Unlocking Upstream Financing for Africa s Oil & Gas Sector

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Unlocking Upstream Financing for Africas Oil
Gas Sector

• CCA Africa Oil Gas Forum
• Houston 1 December 2004
• Chris WJ Roberts, VP Director, EMERGX Inc.

President
VP Western Canada
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Unlocking Upstream Financing for Africas Oil
Gas Sector

• Africas Energy Poverty
• Current Trends Challenges
• Mitigating Upstream Risk
• Closing the Financing Gap

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Definitions

• MAJORS IOCs, including supermajors,
  integrateds, independents, mid- to large-cap
  Exploration Production (EP) firms most
  publicly traded
• NATIONALS State-owned (in whole or in part) EP
  companies, African non-African
• JUNIORS small-to-mid cap independent EP firms,
  usually publicly traded but sometimes privately
  held/pre-IPO/pre-production/start-ups mostly
  North American African

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Africas Energy Poverty
Poor access to energy efficient fuels and
electricity will keep billions of people locked
in a cycle of poverty unless rich nations step
in. About one-third of the world still won't have
access to electricity in 2030 and the U.N.'s
Millennium Development Goal of halving the
proportion of poor living on less than 1 a day
by 2015 won't be met unless an extra 200 billion
is invested . (International Energy Agency, World
Energy Outlook, October 2004)
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Exploration Drives Projects

• Despite real increases in OG production,
  exports, and investment over the last decade, per
  capita domestic consumption of petroleum products
  has declined across most of Africa.

• Recent OG price increases are partly the result
  of majors capital discipline, leading to a lack
  of exploration aggressiveness globally e.g.
  between 1998-2003, top ten majors exploration
  investment dropped by 30

MAJORS NEED ELEPHANTS
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Current Trends

• OFFSHORE WEST AFRICA activity increasing rapidly
  majors and nationals dominate due to capital
  requirements (50m for exploration well 500m
  for new FPSO) predominantly aimed at export
  markets
• LARGE PROJECTS coming on stream or attracting
  capital, including CCPP, Songas, WAGP,
  Mozambique gas fields, Kudu gas field, various
  LNG trains most of these resources discovered in
  1960s-1980s NEPAD gives boost to large regional
  infrastructure projects
• COMPETITION FOR CAPITAL US Can majors/juniors
  looking beyond domestic declining basins, as are
  institutional investors higher prices stimulate
  exploration but also more intensive development,
  improve economics of oil sands, marginal
  fields, synthetics, alternatives jurisdictions
  must still work hard to be attractive, especially
  in Africa

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Drilling Comparison Africa vs. Alberta
2003 approx. 1000 wells (all types) drilled
onshore offshore Africa
2005 est. in the province of Alberta alone,
approx. 18,600 wells (all types) will be drilled
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Above Ground Risk Challenges

• Geology Prospectivity (below-ground risks) not
  significant obstacles
• Key Above Ground Risks for Africa
• Political Risk (e.g. Cote dIvoire, Niger Delta)
• 53 different investment, tax, energy regulatory
  regimes some in transition
• Lack of local service industries
• Lack of suitable infrastructure
• Perceptions of corruption
• RESULT Financing sources limited

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Upstream Investor Types

• Majors Nationals EP financed from cash-flow,
  some debt/bonds, stock markets, divestitures
• Juniors owners/directors, private equity
  placements, IPOs/stock markets (e.g. TSX, TSX
  Venture, LSE/AIM)

• Energy Trusts Cash-flow, unit sales, etc. EP
  
• investments need direct links to reserves or
  cash-flow
• Institutional (investment funds/pension
  funds/mutual
• funds) private equity public equities
  debt
• IFIs/DFIs (IFC, AfDB, OPIC, FMO, etc) private
  equity,
• debt, guarantees ? more downstream appetite
• Individual Investors retail - publicly
  traded
• equities, bond issues, trusts, or funds
  occasionally
• direct via private placements for high-net
  worth
• investors

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Upstream Finance Risks for Investors

• Inherent Upstream Risks Wildcat factor
• Political Risk Above Ground
• Region/Country
• Tax, forex, regulatory hurdles changes
• Operating area
• Geological Risk Below Ground
• Inadequate public or legacy geophysical data
• Reserve size
• Commercial Risk
• Management
• Financial
• Availability of partners, services supplies
• Dry holes EPSA clock is always ticking
• Environmental liabilities

Exploration and/or Africa restricts investor
pool
Many majors have an offshore only policy in
certain regions
Majors have internal resources, wide shareholder
base, good credit ratings, diversification to
mitigate most risks
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Upstream Finance Risks for Investors

• 5. Infrastructure Risk
• Exploration stage
• Development stage
• 6. Market Risk
• Access to global markets pricing
• Weak or undeveloped domestic markets (esp. gas)
• Market changes (technological, competitive)
• 7. Investment Risk
• Exit Strategy
• Tax incentives implications
• Stakeholder investment guidelines
• Host Governments need to focus primarily on
  these aspects of risk mitigation to improve
  climate for junior IOC and Domestic EP firms
  their investors

Why take risks upstream when you can
cherry-pick downstream? (i.e. safer, albeit
more utility grade, returns)
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Mitigating Upstream Risks for Investors

• 1. Inherent Upstream Risk Aggregate share

2. Political Risk Work with an IFI or DFI
partner integrate CSR from beginning
3. Geological Risk Leverage technology junior
advantage
4. Commercial Risk Dont invest in companies,
invest in EP
programs/concessions (GOR)
5. Infrastructure Risk Be aware, plan, and BOOT
6. Market Risk Diversify
7. Investment Risk Align structure to match tax
and investment needs of investor community keep
options open for exit (monetize GORs, roll into
trust, etc)
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The Junior Financing Gap
UPSTREAM DOWNSTREAM
SECURE EPSA EXPLORATION PROGRAM
DRILLING DEVELOPMENT PRODUCTION
FINANCE SOURCES Internal Resources
FINANCE GAP Internal Resources (Majors
only) Capital Markets (limited appetite) IFIs
DFIs not available this stage
FINANCE SOURCES Majors, Nationals IFIs/DFIs
Capital Markets (equity debt) Energy Trusts
Other Partners
International juniors considering Africa and
their domestic counterparts face a real financing
gap, limiting EP overall and constraining
development of domestic energy players in Africa
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Closing the Junior Financing GapAn example

• RESULTS
• Increase EP and downstream opportunities
• Increase institutional exposure to Africa
• Stimulate African junior private sectors
• Integrate CSR earlier
• Promote EIR policies
• REDUCE AFRICAS ENERGY POVERTY

COINVESTORS
EMERGX Africa Fund 100 million
EXPERT MGMT
GOVERNANCE
Africa/Global (20) Institutional, Majors
North America (60) Institutional, Majors
IFIs, DFIs (20)
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Thank you.

• Chris Roberts, Emergx Inc.
• Email roberts_at_emergx.com
• www.emergx.com