FINANCING INDEPENDENT OIL & GAS PROJECTS: CRITICAL SUCCESS FACTORS IN THE CURRENT ENVIRONMENT Steve Puckett TRI-ZEN International

FINANCING INDEPENDENT OIL & GAS PROJECTS 2 OUTLOOK Project Finance in late 1990’s…. ….e in 2008…. …. Project Finance in late 1990’s…. ….e mploying off balance sheet project finance and financial engineering to enhance equity returns, while preserving corporate credit ratings and improving reported earnings Independent oil & gas projects in 2008…. …. debt financing to fund the acquisition and development of oil & gas assets, with developments in the types of transactions financed, the choice of debt options and the terms available

FINANCING INDEPENDENT OIL & GAS PROJECTS 3 OIL & GAS PROSPECTS  In the global oil & gas market much of the activity is being driven by meeting the surging energy demands of the Asian region. Asian companies are investing heavily  The most active regions are the reserve-rich FSU, the Middle East, North Africa & South East Asia  Gas prospects and LNG development also seeing dramatic growth and increasing deal interest, due in part to technology improvements, lower costs in some areas, and surging demand

FINANCING INDEPENDENT OIL & GAS PROJECTS 4 STANDARD BORROWING BASE  Combines flexibility with relatively favourable pricing  Enables borrowers with significant assets to raise debt financing on their value  Producing assets assessed typically on a P50 basis and development assets on a P90 basis  Finance facilities flexible and typically revolving  Cash flow projections critical and sets the amount, pricing and maturity date of debt available

FINANCING INDEPENDENT OIL & GAS PROJECTS 5  Equity markets typically tapped at early stage for potentially significant funding  Equity markets can be volatile and sometimes difficult to tap for future finance  Recent liquidity in debt markets has resulted in the availability of short term loans or ‘bridge financing’ to be later replaced by base financing once cash-flows / production levels permit  Lenders typically seek to ensure everything necessary is in place to ensure development stage assets can be brought into production within say 12 months FINANCING OPTIONS WITHOUT AN ASSET BASE

FINANCING INDEPENDENT OIL & GAS PROJECTS 6 FINANCING OPTIONS – CRITICAL FACTORS FOR BRIDGE FINANCE  No barriers to entry in way of production  No barriers to entry in way of transportation  Confidence in regulatory market to allow approvals for delivery  Comprehensive Due Diligence  Early refinancing encouraged by lenders which require a “right to match” or prospect of facing punitive fees

FINANCING INDEPENDENT OIL & GAS PROJECTS 7 FINANCING OPTIONS - ALTERNATIVES  Investment banks promoting alternatives to commercial bank debt  Short maturity loans that can be arranged, but not underwritten, by the bank and with a group of non-bank lenders, such as hedge funds, arranged  Can be advanced in single tranche at financial close, but attracting a higher price – in both margin & fees  Risk of tighter security package. Completion risk accepted, where extension or waiver of the debt repayment may be more challenging, but not impossible, because of commonly shared objectives for success

FINANCING INDEPENDENT OIL & GAS PROJECTS 8 GROWTH THROUGH ACQUISITION  A route to fast track growth and fast track to a borrowing base facility  Many acquisitions are effectively “auctions” where a borrowing base facility – with the addition of stretch tranches maximizes the available funds  The borrowing base value will be secured against the assets acquired, effecting transformational growth for the acquiring company  To avoid pre-emption, other contract and license issues, and often also for tax efficiency, the acquisition will typically be by share purchase

FINANCING INDEPENDENT OIL & GAS PROJECTS 9 GROWTH THROUGH ACQUISITION – RISK AND SECURITY  Security will be sought by lenders but in some jurisdictions, limited financial assistance is allowed  Multi – sourcing and layering of debt, including such options as Mezzanine finance, or use of secondary markets, or a “second lien loan”  Second lien lenders are classified as Senior lenders until an event requiring enforcement of a security, when they will rank lower  Such structures have been prevalent in Europe

FINANCING INDEPENDENT OIL & GAS PROJECTS 10 FUTURE PROSPECTS - PUBLIC COMPANY TAKEOVERS  Are we reaching a time of consolidation for the many smaller independent companies that have come to market?  With larger number of companies in the UK’s AIM market and other secondary markets, we may be entering a period where listed company takeovers are seen  Such takeovers could be funded by acquisition financing debt – possibly from hedge funds, or similar institutions

FINANCING INDEPENDENT OIL & GAS PROJECTS 11 FUTURE PROSPECTS – PUBLIC TO PRIVATE  Public to private – a market trend – able to be similarly funded by acquisition financing debt  Additional challenges and risks are matched by potential significant rewards  Typically an offer will rely on key conditions, such as no material change in business, but in some jurisdictions, such as the UK, these will not be upheld  Offers will likely also contain default events – again challenging to enforce  Other than publicly available info, limited access for DD

FINANCING INDEPENDENT OIL & GAS PROJECTS 12 ASSETS  Growth in international activities of independent oil & gas companies is a further increasing trend  Variety of jurisdictions can circumnavigate the globe ….South America-Middle East-India-Indonesia-China  A borrowing base facility is usefully flexible for a range of jurisdictions and for a range of maturity of businesses and assets  The mature and the newer assets in different territories can blend to balance risk

FINANCING INDEPENDENT OIL & GAS PROJECTS 13 FUTURE PROSPECTS – GLOBAL CONSIDERATIONS  Global prospects, including countries in the Middle East, can offer opportunities for borrowings, particularly for smaller oil & gas prospects where the NOCs or IOC’s have less interest  A borrowing base facility for new market entries relies on a mix of security. Typically these are less than for project finance arrangements and are by way of such items as share pledges or debentures as charges over assets  Borrowing base facilities do not impose the same extent of rigid requirements for direct agreements with counterparties that are usually required in project finance

FINANCING INDEPENDENT OIL & GAS PROJECTS 14 FUTURE PROSPECTS - GROWTH  In this highly priced and sometimes volatile environment the financing of projects reflects the dynamic business environment  Flexible financing has been enabling independent oil and gas businesses to pursue and fully exploit the increasingly global prospects and opportunities  Finance providers and their advisors are quick to adapt to newly evolving landscapes

FINANCING INDEPENDENT OIL & GAS PROJECTS 15 FUTURE PROSPECTS – CURRENT MARKET UNCERTAINTIES  Current uncertain market conditions will impact lenders’ perspectives  Loan percentages likely to fall and pricing to increase  Relationship banking likely to gain in importance while non-bank lenders may reduce in numbers  Deal closing may take longer and more be pre-syndicated  The value of secondary market loans could impact the appetite for primary market deals and projects’ future cash-flows will need more certainty….for how long?

FINANCING INDEPENDENT OIL & GAS PROJECTS 16 THANK YOU THANK YOU TRI-ZEN International Singapore and Bangkok Hong Kong Jakarta Melbourne Mumbai Perth Shanghai The author is grateful to Ashurst for input and advice in preparation of this presentationwww.tri-zen.com