Investment Banking

Gas Project Financing in Indonesia

IndoGAS 2011 Jakarta, 27 January 2011

SMBC Overview

Asian bank with global presences Dedicated to Indonesia and project finance Operates in Indonesia via BSMI 20+ years supporting the LNG Industry More than 80 project finance bankers in Asia Dedicated oil & gas team in Singapore Consistently top 10 globally in project finance
Global Arranger of the Year 2009

SMBC

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Some gas projects participated by SMBC

Indonesia Indonesia
Papua New Guinea

BPMIGAS TANGGUH LNG West Java FSRU

Financial Advisor to Sponsors US$3.5 Billion

PNG LNG

GUANGDONG LNG SHIPPING

US$ 4.6 billion JBIC / NEXI Agents & Mandated Lead Arranger

Asia Pacific Petrochemical Deal of the Year 2006

Financial Advisor Mandated Lead Arranger

Financial Advisor to Sponsors 2006

2011 (Ongoing)

2006

2009

Qatar

Peru

Russia

Yemen

NAKILAT INC QATAR GAS TRANSPORT CO LTD

US$4.74 billion US$ 400 million SAKHALIN II YEMEN LNG US$2.8 billion Mandated Lead Arranger

Middle East LNG Deal of the Year 2006

Sole Financial Advisor 2006

Latin American Deal of the Year 2008

Joint Bookrunner
2008

US$5.3 billion Mandated Lead Arranger

2008

2008

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SMBC Indonesian projects

Project
West Java FSRU Greenfield LNG Indonesia IPP Indonesia IPP Wampu Hydro Tanjong Jati A Paiton 3 Cirebon PT Asahimas Tanjung Jati B expansion Tanjung Jati B Batam IPP PT Jawa Power Paiton 7 / 8

SMBC Role
Financial Advisor to sponsors (ongoing) Financial Advisor to sponsors (ongoing) Financial Advisor to a bidder (ongoing) Financial Advisor to a bidder (ongoing) Financial Advisor (ongoing) Financial Advisor MLA, Insurance Bank MLA, Documentation Bank, KEXIM Coordinating Bank Financial Advisor MLA Financial Advisor/MLA Financial Advisor MLA MLA

Copyright 2011 Sumitomo Mitsui Banking Corporation. All Rights Reserved.

Financing Gas Projects: Indonesia Big picture

1. Importance of the value chain = gas needs contracted buyers 2. Project economics = gas / LNG prices 3. Credit strength of the gas buyers = export vs. domestic markets 4. Regulatory environment = TBS, DMO and cabotage 5. Evolving technology = FLNG and FSRU 6. Local contents = Local banks and local contractors

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The gas value chain: lenders considerations

Elements of gas projects are difficult to finance in isolation All participants in the chain rely on same cash flow Every segment of the gas chain has different challenges

Indonesian LNG Chain

1. Upstream 2. Liquefaction 3. Shipping 4. Regasification

Gas Reserves Terms of GSA Ownership rights Domestic obligations

Business model: i) integrated ii) tolling iii) non integrated Conventional vs. FLNG

Indonesian cabotage Shipyard Local Content Ownership vs. lease of LNG vessels

Choice of business model (merchant vs. tolling) Source of LNG Gas price and demand FSRU vs. onshore regas

Copyright 2011 Sumitomo Mitsui Banking Corporation. All Rights Reserved.

Favorable macroeconomics for Indonesia

Indonesia 10 years Credit Default Swap Global gas price vs oil price outlook

Source: Bloomberg

Source: E-ON

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Cost of raising debt in US Dollar

Note Increase in banks funding cost offset by reduction in base USD rates. In summary, USD interest rates are still relatively cheap

Jun 2008 Margin @ 1.5%

6.2% Cost of Debt to Borrowers

4.7% Banks Margin 4.6%

Oct 2010 Base USD 5 yrs Rates Margin @ 3.0%

1.6% June 2008 October 2010

Source: Bloomberg and SMBC estimates
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Sources of Capital: Upstream Project

Traditional approach for independent E&P is Reserve Base Lending Reserve (1P / 2P) and gas prices key decision factors for lenders Financial strength of upstream sponsor and gas buyer

Upstream Project Cost (100)

Project Finance Loans (50-70)

Banks
Multilaterals or Export Credit Agencies

Equity (30-50)
Sponsors

Guarantees

Copyright 2011 Sumitomo Mitsui Banking Corporation. All Rights Reserved.

Sources of Capital: Integrated LNG project

The capital structure would normally involve 50 to 70% debt from various sources commercial banks, ECA/MLA, sponsor senior loans and in some occasions, project bonds

LNG Project Cost (100)

Debt to Equity Ratios from 50:50 to 70:30

Project Finance Loans (50-70)

Banks
Multilaterals or Export Credit Agencies

Equity (30-50)
Sponsors

Sponsor Loans

Guarantees

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LNG Project Integrated Structure

SINGLE PROJECT COMPANY / BORROWER Involve same Sponsors in the Upstream , and Liquefaction facilities for alignment of interests across the LNG chain The Borrower enters directly in the Sales and Purchase Agreement (SPA) with the LNG Buyers Example: PNG, NWS, QatarGas II, RasGas, Sakhalin II, Tangguh

Sponsor A

Sponsor B

LNG Project Co (Borrower - SPV)

LNG SPA (take or pay)

Upstream

Liquefaction

Shipping

LNG Buyers

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LNG Project Non Integrated Structure

LEGAL SEPARATION UPSTREAM AND DOWNSTREAM Different shareholding interests between Upstream & Downstream Upstream may involve Govt. entity potential need for regulatory approval of the GSA Examples: Peru LNG, QatarGas, NLNG, Brunei LNG

Sponsor A

Sponsor B

GSA

LNG Plant Co (Borrower)

LNG SPAs (take or pay)

Upstream

Liquefaction

Shipping

LNG Buyers

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LNG Project Tolling Structure

SINGLE BORROWER FOR LNG PLANT ONLY May have same or different sponsors in the Upstream and LNG plant. Well suited for limited recourse financing of LNG plant and is normally used when the Upstream facilities may be difficult to finance or to maximise debt at LNG plant level Tolling counterparty expected to be creditworthy to support limited recourse financing. Examples: Bontang, Arun, Egypt LNG

Sponsors
LNG SPAs (take or pay)

LNG Project Co

Tolling Agreement

LNG Plant Co
(Borrower)

Upstream

Liquefaction

Shipping

LNG Buyers

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Floating LNG
FLNG concepts
A wide number of early concepts is now reduced to a few serious ones Industry divided between SMALL SCALE (below 3 mmtpa) and LARGE SCALE (3-5 mmtpa) Two concepts embodied by FlexLNG and Shell concepts have different challenges but appears equally viable
0 < $1000 /TPA (simple) > $1,000 /TPA (complex)

Shell 3.5 ($3bn) SBM Linde 2.5 Hegh 1.6-2.0 (Niche) FlexLNG 1.7 (N2 Cycle) 3

Inpex 4.5 ($10bn) ConocoPhillips 5.3

MTPA

SMALL SCALE

LARGE SCALE

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FLNG Overview
Key Features FLNG allows to liquefy natural gas without the need of onshore infrastructure and pipelines Similar to an FPSO project but part of an LNG chain with its critical aspects and complexities. Significant capex requirements needed across the LNG chain FLNG is an attractive technical solution for stranded gas fields in Asia...but there is no precedent POSITIVE FACTORS
Endorsement by majors (PTT, Shell, etc) Expected flexible design for potential redeployment Reduced infrastructure requirement Expected lower environmental impact Vessel construction in confined environment (shipyard)

Location of Stranded Gas Reserves

CHALLENGING FACTORS
Lack of precedent and untested technology Competition for capital with conventional LNG Requires ingenuity to arrange financing Emergence of unconventional gas (ie. shale, CBM) Softening of gas and LNG prices

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FLNG Project Challenges

Type of Issue
Project / Commercial Issues

Issue
1. Lack of precedent 2. Gas supply (Reserves and Project-on-Project Risk) 3. Ownership of Upstream and FLNG 4. Complex development with multiple interfaces 5. Effective cost control

Financing Issues

6. Mitigation of completion risk 7. Mitigation of operating risk 8. Contract Alignment across the LNG value chain 9. Insurance capacity 10. Optimising funding sources and mix 11. Inter-creditor issues among sources of debt

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FLNG Project Structure: Integrated Model

Sponsors

Contractor LNG SPA

Upstream Co (Borrower 1)

FLNG Co (Borrower 2) Charter Contract

(with guarantee)

Upstream

Liquefaction

Shipping

LNG Buyers

Upstream Co and FLNG Co can raise financing jointly Sponsor and Contractor alignment, reduces project-on-project risk Attractive for contractor which are looking for return upside

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FLNG Project Structure: FPSO Model

Sponsors

Contractor / Operator
LNG SPA Charter Contract

LNG Project Co

FLNG Co (Borrower) Upstream Liquefaction Shipping LNG Buyers

Established bankable structures similar to a tolling arrangement Charter guarantee from Sponsors Transfer of operating risk via the Charter Contract Upstream and Liquefaction are finance separately to Sponsors?

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Floating Regasification Units (FSRU)

1. Business Model = Ownership vs. Lease 2. Allocation of market risk = Contractors pass on risk to regas company 3. Credit risk = Payment obligations of the regas company 4. Regulations = Implications of Indonesian cabotage

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Thank You

Luca Tonello First Vice President, SMBC luca_tonello@sg.smbc.co.jp

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