Financing Domestic Gas & Gas-Based Industries Paul Eardley- Taylor, Oil & Gas: Southern

22 September 2015 Contents 1

Section Page

1. Introduction 2

2. LNG 5

3. Domestic Gas Projects 10 Section 1:

Introduction : Natural partner in Africa 3

Most comprehensive network in Sub-Saharan Africa

On-the-ground presence in 20 African countries On-the-ground presence in 20  151 years of experience in Africa African countries  Largest bank in Africa

– Approximately 49,000 employees in Africa

– Over 1,200 bank branches and 8,600 ATMs South Ethiopia  Growth on the continent is the key strategic focus area Sudan Côte d’Ivoire Uganda  Market Capitalisation: ZAR 225 billion (21 September 2015) D.R.C Unrivalled  Investment banking presence across the region and in key knowledge of sub- Saharan Africa markets strengthened by recent acquisitions: through on-the- – IBTC Chartered Bank, Nigeria ground presence Standard Bank – CFC Bank, Kenya Stanbic Bank Mozambique – Recently opened a branch office in Cote d’Ivoire Stanbic IBTC Bank Swaziland  Ability to provide corporate and investment banking solutions CFC Stanbic Bank including advisory, transaction structuring and bespoke debt funding packages in local and foreign currencies

Strong product Angola (20.1 million) Ghana (25.2 million) Nigeria (170.1 million) Swaziland (1.4 million) teams in , Botswana (2.1 million) Kenya (43.0 million) South Africa (52.2 million) Tanzania (43.6 million) Lagos, Nairobi and London Côte d’Ivoire (19.8 million) Lesotho (1.9 million) (10.6 million) Uganda (35.9 million)

DRC (73.6 million) Malawi (16.3 million) Mozambique (23.5 million) Zambia (14.3 million)

Ethiopia (91.7 million) Mauritius (1.3 million) Namibia (2.1 million) Zimbabwe (12.6 million)

(Population) Source: CIA World Factbook Introduction

Overview

Mozambique seems  Over the last 30 years the demand for the use of gas as a substitute for coal and oil as an energy source (especially as to be at the ‘Tipping feedstock for power generation) has increased globally Point’’ of developing a natural gas-driven economy…..

 Southern Africa is in the process of catching up on this trend. In recent years we have seen significant gas discoveries in

Mozambique and Tanzania (say 240 Tcf combined) with South Africa estimated to have large quantities of indigenous

hydrocarbons with a plan underway to develop LNG imports for power generation as the key unlocking step

 Mozambique specifically has reached ‘’The Tipping Point” (Gladwell, 2013) on its LNG and other gas developments. The

following highlights:

 June 2014 – the Gas Master Plan (‘’GMP’’) was approved by the Council of Ministers

 August and December 2014 – the Enabling and Decree Laws were passed facilitating Project development

 18 May 2015 – the Chicago Bridge & Iron (‘’CB&I’’), Chiyoda Corporation and Saipem joint venture was selected as Area 1 onshore EPC Contractor to build Mozambique LNG’s first 12 MTPA at Palma. This has boosted other in- country LNG and gas developments;

 September 2015 – From interaction with Area 4 consortium, they continue to aim to make a Final Investment Decision for their Floating LNG (‘’FLNG”) Project by December 2015

Mozambique has made some good progress over the last year with regards to Area 1 & 4, noting as context the Brent price fall from USD 115 bbl (Jul 14) to USD 48 bbl (yesterday) Section 2:

Mozambique LNG Mozambique LNG

Key points Standard Bank Macroeconomic Study (‘’Report’’)

Ongoing In developing the APC APC negotiations for Report, SB combined Advisors Negotiations two years rigorous analysis with 25 Nov approved by expert input on the Council of Ministers; Mozambique economy ratified by Assembly and political Passed – 2015/2016 2020 landscape Enabling 20 August Decree FID Law  Law  Council of Sustained Assembly APC engagement with Ministers client help guided the Private Report as well as channels – influenced the client’s 1 August own strategy Public Some key success factors emerged: (indirect) channels – • Transparency in analysis and data sources 19 August Standard Opportunity for key Bank • Consideration and alignment with stakeholders to Report Completed 31 July Government priorities consider findings before public release • Alignment with mainstream development Specialist Standard Bank literature Economists Analysis • Direct input from key Mozambican insiders In under 3 weeks, the Mozambique Sustained , Two- • Conveying insights from the above to client Report helped Political/Economic way APC • Leveraging our in-country expertise and advance 2 years of Expert Input Engagement network protracted Preliminary negotiations work begins May/June

The Macroeconomic Study made a major contribution to the Project debate, with the highest stakeholder level aware of the study and its key conclusions Mozambique LNG continued…

Standard Bank Involvement continued…

Standard Bank  The Macroeconomic Study on Mozambique LNG examined the financial and economic impact of the Project on Mozambique produced a detailed report on ̶ As well as Real GDP (per below), employment, fiscal and balance of payment impacts were also analysed Mozambique LNG

 Standard Bank had access to APC data and used the study to provide a detailed and transparent assessment of Mozambique LNG’s fiscal and economic impacts. This facilitated the advancement of the Project within the country significantly, which at times was not well understood by all decision makers

 Standard Bank specifically included an analysis and modelling of Domestic Gas Sales (“DGS”) which allowed local industrial Domestic gas was a projects to be developed with private capital and fuelled by a percentage of offshore gas not transformed into LNG but which significant was sold to domestic buyers component of LNG opportunity for Mozambique 140

126

120

100 93 82 80

60 54

40

15

20 Mozambique GDP (2013 USD Billion) USD (2013 GDP Mozambique

0 2014 GDP 2035 No Project 2035 6 trains 2035 6 trains and DGS 2035 6 trains, DGS and Area 4

GDP Base Case Area 1 - 6 trains DGS Opportunity Area 4 (assumption)

Real GDP increases per the above. In parallel, Mozambique Inc secures between 62%-65% of Project cash flows which increases to 84-88% on a discounted basis Mozambique LNG continued… 8

Standard Bank Modelling of Domestic Gas-Based Projects

Large potential for  Natural gas sold by Concessionaire at cost of production (with Project return - but insulated from global prices) will transform gas industry Mozambique development from low-cost domestic  Downstream projects were modelled such that private funding could be obtained for their development gas sales from the Project – as in US or ̶ Standard Bank assumed domestic gas price of USD 3.25 / MMSCF (broadly equivalent with Henry Hub, whose low price Qatar has driven manufacturing growth in the US)

 Total tax from projects USD 34 billion Create comparative  No assumptions on location after Project comes on-stream. We assume a pipeline only fuels a power station but could also advantage for transport gas for GTL, Methanol among others. We also believe SMEs will be a key beneficiary of domestic gas – but not Mozambique modelled given variation in scope and small size

̶ Standard Bank anticipates large employment and GDP impacts from gas-based SME development Project All-In Capex Total Income Project Capacity IRR Operations (USD bn) Tax (USD bn) Will drive industrialisation, job Palma Power 353MW 2020 0.5 12% 1.2 creation and economic growth Palma Fertiliser 1 165 KT p.a. 2020 1.9 17% 4.2

Petrochemicals 3 368 KT p.a. 2025 4.7 15% 10.3

GTL 47.9 kbbl/d 2030 19.2 9.4% 17.4

Most can be funded Pipeline (Maputo Power) 400m GJ/year 2035 9.4 -1% 1.3 from private capital – reducing cost and risk to Mozambique Domestic Gas will create major comparative advantages for Mozambique. This will have huge transformational potential and drive growth and employment creation

As with Oman and Qatar, Mozambique is likely to develop a strong domestic gas sector to broaden and deepen its national economy Mozambique LNG continued…

Case Study: Banking Sector Impact of Selected LNG Comparators

Large revenues that  Fiscal Take of Government will flow through Mozambican banking sector will flow through banking sector ̶ This amounts to USD 212 billion directly from 6 train case over life of Project resulting from LNG ̶ Amount will be significantly more when considering APC expenditure, Eni LNG developments and induced effects Project will increase demand for banking  As such, banking sector will grow not only from retail perspective, but also see increasing demand for investment banking services and require products as well as require more sophisticated product offerings in country more sophisticated  These cannot occur if there is not related reform and development of the institutions and regulatory framework governing the banking product Mozambican banking sector services  Qatari, Omani and T&T banks experienced total asset CAGRs of 26-30%, 19% and 11% respectively over period 2003 - 2013

Total Asset Growth: Selected Qatari, Omani and T&T Banks 140 Important regulatory and institutional 120 sophistication will

be required to 100

unlock banking 80 sector potential

60 USD Billion USD 40

20

Other LNG 0 jurisdictions QNB CBQ Bank Muscat Republic Bank demonstrate what 2003 2008 2013 may be possible Between 2003-2013, the leading Qatari banks grew their balance sheets at a 29% CAGR, showing the transformational affect of LNG Source: Company Data Section 3:

Domestic Gas Projects Domestic Gas Projects 11

Overview

ENH/ENH subsidiary/SPV will be  We assume that DGS will be used as a feedstock for domestic projects. Per the GMP, Mozambique’s priority sectors are power, the single buyer for diesel, fertiliser and petrochemicals. domestic gas from Anadarko/ ENI – we assume carrying  We assume that the earliest projects can come online in 2020, with more projects possible with additional trains. We assume responsibility to pricing would be broadly at landed cost, inclusive of an upstream return negotiate sales contracts  An assumption is made that the DGS will arise from a standalone field development without interaction with fields dedicated for LNG

exports. For example, if a domestic gas project is late this could affect LNG production and there is also the case of Eqypt to

consider.

Single buyer will on-  Given ENH’s role in the O&G sector either directly through a subsidiary or through a newly created SPV, will become the buyer of sell gas to the the domestic gas on behalf of the country (“Aggregator”) as set out in the Decree Law. ENH will then on-sell the natural gas to domestic gas projects at TBA tariffs different domestic gas project concessionaires in Mozambique at a TBA tariff, an option is also to sell the gas to neighbouring countries (for example SA, although not expected for a while).

 Trains 1 & 2 are expected to reach full FID in Q2 2016, we expect LNG production (train 1) first gas by 2020. This means

construction for domestic projects, fertiliser or power, need to commence in 2017 to be able to receive gas for commission in 2020.

Revenues from  This leaves 18 months from now for the execution of a bid selection criteria, requesting of proposals from different domestic projects, domestic gas sales selection of successful projects and for the projects to reach financial close by [June 2017]. can be utilised to service costs incurred for the purchase of  We would expect multiple bidders for fertiliser and power, noting that key strategic choices must be made for fertilisers (will the gas from the LNG concept be one of standalone projects or projects linked to methanol/petrochemicals possibilities). Other markets are naturally more Upstream Project. What will the margins limited in players (e.g. GTL). be?

Domestic Gas Projects continued… 12

Many Variables

Executing DGS  Although a simple concept, there are a huge number of variables to consider, inter alia: requires multiple issues to be solved – Concerning the volume of domestic gas supply: in a short timeframe ► Mozambique has dry gas (implications for petrochemicals among others) and the long-term price of Brent Crude oil (for example long-term LNG pricing slopes and henry Hub alternative);

► The number of trains to be developed by Anadarko and ENI (including the spare capacity at the fields that supply the trains) and applicable capital costs, infrastructure; and ultimately the global demand for LNG.

– Agreeing a DGS strategy and documentation with each of the Area 1 and Area 4;

– Determining the priority and sequencing of DGS allocation across individual Domestic Gas Projects, including their commercial allocation process (for example tender process). Key Issues to think about;

► What is the schedule of gas likely to be available at what price? (When the number of trains are not all known)

► Where will projects be located? The LNG landing point is known. There is a natural possibility of building the DGPs around Palma (the industrial city model) but this first mover advantage could inhibit later development elsewhere

► If development is sought elsewhere, there are implications for transport costs, funding and project economics which may challenge project start dates

► Who will run the tender process? The Ministry or ENH?

► What type of industry is desired? For example, standalone fertiliser projects could be developed (Mozambique has a shortage of fertiliser, low usage and badly needs a distribution industry). Alternatively, integrated fertiliser and petrochemical developments could be planned in time (but this has to be considered when building the initial fertiliser project). There are implications for the number of applicable forward linkages

– Determining the price at which DGS would be on-sold to individual projects. Per the Macroeconomic Study, Standard Bank assumed that the DGS landed cost would be USD 3.25 MMSCF (flat). If, for example, there is a potential price of 3 USD per MMSCF, will this be indexed? Whilst this price may work for Projects? will their be a cross- subsidy for fertiliser or GTL (who may need a lower price)? Domestic Gas Projects continued… 13

Many Variables

Executing DGS – Carefully considering how Area 1 and Area 4 can develop their initial LNG trains in parallel with the initial provision of DGS. For requires multiple issues to be solved example, the two concessionaires’ building four trains of LNG in parallel (say between 2018 – 2020) will utilise significant in a short timeframe resources and impact the Mozambique construction industry to an extent it may take away resources from any domestic project planned in early time periods (for example, fertiliser, power, GTL). For example in 2018, there could easily be 40,000 construction jobs within Palma (e.g. two onshore LNG developments plus Domestic Gas Projects under construction);

– Carrying out a detailed regional Spatial Development Initiative (‘”SDI’’) scan of how the development benefits arising from DGS could be allocated across industries and regions. This issue is potentially tricky given the timing readily at which gas will be landed at a specified place (Palma) at a specified time (2020). For example, in the case of power:

► There is limited transmission infrastructure in the North which may impact upon generation (until EDM/Others can afford to build a backbone)

► However, a Floating Storage and Regasification Unit (‘’FSRU’’) is possible at Matola (which can facilitate a major gas to power project and provide a core of demand for a future pipeline, e.g. GASNOSU. Power can also be supplied to South Africa in parallel (e.g. through the Gas RFI process).

– Determining and negotiating the contractual arrangements under which gas would be sold by Area 1 and purchased by the Single Buyer (ENH), and the political, legislative and regulatory underpinning of this;

– Determining the domestic gas industry (and physical) structure as to how the gas would be sold from the Single Buyer through the value chain (owned by who? Funded by who?) to end users (individual projects);

– Determining the optimal capital structure for such domestic projects and assisting where required in the raising of funding. Whilst we are confident on Mozambique’s long-term trajectory the applicable sovereign rating (B- / B2 / Category 7) and in-country resources will constrain funding for some time; Domestic Gas Projects continued… 14

Many Variables

Executing DGS – Turning to GTL: requires multiple issues to be solved ► Which GTL project will be selected? And how? There are two. And how will the Gas Price be determined? Would in a short timeframe domestically produced diesel be sold at a concessional price domestically? Would this skew behaviour and economics? How would surplus product be exported?

– There are also numerous challenges for ENH:

► If ENH positions itself as the Aggregator, to reduce the risk of one party having a monopoly over the gas projects (e.g. it may be appropriate for ENH not to participate as a bidding party (or only as a passive minority for all bidders).

► Could the [Ministry] be placed in charge of establishing the policies to govern the tender process regarding which parties are awarded contracts and ENH be responsible for negotiating the contracts. Currently the Decree Law states ENH as the Aggregator and also as the Government body which is responsible for participating in the entire value chain. What does this mean in practice?

► At what price will the gas be sold to ENH? What is the price that ENH will pay to project developers or SA if gas is exported? Will they make profits or recover costs? How will margins be determined? In short, does ENH’s Aggregator role need to be independently regulated to unlock Domestic Gas Projects? The example of NNPC or Eskom looms large

► How will ENH raise its funding? As well as Trains 1 & 2, there is FLNG, Pande/Temane/Inhassoro, Trains 3&4 etc. It is easy to see how USD 4 – 5bn of funding and contingent support is needed by 2016 alone (c. 20-25% of GDP))

Nonetheless, to tee up the panel we note on the next slide a strawman slide for funding the Domestic Gas Projects Domestic Gas Projects continued… 15

Financing Strawman

Construction of the 1. Achieve FID and Financial Close on Trains 1 and 2 of Mozambique LNG first DGPs need to run in parallel with the . Assumed to include Domestic Gas Sales to Mozambique. Roadmap also agreed for future Domestic Gas Sales from Trains 3&4, construction of the LNG upstream plant 5&6 etc (gives more certainty on volumes, price and schedule albeit execution depends on LNG conditions)?

. FLNG generates cash flows for Mozambique but does not result in domestic gas

2. Determine role of ENH

. Aggregator Role has potential for conflicts of interest (intentional or unintentional, see NNPC/Eskom for examples)

. Independent regulator announced (?) Focus on pricing and market structure?

3. Determine tendering process for DGPs Suggest strict . Focus on attracting high quality and creditworthy project developers (Why? Experience and balance sheet ability in a B- / B2 selection criteria for awarding DGPs market (for a time), vital to have investment ability, bank relationships and ability to attract funding, promoting ability to close)

. As well as Gas Price, need to ensure maximum forward-linkages (e.g. link fertiliser to petrochemicals, involve developers in downstream distribution etc)

. Mix of tendered projects (e.g. IPPs) plus negotiated for small markets (e.g. GTL) ran by the Ministry?

4. Determine financing conditions for Domestic Gas Projects

. Focus on ensuring full funding of each DGP upon confirmation of preferred bidder (as first prize)

. Each project should be able to be financed on a standalone basis

The above principles may leave a residual challenge – funding common / social / household infrastructure, gas vehicles etc Disclaimer 16

If you received this document in error, please immediately return the document and other related documents to Standard Bank. On receipt of this document, you agree to be bound and are deemed to understand that:

This presentation is provided to you for information purposes only on the understanding that such information is strictly confidential. This presentation must not be delivered or its contents disclosed to anyone other than the entity (including its employees) to which it is provided and must not be used or reproduced, in whole or part, for any purpose other than in the consideration of the transaction or financing of such transaction described in this presentation. This presentation is intended to be a commercial communication and is not to be construed as a recommendation or the constitution or solicitation of an offer for the sale and purchase of any financial product, service, investment or security. The information, investments and/or strategies discussed in this presentation may not be suitable for all investors and where you have any concerns you should approach an investment advisor.

We do not accept liability for any loss (direct or consequential) arising from use of this presentation. You must not rely on any communication (written or oral) from us as investment advice, a recommendation to enter into a transaction (which includes the information and explanations related to the terms and conditions of a transaction) or deem it to be an assurance or guarantee as to the expected results of a transaction. Investments discussed in this presentation may fluctuate in price or value over time and past performance is not indicative of future results. While we have taken care in preparing this presentation, we give no representation, warranty or undertaking and accept no responsibility or liability as to the accuracy or completeness of the information set out in this presentation. This presentation does not represent an offer of funding and any facility to be granted in terms of this presentation is subject to us obtaining the requisite internal and external approvals.

Our duties and responsibilities do not include tax advisory, legal, regulatory accounting or other specialist or technical advice or services. You must procure and rely on independent assessments and investigations into all matters contemplated in this presentation.

© 2014 Standard Bank Group. All rights reserved.

South Africa The Standard Bank of South Africa Limited (Reg.No.1962/000738/06) is regulated by the South African Reserve Bank and is a Licensed Provider and Registered Credit Provider (NCRCP15).