23-25 May 2007 Issues and challenges in funding working capital and capital expenditures requirements FINANCING AFRICAN REFINERIES 11th African Oil & Gas, Trade and Finance Conference and Exhibition Nairobi Guillaume Leenhardt DAY 2, Session 7, Room A, 14:00-15:45 NOT AN OFFICIAL UNCTAD RECORD

2 Market environment Key issues for working capital financing Challenges for financing capital investments Hedging price risks Senegal – Lessons Learnt Agenda

3 Section 1Market environment

4 High crude oil prices and volatility Pressure on bank credit lines Pressure on refinery cash flows due to slow adjustment of local prices and inefficient transfer mechanisms from subsidy/stabilization funds Refining margin volatility Following a period of strengthening in since 2005, onwards remain uncertain Deregulation of the downstream Less “ideological” pursuit of deregulation now than in 90’s Trade-off of temporary protection against future investment is accepted by Governments and the Bretton Woods institutions. Generally improving macroeconomic climate Trade-off of temporary protection against future investment is accepted by Governments and the Bretton Woods institutions African governments are more focused, determined and powerful to save their ‘refining trees’ Market environment

5 Section 2Key issues for working capital financing

6 Supplier Credit versus Bank Credit Supplier Credit : L/C versus Open Account Bank Debt : Local versus Foreign banks Key Decision Drivers : Cost Flexibility Credit Capacity Habits Nature of suppliers requirements (Majors versus traders) Co-operation between onshore and offshore banks  In most cases international commodity banks, such as BNP Paribas, are involved Working Capital – a question of arbitrage

7 Section 3Challenges for financing capital investments

8 Objectives Increasing capacity Improving yields Meeting environmental norms Key Decision Parameters : Target Markets : Domestic or Export ? Importance of depth and future growth of local/regional markets Extent of reliance on government protection against direct imports With many projects on the drawing board, is there a risk of oversupply in Africa ? Profitability Uncertainty regarding international refining margins in the medium term Need for temporary additional margin granted by government Challenges of environmental CapEx – no additional cash flows, hence in need of government/multilateral support Considering significant size of investment – which investor ? State: willingness but limited means and Bretton Woods constraints Majors: expertise and means but little willingness, who will tomorrow’s Majors in Africa be Local players: willingness but little expertise and means Tenor How to reconcile financier requirements and sustainability of repayment flows Capital investment

9 Section 4Hedging price risks

10 Despite natural price protection via IPP based local formula, hedging strategies can be used for : the benefit of refiners to fix refining margins in support of CapEx financing projects the benefit of consumers or the state budget by means of hedging the sale price A possible approach Hedging could be subscribed by the national stabilization funds with cost borne as an element within the local price structure and credit risk guaranteed by bilateral or multilateral donors Cost impact is lowered due to dispersion No burden for state budget Benefit to balance of payments and FX reserves Hedging for African refiners

11 Section 5Senegal – Lessons Learnt

12 Despite its many strengths (reliable assets, experienced shareholders and management, depth of local market and government tariff protection) the refinery is traversing a period of crisis which has brought production to a halt Some possible causes: Inadequate shareholding structure (no clear leading shareholder), incoherence between the vision of the shareholders (the operational decision-makers) and the Public powers (the molders of the of the regulatory framework) Absence of significant investment over the past 20 years (in contrast to the refineries of Ivory Coast, Gabon, Cameroon and Ghana……and soon Kenya) Lack of working capital combined with the excessive weight of subsidies on LPG and accumulation of late payments by the local electricity company giving rise to heavy financial costs and chaotic crude oil procurement policy Unfavorable market environment, characterized by the prolonged increase in price of crude oil between , having generated losses arising from the monthly lag in local price adjustments  However, there is hope that a way out of the crisis can be found with mobilization of the banking pool led by BNP Paribas and support from the shareholders and Government Senegal