Financing the Commodity Sector

Matthieu LACAZE

Deputy Global Head of E&C Finance

March 2012

ARA 2012 - AFRICAN REFINERS ASSOCIATION

2

Increased financing

needs of the Commodity

sector

New constraints

on financing imposed to

banking industry

A New Paradigm

a new market with new rules

A New Paradigm: a growing sector which must explore new fuelling sources

3

1. Increased financing needs of the Commodity industry

4

The Commodity Market grows on the back of strong

market fundamentals

Demography

o Very important increase of worldwide population

o From 2.5bn in 1950 to 9bn by 2050!

Increased consumption of commodities per capita

o Change of living standard & habits

o New technologies

o Growing size of middle-class

Historically high commodity prices…

o Tensions on the market

o Stable futures

o Commodity extraction costs on the rise

Mostly driven by Emerging Markets growth

Increased financing needs of the Commodity industry

Larger Volumes x High Prices = Fast growing E&C sector

Population levels and growth (in millions)

Oil consumption (in ‘000bopd) and prices (in $ /bbl)

Sources: IEA World Energy Outlook 2011, BNP Paribas

3337

6840

8333

0

2 500

5 000

7 500

10 000

1965 2009 2030

Non-OECD

World

OECD

Sources: United Nations figures

S. & Cent. America

North America

Europe & Eurasia

Middle East

Africa

Asia Pacific

0

20

40

60

80

100

0

20 000

40 000

60 000

80 000

100 000

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

5

A Global Growing Market

Current and Long-Term Trends for Regional Crude Oil Demand (IEA New Policies Scenario) (million barrels per day)

Sources: IEA World Energy Outlook 2011, BNP Paribas

OECD Americas OECD Europe

India

China

Other Asia

OECD Asia Oceania

0 5 10 15 20 25

2010

2020

2035

Latin America Africa

Middle East

E. Europe & Eurasia

0 5 10

2010

2020

2035

0 5 10

2010

2020

2035

0 5 10 15

2010

2020

2035

0 5 10

2010

2020

2035

0 5 10

2010

2020

2035

0 5 10 15

2010

2020

2035

0 5 10

2010

2020

2035

0 5 10

2010

2020

2035

0 5 10

2010

2020

2035

Total World

2010 86.7

2020 92.4

2035 99.4

Main Consumption in the Developed Countries,

but Growth in the Emerging Countries

6

The various players of the “commodity chain”

… and their respective financing requirements

Producers Oil producers

Mining companies

Transformers Refineries

Smelters

Traders Small traders

Large trading companies

Trading groups of large companies

Distributors Bunkering

Wholesale

Terminals

Downstream Midstream Upstream

Transportation

Logistics

Each category of players needs specific set of financing products.

Financing mainly provided by banks but also by Capital Markets

The mix between those 2 sources of financing will change.

Mainly Bank Debt

Structurally highly leveraged

No fixed assets

Mostly ST financing

Capital Markets + Bank Debt

Important fixed assets (LT)

Capital intensive

LT financing for Capex

ST financing for Opex

Bank Debt + Capital Markets

Fixed assets with MT financing

needs

7

2. New constraints on financing volumes available from banking

industry

8

Banks are facing 2 sets of challenges:

I. A STRUCTURAL ELEMENT: the implementation of Basel 3

Increasingly stringent

Quicker implementation than originally planned

Aimed at reinforcing the robustness of financial institutions

AND

II. A CONJONCTURAL ELEMENT: US Money Market Funds have drastically reduced their

exposure to European banking sector since mid-2011

Resulting in a greater difficulty for European Banks to access US Dollars funding, and

Directly impacts the Energy and Commodity sectors which are massively dollarized.

New constraints on financing volumes available from banking industry

9

2. New constraints on financing volumes available from banking

industry

I. A STRUCTURAL ELEMENT: the implementation of Basel 3 for banks

II. A CONJONCTURAL ELEMENT: US Money Market Funds have reduced their

exposure since July 2011

10

Various institutions develop proposals for regulatory changes

National level

Regional level

(European Union only)

Basel

Committee

FSB

G20

High-level guidelines of policy

direction

Key role in financial regulations

Develops high-level guidelines

which are typically endorsed by

G20

Policy recommendations to

internationally active banks

For EU members, provides

binding directives and guidelines

Sets laws and regulations for

financial institutions

Supervises financial activities in

domestic system

Where do we stand?

• Far-reaching regulatory guidelines provided,

e.g., Pittsburgh declaration and December

2009 "Basel III" proposal

•US with substantial regulatory activity

• EU Commission has been fast in transforming

guidance into directives (CRD 3 and 4, EMIR)

•Most European countries wait for EU directives

while some have been "front-running" (French

rules on compensations, FSA liquidity regime)

• Some countries with significant consumer

protection activity (Germany, France)

Ultimate responsibility in respective jurisdiction

Political coordination / guidelines

11

Participants

Implementation

Expected Outcome

13 countries

Basel II Basel III and other reforms post-crisis

27 countries

Base

l le

vel

U.S.: never applied Uncertain/differentiated application of recommendations

Credit Risk-

sensitive

approach

for capital

Less capital for

banks with high-

quality portfolios

Capital requirements:

Risk-sensitive approach

confirmed BUT

- More capital base,

of better quality

- Additional capital

charges and capital

buffers

Much more capital for

all banks

Market Risk

Securitisation

1 LCR: Liquidity Coverage Ratio 2 NSFR: Net Stable Funding Ratio

New constraints on:

- Size (Leverage ratio)

- Liquidity (LCR1 & NSFR2)

- Incitation for banks to use

clearing houses

- Banking resolution

(e.g. bail-in proposals)

- Financial taxes

- Specific activities

(e.g. proprietary trading)

- Accounting

Some non-coordinated

efforts of supervisors

Basel 3 Basel 2.5

Regulation on banks: from Basel II to Basel III

12

Basel Committee documents are

based on the lessons of the crisis

At a micro-prudential level

1. Banking sectors of many countries

have built up excessive on- and

off-balance sheet leverage

2. The level and quality of the bank

capital base has been gradually

eroded

3. Banks were holding insufficient

liquidity buffers

At a macro-prudential level

4. The crisis was amplified by a

procyclical deleveraging process

5. And the interconnectedness of

systemic institutions through an

array of complex transactions

To prevent future crises, 5 key actions are

considered

2. Capital

• Better quality, higher level, more consistency and

transparency of the capital base

4. Risk coverage (counterparty & credit risks)

• Strengthen the capital requirements against counterparty

risk

• Raise the risk weight on exposure to financial sector

1. Leverage

• Promote a leverage ratio based on gross exposures

3. Liquidity

• Implementation of 2 liquidity ratios

5. Procyclicality

• Reduce procyclicality

• Promote countercyclical capital buffers

• Implement dynamic provisioning based on expected loss

Focus on “Basel III” framework

13

Common Equity

Tier 1 (CET 1)

Conservation

buffer (CET1)

Tier 2

(gone concern)

Additional T1

(going concern)

Countercyclical

buffer (CET1 or

equivalent)

Systemic buffer

(CET1 or

equivalent)

4,5%

2,5%

0-2,5%

Minimum CET 1

7%-13%

to distribute

dividends

depending on

banks and cycle

1,5%

2%

0-3,5%

Common

Equity

Tier 1

2%

Tier 1 2%

Tier 2 4%

From Basel II… … to Basel III

Basel 3 Impact on Banks Capital Structure

To limit

distribution

when losses

occur

To reduce

procyclicality

To reduce

systemic risk

To bear losses

and respect the

leverage ratio

Higher minimum requirements

(Basel Committee)

14

Key Take-aways on the new regulatory framework

Regulatory costs to increase for all banking products in the coming

years

Some products more impacted: unsecured vs. secured

financials vs. corporates

back-up vs. other purposes

Several banks, particularly in Europe are already implementing changes

15

2. New constraints on financing volumes available from banking

industry

I. A STRUCTURAL ELEMENT: the implementation of Basel 3 for banks

II. A CONJONCTURAL ELEMENT: US Money Market Funds have reduced their

exposure since July 2011

16

A deteriorated environment for Euro area banks…

5-year CDS for Selected European Sovereign

Source: Bloomberg, March 2012.

Market sentiment regarding Euro area Sovereign Debt slightly improved since December 2011

Continued uncertainty in financial markets relating to sustainability of public finances in some

eurozone economies + fear of contagion affecting core euro area countries

… but some improvement already observed in 2012

Some reopening of interbank market observed, especially for shorter tenors;

Increased cost of funding was only partially passed on to borrowers at this stage.

17

3. A New Paradigm :

a growing market which must explore new financing sources

18

A New Paradigm: How to adjust to this new world?

Banks: increase the distribution of loans particularly to the non-banking sector.

Allow your banks to bring new comers which cannot finance your activities directly,

As potential investors have already shown a strong apetite for Oil & gas transactions,

But their yield requirements might differ from banks.

Clients: optimize utilization of credit lines (economic cycles, funded/unfunded,

...)

Need to better manage through-the-cycle processes in order to limit financing requirements

o Minimize inventory, and adjust terms of payments to economic cycles, and

o improve payment performance

Is the Commodity Sector too dependant on US Dollars ?

19

A New Paradigm: The new parameters which will impact financing costs

Financing costs for

Borrowers

Greater importance of side business

(eg cash mgmt and hedging)

KYC, Payment risk and loans performance

will be under close scrutiny

New financiers requirements on

Return on Assets

may differ from historical lenders’ Basel 3

impacts

on banks costs of funding

Access to US Dollars

for USD denominated

facilities

20

Despite the difficulties, one shall keep in mind that:

European institutions have played a prominent role for decades in financing the

commodity business in Europe, Middle East and Africa and can still boast of:

Excellent track record of operations with key industrial counterparts involved in strategic

transformation or import/export transactions;

Very strong know-how in structuring, and arranging deals in the most efficient way;

In-depth knowledge of the countries and counterpart’s activities which was acquired through

years of local due diligences and daily communications with our clients

Teams dedicated to the Oil & Gas sector to better address the sector’s specifics

Unrivalled syndication capabilities expected to further expand to new financing products.

A New Paradigm: How will your historical partners will help you to adapt?

New challenges for all commodity players and banks to keep on working in a sustainable way.

Banks proven track record in serving commodity players’ needs.

21

This document is only directed at (a) professional customers and eligible counterparties as defined by the markets in Financial Investments

Directive, and (b) where relevant, persons who have professional experience in matters relating to investments who fall within Article 19(1) of the

Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. Any person who is not a relevant person should not act or rely on this

document or any of its contents.

Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive

nor sufficient for making decisions, nor should it be used in place of professional advice. The BNP Paribas Group does not accept responsibility for

any loss arising from any action taken by anyone using this material.

BNP Paribas is incorporated in France with Limited Liability. Registered Office 16 boulevard des Italiens, 75009 Paris. BNP Paribas is authorised by

CECEI and supervised by the Commission Bancaire.

This document is for the use of intended recipients and may not be reproduced (in whole or in part) or delivered or transmitted to any other person

without the prior written consent of BNP Paribas. By accepting this document you agree to be bound by the foregoing limitations.

© BNP Paribas (2012). All rights reserved

Disclaimer