The Project Financing of Cross-Border Pipelines a Presentation to the Energy Charter Workshop Brussels

The Project Financing of Cross-Border Pipelines a presentation to the Energy Charter Workshop Brussels by Rubin Weston Chadbourne & Parke 17 October 2006 Regis House, 45 King William Street London EC4R 9AN Tel: +44 (0) 20 7337 8031 <a href="mailto:[email protected]" target="_blank">[email protected] </a>© 2006, CHADBOURNE & PARKE All Rights Reserved Chadbourne & Parke: Legal Leaders in Energy Representing EBRD on the $180 million and $170 million financings of LUKoil’s and SOCAR’s respective investments in the Shah Deniz gas field and the South Caucasus Gas Pipeline Representing SOCAR on a $750 million loan facility in respect of the repayment of carry financing provided by TPAO and Exxon in respect of the ACG oil field and the financing of future cash calls Representing IFC on a $82 million loan to SC Petrotel-Lukoil SA to finance the modernisation of its refinery in Ploesti, Romania Represented Black Sea Trade and Development Bank and IFC on the financing of the Galata Gas Field, located offshore of Varna, Bulgaria in the Black Sea, the first limited recourse upstream project financing in the Black Sea Represented Transneft on a US $150 million syndicated receivable based financing facility arranged by Raiffeisen, Transneft’s first syndicated loan Represented IFC on the financing for a portion of LUKoil’s share of development of the Karachaganak field, the largest limited recourse petroleum project financing in Kazakhstan Represented Nations Energy on a US $150 million syndicated financing arranged by CSFB for the development of the Karazhanbas oil field in Kazakhstan and the Mishovdag and Kelameddin oil fields in Azerbaijan Represented Rosneft in connection with its participation in the Sakhalin 5 Project 2Overview of Presentation: Challenges Presented by Cross Border Pipeline Financings Types of Financing What is Project Finance? What are the risks? Case Studies: BTC Oil Pipeline and the South Caucasus Gas Pipeline 3Challenges Presented by Pipeline Financings High initial investment and delay in revenue generation creates a significant completion risk Number of parties involved, diversity of interests: public sector divergent interests: export country Ö high price transit country Ö high tariff country receiving hydrocarbon Ö low price and low tariff private sector divergent interests: <ul style="display: flex;"><li style="flex:1"> companies of </li><li style="flex:1">- supply </li></ul>- transportation - purchase public sector v. private sector this diversity of interests creates an increased risk of conflict History of vulnerability to disruption and of generating conflict e.g. oil pipeline established by Iraq Petroleum Company in 1930s to establish an export route for Iraqi oil through Syria was closed for a substantial part of its operating life 4Types of Financing Sovereign Sponsor Credit supported financing Project financing 5Sovereign/Sponsor Financing Sovereign and/or sponsor can finance a transaction from its own resources or by raising finance by: bank borrowing accessing the capital markets raising equity (sponsor only) CPC Pipeline financed by 50:50 division between states (Russian, Kazakhstan, Sultanate of Oman) and the project participants 6Credit Supported Loans Possible sources of guarantees: parent companies sovereign states The underlying transaction must be fundamentally sound (i.e. cash flows should be sufficient to service debt) Recourse to provider of credit support throughout the duration of the Loan. 7What is Project Finance? Project Finance is non-recourse or limited recourse finance, predicated primarily on the merits of the project rather than on the credit of the project sponsor(s) Parties to a project financing: Either: A financing of the project vehicle project sponsor(s): no/limited recourse in respect of the borrower's obligations to the lender borrower/project company: special purpose vehicle (SPV) that owns the pipeline and has no obligations or liabilities outside the project host governments: grant the concessions necessary for the project to be implemented lenders 8What is Project Finance? (cont’d) OR A financing of a project participant borrower: SPV, but constitutes a participant in the project, rather than the project company itself project company: may be required to enter into a direct agreement with the lender with respect to certain matters (e.g. acknowledgement of the rights of the lender upon the enforcement of its security) sponsor: the company which owns the borrower; no/limited recourse in respect of the borrower's obligations to the lender host governments: grant the concessions necessary for the project to be implemented lenders 9Project Finance: Financing the Project Vehicle Host Government Direct Agreement Concession (Host Government Agreement) <ul style="display: flex;"><li style="flex:1">Bank </li><li style="flex:1">Sponsor(s) </li></ul>Project Vehicle (SPV) Limited Recourse Security over Shareholding(s) 10 Project Finance: Financing a Sponsor Host Government Direct Agreement Concession (HGA) Security over Shareholding in Sponsor Parent Company Project Company (SPV) Bank Shareholding in Sponsor Loan Sponsor Direct Agreement 11 Project Finance: Security Package Security, may include the following: Pledge of shares in borrower Assignment of rights under project agreements Assignment of insurance proceeds Charge of offshore bank accounts Charge over property Guarantees and other support from the sponsor: Guarantees completion cost overrun Support Agreements share retention managerial support 12 What are the Risks? Potential lenders will evaluate various types of risk, including the following risks: Upstream Completion Operation Market Political Legal Tax Regulatory Environmental Price / Tariff Conflict 13 BTC and SCP: Project Summaries <ul style="display: flex;"><li style="flex:1">Baku-Tblisi-Ceyhan (BTC) </li><li style="flex:1">South Caucasus Pipeline (SCP) </li></ul><ul style="display: flex;"><li style="flex:1"> Integrated, one pipeline </li><li style="flex:1"> Integrated, one pipeline </li></ul>company - South Caucasus Pipeline Company company - BTC Company 1,768 km pipeline from Baku to <ul style="display: flex;"><li style="flex:1">Ceyhan </li><li style="flex:1"> 690 km gas pipeline connecting </li></ul>the Shah Deniz gas field to markets in Azerbaijan, Georgia and Turkey. Pipeline runs from Sangachal terminal through Georgia to Turkey One million barrels per day capacity; capable of expansion Provides capacity for the ACG PSA participants plus other founder investors from the North Caspian area 20 bcm per annum design capacity 14 BTC/SCP: Pipeline Routes 15 BTC/SCP: Contractual Framework The contractual framework can be divided as follows: Inter-Governmental Agreements / Host Government Agreements grant the rights and privileges necessary for pipeline construction and operation BTC/SCP documents provide a framework for future cross-border pipeline projects Commercial Agreements Organisational (constitutional documents and shareholders’ agreement) dictate relationships between participants in the project vehicle, including, financing obligations (i.e. basis pursuant to which cash calls are paid) process by which shares can be transferred appointment of operator voting requirements for specific decisions return on investment, payment of dividends consequences of default Third party dictate relationships between the project vehicle and third parties 16 BTC: Contractual Framework IGA Turkey Georgia Azerbaijan HGAs BTC Third Party Agreements Organisational Documents 17 SCPC: Contractual Framework IGA IGA <ul style="display: flex;"><li style="flex:1">Georgia </li><li style="flex:1">Azerbaijan </li></ul>HGAs SCPC Turkey Third Party Agreements Organisational Documents 18 BTC/SCP: Financing Arrangements <ul style="display: flex;"><li style="flex:1">BTC Financing Arrangements </li><li style="flex:1">SOCAR/SCP Financing Arrangements </li></ul><ul style="display: flex;"><li style="flex:1"> $2.589 billion of debt (up to 12 year </li><li style="flex:1"> EBRD provided $60 million of </li></ul><ul style="display: flex;"><li style="flex:1">financing to Azerbaijan (South </li><li style="flex:1">term) </li></ul>Caucasus Pipeline) Limited Approximate debt amounts (AzSCP), a wholly-owned subsidiary of SOCAR, and $70 million to Lukoil Overseas Midstream Shah Deniz Ltd (Lukoil Midstream), a wholly-owned subsidiary of Lukoil Overseas. Each borrower is a 10% shareholder in South Caucasus Pipeline Company, the owner of the pipeline ($millions): IFC/EBRD A/B Loans 500 <ul style="display: flex;"><li style="flex:1"> ECA facilities </li><li style="flex:1">766 </li></ul> JBIC Overseas <ul style="display: flex;"><li style="flex:1">Investment Loan </li><li style="flex:1">300 </li></ul><ul style="display: flex;"><li style="flex:1">100 </li><li style="flex:1"> OPIC PRI Loan </li></ul> Sponsor Senior Loans 923 Commercial bank (15) participation EBRD is syndicating a portion of around $1 billion its loans to commercial lenders Security included Security included: completion guarantees completion guarantee / debt service undertaking share pledges in SCP and AGSC assignment of agreements including revenues under the Transportation Agreement assignment of AzSCP’s and Lukoil Midstream’s rights under project agreements pledge of AzSCP’s and Lukoil Midstream’s offshore bank accounts 19 BTC/SCP: Risk Analysis Upstream Azeri-Chirag-Gunashli field is expected to yield in excess of 5bn barrels of oil; peak production of 1 million barrels/day; additional production expected from North Caspian Shah Deniz is estimated to have sufficient reserves and production Completion financial commitment from sponsors – SCP: Substantial Equity – BTC: Substantial Equity and Sponsor Loans high level of confidence in sponsors BTC: BOTAS entered into a lump sum (fixed price) turnkey contract for the Turkish section of the pipeline, which the Turkish government guaranteed 20 BTC/SCP: Risk Analysis (cont'd) Operation quality of sponsors shipper commitments Market BTC/oil: western markets SCP/gas: BOTAS (Turkey) Price / Tariff a minimum return is guaranteed, regardless of volumes shipped 21 BTC/SCP: Risk Analysis (cont'd) Legal IGAs and HGAs override local laws and address key legal risks HGAs provide for international arbitration Tax favourable regime established by HGAs Regulatory facilitated by HGAs Political risk lGAs and HGAs provide a forum for co-operation and dispute resolution Environmental IFIs stringent requirements (including Equator Principles) met 22 BTC/SCP: Risk Analysis (cont'd) Conflict common interest in success of pipelines Countries: Azerbaijan: export markets Georgia: cheap gas Turkey: allows tankers to bypass the Turkish Straits SCP: contractual arrangements in place to ensure that a party cannot default upstream whilst its sister company benefits midstream and visa-versa Azerbaijan and Turkey have taken 25% and 6.7% shareholdings in BTC; Azerbaijan (via a commercial affiliate of SOCAR) has a 10% shareholding in SCPC IGAs and HGAs attempt to establish a fair balance between all parties 23

The Project Financing of Cross-Border Pipelines a Presentation to the Energy Charter Workshop Brussels

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