Presentation to 12th FPSO Congress

Understanding critical factors to create a “bankable” project

20th September 2011, Singapore

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WHO’S INVOLVED

Floating Production Contractor

The key to a long lasting and successful business relationship is mutual understanding of your business partner’s strengths, weaknesses and needs.

Banks Field Operator/JV Partners

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WHO’S INVOLVED

Floating Production Contractor

All too often we end up with misconceptions……

Banks Field Operator/JV Partners

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HOW BANKS WORK……and why it matters to you

Banks lend many times their available capital and borrow the cash to lend from other people.

There is a mismatch between lending and borrowing – long vs short

CAPITAL

Short term

DEBT

Long term

Short term

LENDING

Long term

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HOW BANKS WORK……and why it matters to you

The European Central Bank estimates that Europe’s banks need €270,000,000,000 of new Capital

The European sovereign debt crisis is causing a European banking crisis – bank’s are either losing capital or at risk of losing capital.

Banks are having increasing problems funding in US$. Banks will in effect “shrink”.

CAPITAL

Short term

DEBT

Long term

Short term

LENDING

Long term

?

US$ Money Market funds have pulled back from lending to banks

Bank’s appetite and ability to lend long term is likely to be more constrained

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A REMINDER – The Role of Senior Debt

Compare the “firepower”:

Contractor with $1bn cash ($1bn equity / shareholders funds), or

Contractor with $4bn cash ($1bn equity / shareholders funds and $3bn debt)?

Compare the cost:

Equity Investors target returns between 15% and 30% per annum

Senior debt providers charge a margin based on credit risk – eg. 2% to 4%

Debt is tax deductible

Allows companies to “do more” than pure equity allows

The power of debt:- Debt multiplies the power of Equity

Take on more Projects

Debt turbocharges the Return on Equity

Project IRR of 12%. Debt cost 7%

100% Equity Equity IRR 12%

50% Equity / 50% Debt Equity IRR 17%

20% Equity 80% Debt Equity IRR 32%

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A TYPICAL TRANSACTION STRUCTURE

Floating Production Contractor

Bank

Bank

Shipyard

JV Partners

Field Operator

FPSO SPC

Project SPC

Equity Investor

Charter Senior Debt (50% rising to 70%/80%) Contributions

Construction/ Conversion

Equity (50% dropping to 30%/20%)

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HOW BANKS THINK – The Repayment Questions

WHO PAYS?

HOW MUCH DO THEY PAY?

WHEN DO THEY PAY?

CAN THEY AFFORD TO PAY? or WHERE WILL THEY GET THE CASH TO PAY?

WHAT CAN CAUSE THEM TO STOP PAYING?

WHAT CAN BE DONE TO AVOID THEM STOPPING PAYING?

WHO ELSE CAN PAY?

HOW CAN I GET THEM TO PAY?

IF ALL ELSE FAILS, WHAT CAN BE DONE TO RECOVER THE MONEY?

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RISK ASSESSMENT

Design / Construction/ Integration / Onshore

Commissioning

When assessing whether to lend to a project banks look to the overall project risks, review all the Contracts, and examine who is taking what risks and why.

Shipyard

Field Operator

Contractor

Offshore Commissioning / First Oil / Final

Acceptance

Stabalisation / Regular

Operation

Off Hire / Termination

Project Timeline

Non

-Reco

urs

e

Reco

urs

e LIM

ITED

REC

OU

RS

E

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EFFECTIVE PARTNERSHIPS

A difficult business – Heavy Industrial Engineering Projects with long timelines

It’s about People – Project Management and Contracting Strategies

Quality Suppliers and sub-contractors (eg. Shipyards)

Building is hard, operating safely and efficiently can be just as challenging

History tells us a lot……………

…………………………….the devil is in the detail.

UNDERSTANDING YOUR BUSINESS AND RISKS

Use experienced bankers who know the sector and its history

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Thoughts and Observations around Contracts

Too often the Contract presented to the Contractor has “history”

Take a couple of old contracts

Add your nightmares

Hammer the Contractor

Present THE CONTRACT

Risk / Reward balance has to be realistic – especially in challenging economic times

Experienced Banks have seen a lot of contracts – the good, the bad and the ugly

The problem is when does a bank get to see the Contract? IS IT BANKABLE?

Are we coming to the time when a Standard Contract is needed? Even if just to cover basic principles and “boilerplate” provisions.

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LASTLY…………..be aware of what Bank Risk Officers see!

The stuff of nightmares....

Disclaimer: This presentation is issued by Australia and New Zealand Banking Group Limited (“ANZ”, which term shall include its officers, employees, representatives and agents). The information and opinions contained in this presentation (upon which ANZ may have acted or may act for its own purposes) are published for the assistance of recipients but are not to be relied upon as authoritative or taken in substitution for the exercise of judgement by any recipients. While such information and opinions have been compiled or arrived at by ANZ in good faith and from sources believed to be reliable, no representation or warranty, express or implied, is made or given as to their accuracy, completeness or correctness. Any opinions contained in this presentation may be changed by ANZ at any time and without notice. ANZ accepts no liability whatsoever for any loss or damage, whether direct or indirect, consequential or otherwise, howsoever arising (whether in negligence or otherwise) out of, or in connection with or from any use of the contents of and/or omissions from this presentation. The material contained in this presentation is confidential and may not be reproduced (in whole or in part) to any other person without the prior written consent of ANZ. ANZ is not acting as adviser: ANZ is not acting in an advisory capacity as to legal, taxation, accounting or regulatory matters. Accordingly, before entering into any transaction, you should seek independent advice concerning this proposed transaction on all of these matters.

NOTICE OF CONFIDENTIALITY AND DISCLAIMER

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THANK YOU

Questions?