 100 bppa 10

15. Securing Oil Revenues Protection Range and Opportunity Cost versus historical and forward $/bbl 100 Higher Amortisation Payment Call Spread 90 80 The strategy offers effective protection from falling oil price, limited to the difference between the Put Strikes The opportunity cost of the strategy is limited to the Call Spread 70 60 Lower Amortisation Payment 50 Put Spread 40 30 20 10 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 ____________________ Source: Bloomberg Protection and Risk Range refer to an Asian Single Settlement Four-Way Strategy maturing 31st December 2009 11

16. Solving the Problem of Revenue Stability… Securing Oil Revenues Stabilising Revenues Traditional hedging by buying puts or selling forward can be a delicate decision if the market goes against the hedge In retrospect, any put premium lost will often be seen as money wasted… putting the decision makers at “political risk” AAA oil bonds achieve the same objectives as the puts, without incurring any political risk • Fiscal Policy and Stabilization Funds can be complementation do NOT solve the problem entirely • Risk Management via Oil Price Insurance (Put Option) is the most conservative • Protect against lower prices • Retain upside to higher prices • Risk Management via Oil Forward Sales does not benefit from upside • Risk management via Over-The-Counter (OTC) derivatives, such as buying put options, selling forwards, or selling call options, may not be an efficient nor suitable approach for governments • AAA oil bonds provide AAA insurance, better suited for governments 12

17. AAA Oil Bonds Optimise Revenue Management Favourable Market – High Oil Forwards AAA Oil Bonds 3 year Oil Bond vs Fixed Income Current Crude oil Price $/bbl Securing Oil Revenues Investing in Oil Indexed Notes • AAA Oil Bonds are highly conservative investments, that simultaneously combine the benefits of stabilization mechanisms and hedging of oil price risk • Current historically high oil forward prices provide a short term OPPORTUNITY to oil producing countries… but also a long term THREAT on how to manage falling revenues if oil price drops • The bullish outlook in the immediate-near term, should not blind policy makers of the opportunities and threats arising from current long-term prices • AAA Oil Bonds provide significant improvements versus traditional Over the Counter Derivatives or Money Markets 13

18. Indicative Termsheet Securing Oil Revenues 3 Year AAA Oil Bond, 40 $/bbl Floor, 100% Principal Protected Issuer: African Development Bank (AAA/Aaa) Issue Size:[USD 1 Bio] Maturity Date:[3 years] from Issue Date Issue Price: 100% in USD Redemption:100% in USD Coupon: An amount in USD, payable ANNUALLY, equal to the maximum of zero or the difference between the Floor Level and the Final Price, per the Oil Volume Protected Max [ 0 , Oil Floor – Oil Final ] x Oil Volume Protected Oil Floor: [40 USD/bbl] Oil Final : Daily averageof IPE Brent over year prior to each Settlement Date Oil Volume Protected: [3.65]million bbl per annum (total 11 million bbl over 3 years) Fees: None Dealer/Underwriter: Merrill Lynch International Listing: Unlisted Program: Global Debt Issuance Facility Format: Permanent Global Note The PV of the interest available is around 13% of the notional, which given current put options prices allows to purchase 11 million barrels of $40/bbl puts spread over the next 3 years The AAA bond will return 100% at maturity, and protects $440 Million of oil revenues over the next 5 years Basis: IPE Brent: 62.96 $/bbl, assuming 3 Year AAA Oil Bond, strike 35 $/bbl, 100% Principal Protection 14

19. Graphical Illustration Benefits & Considerations Description Realised Price Forgone Appreciation Downside Protection Oil Price Put Strike Lower Call Strike Higher Call Strike Securing Oil Revenues Three-Way Zero Cost Strategy - Oil Derivatives • The Three-Way Zero Cost strategy enables Producer to achieve price protection on crude oil while partially participating in rising oil prices. Producer can finance the purchase of a Put Option by selling a Call Spread. The structure limits the opportunity cost of the hedge to the difference between the Higher and Lower Call Strike • At maturity, assuming cash settlement: • If the oil price is less than the Put Strike, then Producer receives the difference between the Put Strike Price and the prevailing oil price • If the oil price is higher than the Put Strike and less than the Lower Call Strike, neither party makes a payment • If the oil price is greater than the Lower Call Strike and less than the Higher Call Strike, then Producer pays the difference between the prevailing oil price and the Lower Call Strike • If the oil price is greater than the Higher Call Strike, then Producer pays the difference between the Higher Call Strike and the Lower Call Strike • The Three-Way Strategy can be implemented in Asian and Quanto forms • Producer receives compensation when the oil price drops below the Put Strike • Producer’s payment occurs only if the oil price is above the Lower Call Strike and is limited to the difference between the Higher and Lower Call Strikes • Structure is zero premium • Producer has the flexibility of customising maturity, Put Strike and Call Strikes, as well as the notional 15

20. Opportunity Cost Call Spread Protection Range Put Strike Securing Oil Revenues Three-Way Zero Cost Strategy – Potential Exposure The Three-Way strategy offers effective protection from large market shocks The risk is limited to the range of the Call Spread and is at much higher levels than both long-term oil prices and current analyst predictions ____________________ Source: Bloomberg Protection and Risk Range refer to an Asian Single Settlement Three-Way Strategy maturing 31st December 2009 16

21. Fixed Price Swap on IPE Brent Three-Way Zero Cost Strategy on IPE Brent Securing Oil Revenues Indicative Prices 17

22. 3. Securing Revenues from Energy Distribution

23. Description Financial Hedge Fixed Price Physical Delivery Basis Risk Physical Coal Delivery Electricity Delivery Merrill Lynch Power Plant Retail Market Regulated Tariff Fixed Price Basis Risk Physical Transfer Physical Transfer Financial Transfer Financial Transfer Securing Revenues from Energy Distribution Fuel/Coal Fired Power Plant with a Regulated Electricity Tariff Physical Fuel Oil Delivery Electricity Delivery • The Power Plant is exposed to the risk of higher Fuel/Coal Market Prices as revenues from electricity sales are regulated • Increasing regulated electricity Tariff is a highly political decision • purchasing cost is directly driven by market price which have proved to be very volatile • Regulated electricity Tariff in most countries aim providing price stability to final consumers • Ideally, the Power Plant would like to stabilise its Fuel/Coal purchasing cost in line with the the regulated electricity Tariff • Merrill Lynch proposal is to secure cost of Fuel/Coal supply at a Fixed Price level through a financial swap or a fixed price physical delivery Fuel Oil Supplier Power Plant Retail Market Floating Market Price Regulated Tariff Floating Market Price Fixed Price Merrill Lynch 18

24. Risk of a margin squeeze Structuring the Hedge Benefit and Considerations Securing Revenues from Energy Distribution Fuel/Coal Fired Power Plant with a Regulated Electricity Tariff • Following solutions facilitate the hedging execution • Guarantee from the State or from a Devlopment Bank • Pari-Passu with the financing banks • Collateral under the form of a partial pre-payment of future purchasing cost • Paying premium for an insurance against higher purchasing costs rather than fixing it • By entering the proposed hedging strategy, the Power Plant can secure is purchasing cost over the future. • It helps to mitigate the risk of margin squeeze when purchasing costs increase more than the regulated Tariff • The Power Plant gives up potential benefit from lower purchasing cost • The basis risk between hedged purchasing costs and revenues from regulated tariff is low as long as price stability drives regulated electricity Tariff • When financing project or restructuring existing financing, Development Banks will value the hedging strategy as • It provides improved visibility on future cash flows generated by the power plant • it helps stabilising retail electricity prices avoiding political tension from Tariff increase 19

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