Mehmet ÖğütçüChairman
Universal Oil and Gas18 November 2014, Dead Sea, Israel
Changing parameters of energy, investment and geopolitics – How should Israel position itself?
WHAT TO PRESENT…
Global energy changes underwayRegional gas dynamics to considerInvestment decisions in the makingEast Med geopolitical tensionsHow do all these impact Israel?Key messages
WHO IS IN CHARGE OF THE “NEW WORLD ORDER”?
The talk of a new world order is no longer a fantasy ... It is happening, albeit gradually
We are back to great-power politics, shifting alliances and spheres of influence in favour of Asia-Pacific
The West is no longer in charge – leadership crisis
Russia, China, India and the rest of G-20 are set to shape the new emerging multi-polar world system.
Changing dynamics and paradigms Supply and demand map of the world energy has changed China and India lead the way for strong demand growth
while North America’s unconventional revolution transformed the supply balance.
World population from 7 bn to 9 bn, with ME from 213 to 313 mn by 2040
Global recession casts some dark shadow. Confidence crisis grows. Intense competition between older and newer economic powers
The painfully slow development of new technologies and alternative fuels. Impact of energy use on climate change and volatility in oil (and gas) prices
Investment delays/cancellations
1,900 cars a day in Beijing onlyIn the period to 2015 China is the dominant driving force for energy demand…
Geopolitical powershift
Powerful political triggers to change the mood in 2014 might possibly include: US-Iran detente A more conciliatory stance towards and from
Russia now under embargo Enhanced supply security for Gulf oil and gas
exports. Political and social upheavals in Iraq, Syria and Libya
China’s recovery and accelerated outward investment
Central Asia re-emerging as a troubled region
Need for a long-term perspective
The length of time it takes to achieve significant changes High-cost infrastructure such as power plants and natural
gas pipelines are built to last for up to 50 years or more Most of the energy sector infrastructure in operation
today was built or at least being planned 20 years ago New infrastructure to meet demand in 2025 is either
under construction or planned in the next few years The vehicles needed to provide transport services in the
future will be different from those on our roads today
EU-27 gas demand/supply outlook to 2030 (Source: ENI)
How can the EU secure its future gas supplies?
Europe will need 400 bcm by 2040. No large-scale delivery of gas from N America to Europe as the netbacks are not attractive.
Recent increases in natural gas prices and the ‘Ukraine incidents’ have raised concerns over the EU’s relatively high dependence on gas imports from Russia.
Russia is clearly more dependant on gas exports to EU than EU is dependant on imports from Russia (25% of total consumption).
How justified are the concerns that Russia might decide to reorient its gas exports towards China or Japan? Russian deliveries to China and Asia will grow.
INTER-REGIONAL GAS EXPORT COMPETITION
The Asia-Pacific market becomes the main destination for internationally traded gas – Eurasia pipelines and LNG from different regions.
Several major projects for Caspian gas, with renewed political involvement To Europe, via Russia: South Stream, Caspian Coastal
Pipeline, CAC rehabilitation To China, from Turkmenistan, via Uzbekistan, Kazakhstan To Europe, with Diversification of Supply Sources: SCP,
TANAP, TAP To India, Pakistan, via Afghanistan: TAPI
Other gas suppliers: The US, Canada, Australia, Angola, Tanzania, Qatar, Iran, KRG, Algeria, East Med...
Israel’s energy challenge
Israel’s energy is to be transformed: yes gasification and exports but do not neglect renewables, efficiency and nuclear
Managing risks, competitiveness and climate change/environment
Investment requirements are massive for E&P, midstream, downstream, power generation, gas processing plants, smart transmission network.
Where will money come from?
Considering the global economic environment, investors cannot rely only on old financing sources
A range of financial instruments are used to provide funding to energy projects. - multiple types of debt, equity, mezzanine finance and venture capital
Now pension funds, sovereign wealth funds, traders, company financing, insurance and Islamic finance are also available
Furthermore, each investor class has different requirements, characteristics and risk appetite for energy projects
Investment or financing decissions are based on estimation of both the risks and returns
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FINANCING ENERGY PROJECTS
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METHODS
Type Description Key metric
Debt Loans/ Credit Facilities
• Provided by a bank, development bank, government, or other entity
• Lenders undertake varying levels of risk assessment, but loans are unlikely to be formally rated by credit rating agencies and are not commonly publicly traded
• Key concern of lenders is the probability of default
• Margin – spread above benchmark rate
• DSCR – measure of ability to cover principal and interest repayments
• Tenor – length of repayment period
Equity
Project finance equity
• Ownership share coupled with project debt or other forms of project financing
• Usually provided by the project developer, sometimes with other equity investors
• Levered internal rate of return (IRR) or return on equity (ROE) to measure project returns after debt service
• Timing of cash flows
Balance sheet financing
• Ownership by a larger company; listed as an asset on the company’s balance sheet
• Company uses corporate financing to build the project, and decisions about capital allocation are made inside the company
• Unlevered project internal rate of return (IRR)
• Project net present value (NPV) at corporate cost of capital
• Timing of cash flows
Mezzanine
Convertible debt
• Debt with the right to conversion into equity share under certain conditions
• Convertible debt investors have the stable returns of debt investors and potential to access higher, riskier returns of equity investors
• Conversion ratio
Now, in line with global illiquidity and increased equity contribution, sponsors need to explore new financial instruments and investor classes...
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CHANGING SOURCES OF ENERGY FINANCE
Type Description Key metric
Equity like
Passive Equity
• Project ownership where certain risks are hedged or transferred to other investors
• Allows passive equity investors to have a stable but limited return on their investment and to take a passive management role
• IRR
• Mitigation of risks
Preferred Equity
• Equity investment that typically bears a guaranteed rate of return
• Preferred equity investors have recourse to a project’s cash flows or assets before other equity investors
• Usually some risks are transferred to other investors or hedged
• Return
• Mitigation of risks
Debt Project bonds
• Sold through an agent to an investor or a set of investors
• Sometimes rated by a credit agency and publicly traded
• Often privately placed with institutional investors who hold the bond until maturity
• Key concern of investors is the probability of default
• Coupon rate – interest rate at issuance
• Margin – spread above benchmark rate
• DSCR – measure of ability to cover principal and interest repayments
• Tenor – length of repayment period
Messages
Bear in mind the game-changers in world energy while investing in or trading of energy - greater diversity and flexibility, more sensitive to shifts in regional prices
Israel should focus on (i) its own domestic gasification and supply security to achieve competitiveness, (ii) then on immediate neighborhood for pipeline gas (eventually to Turkey and Europe), and, in parallel, (iii) also target LNG markets in Asia-Pacific
Integrated energy management needed The IOCs are your best and most effective partners to achieve these
goals – hence, the need to develop a win-win partnership with and look after them well over longer-term.