Professional Documents
Culture Documents
Working Interest in
Kakap Production
Sharing Contract
(PSC)
INVESTMENT PROPOSAL
GLENVILLE PETROLEUM
INVESTMENT COMMITTEE
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Table of Contents
1. Overview of the Kakap Production Sharing Contract (PSC) ............................................................................ 4
Key Oil & Gas Reserves Metrics ...................................................................................................................... 5
2. Regional Business Opportunity: Indonesian Oil & Gas Sector ........................................................................ 7
Fiscal and Tax Reforms .................................................................................................................................... 7
3. Investment Summary ........................................................................................................................................ 9
Acquisition Bid ............................................................................................................................................... 11
Ownership of SPV and Equity Contribution................................................................................................... 12
4. Major Risks and Mitigation Measures ............................................................................................................ 13
Risk: Increase in 6-month USD LIBOR ......................................................................................................... 13
Mitigation Measures ....................................................................................................................................... 15
Interest Rate Swap ...................................................................................................................................... 15
Risk: Cost Escalation ...................................................................................................................................... 16
Mitigation Measures ....................................................................................................................................... 17
Fixed price (Lump sum) O&M contract w/ Cap and Floor on inflation-indexation ................................... 17
Service Level Agreement ............................................................................................................................ 18
Risk: Brent Oil Price ....................................................................................................................................... 18
Mitigation Measures ....................................................................................................................................... 20
Hedging with Derivatives ........................................................................................................................... 20
Costless collars and Swaps ......................................................................................................................... 22
Risk: Offtake Quantity / Demand Risk ........................................................................................................... 22
Mitigation Measures ....................................................................................................................................... 22
Take-or-Pay Contract .................................................................................................................................. 22
Risk: Political Risk ......................................................................................................................................... 23
Mitigation Measures ....................................................................................................................................... 23
Political Risk Insurance .............................................................................................................................. 23
ECA Loans Counter Guarantee ............................................................................................................... 24
Offshore Account ........................................................................................................................................ 24
Implementation Agreement ........................................................................................................................ 24
Strategic Consortium Structure ................................................................................................................... 24
Risk: Force Majuere........................................................................................................................................ 25
Mitigation Measures ....................................................................................................................................... 25
Concessions in Offtake Agreement and Loan Agreement .......................................................................... 25
Implementation Agreement ........................................................................................................................ 25
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Insurance (financed using Catastrophe Bonds) ........................................................................................... 25
Re-Financing................................................................................................................................................... 26
5. Financing Structure ......................................................................................................................................... 28
Project Financing Structure and Contractual Parties ...................................................................................... 28
Special Purpose Vehicle (SPV) .................................................................................................................. 29
Government ................................................................................................................................................ 31
Lenders ....................................................................................................................................................... 31
Sponsors ...................................................................................................................................................... 33
Operators..................................................................................................................................................... 33
Offtakers ..................................................................................................................................................... 33
Key Contractual Agreements .......................................................................................................................... 34
Shareholders Agreement............................................................................................................................ 34
Production Sharing Contract ....................................................................................................................... 35
Loan Agreement ......................................................................................................................................... 35
Operations & Maintenance Agreement....................................................................................................... 37
Crude Oil Sales Agreement ........................................................................................................................ 37
Gas Sales Agreement .................................................................................................................................. 38
References ........................................................................................................................................................... 39
List of Appendices
A1 Risk Register with Mitigation Measures
A2 Oil and 6-Month LIBOR Model/ Illustrative Model
A3 Financial model inputs (Key Assumptions)
A4 Income statement
A5 Cashflow waterfall
A6 DCF and Financial Analysis
A7 Debt Structure
A8 Amortization Schedule
A9 Aggregated Loan Repayment
A10 Depreciation Schedule
A11 Capital Structure
A12 Sensitivity Analysis
A13 Valuation Range
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1. Overview of the Kakap Production Sharing Contract (PSC)
The Kakap Production Sharing Contract (PSC) is an existing oil and gas field located in the
Natuna Sea between Malaysia and Indonesia. It is located approximately 480km northeast of
Singapore in Indonesian waters. The field is approximately 3000 km2 and has 8 producing oil
and gas fields.
Operations started in year 2000, with a remaining 20 years of production from 2016 onwards.
Currently, the produced gas is sold to Singapore through the West Natuna Transportation
(WNTS) to markets in Singapore. The WNTS collects and delivers dry, sales-quality gas direct
to Jurong Island, Singapore. The main trunk line of the WNTS runs towards Pulau Batam until it
reaches the territorial waters of Singapore (Figure 1).
Figure 1 Transportation Pipeline from Kakap to Singapore (Source: Premier Oil, 2016)
The major partners of the existing PSC are the Government of Indonesia, owner of the oil and
gas reserves, as well as contractors whom are tasked to explore, develop and produce oil and gas.
The contractors are entitled rights to operate the assets and receive production and revenue from
the sales of oil and gas.
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Key Oil & Gas Reserves Metrics
Kakap PSC has four major oil and gas producing fields concentrated in the South of Kakap KF
Field, KRA Field, KH Field and KG Field. They are situated in water depths of approximately
90 metres and host all oil and gas production equipment (Figures 2-6).
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Figure 6 Kakap Natuna FPSO
The following table shows the remaining reserves breakdown for each field (Figure 7).
Recoverable reserves are classified into undiscovered and discovered.
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2. Regional Business Opportunity: Indonesian Oil & Gas Sector
In view of the despondent industry data as reflected above, the Indonesia government is adamant
to revive its flagging upstream oil and gas sector. The first of many steps planned for to give the
sector a boost includes a reversal of the changes introduced in the GR79- by removing taxes on
oil and gas exploration (VAT, import and land taxes) Furthermore, fiscal reforms in production
sharing contracts are also expected to follow in the near future as investors/sponsors can look
forward to receiving larger portions of exploration outputs, elevating the actual return on their
investments (Reuters, 2016).
Additionally, non-fiscal incentives to ramp up spending and investments in the oil and gas
industry are also proposed. They are as follows:
Tax Amnesty
Indonesia has launched a Tax Amnesty programme to encourage funds worth US$42.7
billion in assets stashed offshore to be reinvested into the country. These funds are to be
used to boost the economy of Indonesia through:
1. Government bonds
2. State-owned enterprise bonds
3. Financial investments in appointed banks
4. Corporate bonds supervised by OJK (Indonesian government agency)
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5. Government-related infrastructure projects
6. Sectors to be determined by the Ministry of Finance
7. Other investments based on prevailing law
The Tax Amnesty programme will ensure economic stability and growth in the future. As
such, in the face of a stable domestic economic climate, it will be less probable for the
government of Indonesia to heighten overall exploration and production costs through
taxes and fees.
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3. Investment Summary
Financing Structure
Debt-Equity ratio 78% / 22%
Risk-free rate (Rf) 1.99%
Taxes 30%
Equity 100million USD
Consortium Strength 5
Ownership of Glenville 24.5%
Paid up capital 24.5million USD
Shareholder type -Operator
-Major Shareholder
Debt 298million USD
Pre-tax net Cost of Debt 6.16%
After Tax Cost of Debt 4.312%
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Acquisition bid
USD$398 million
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In 2015, the minimum expected hurdle rate of an investment (in stocks) is approximately 10%
with a risk premium of 4% (Rf= 6%) based on the analysis of Berkshire. The returns on
investments in US stocks averages at 9.03% (arithmetic average) for the past 10 years, and
11.01% extending to 40 years.
Risk Premium
Stocks T Bills Stocks T Bonds
1928-2015 6.05% 4.548%
1966-2015 4.69% 2.90%
2006-2015 6.11% 2.53%
Compared against the historic market risk premium of 6% (highest), the investment in Kakap
PSC in year 2016 is highly profitable with rate of return at 12.53%, considering the current
Rf=2% The outlook of the investment market in Indonesia has been recognised to be positive
with potential growth attributing to the Governments efforts which includes approving of Tax
Amnesty programme.
Acquisition Bid
The recommended bid price for Kakap PSC will be at US$398 million. The proposed business
model of this project will generate returns at the rate of 12.53% and equity returns at 17.68%.
The payback period of the invested sum is 5.42 years, with a return of investment of 216.71%.
Over the project lifespan of 19.25 years from Q4 2016 - 2035, Glenville Petroleum will reap a
total profit of US$70.12million in nominal future value and US$4.33 million in present value.
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Ownership of SPV and Equity Contribution
A Special Purpose Vehicle (SPV) will be formed with Glenville Petroleum being the major
shareholder and also the operator of the project. Glenville Petroleum will own 24.50% of the
SPV, following that with Samudera Indonesia owning 20.30%, Royal Dutch Shell with 19.40%,
British Petroleum with 18.50%, and Sembcorp Gas Pte Ltd with 17.30%. The respective parties
will contribute equity of US$1 million per 1% equity owned.
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4. Major Risks and Mitigation Measures
The 6-Month USD LIBOR serves as the base benchmark interest rates for both tranches of
commercial loan undertaken by the SPV. As such, any movements in the LIBOR would have a
consequential impact on the amount of interest payable throughout the entire loan tenure. LIBOR
movements may not seem to have a significant impact on un-levered key financial indicators
such as the NPV and IRR, however, from the perspective of the investors, EIRR and Annual Net
income would be severely shaken due to the rising interest expense.
If Federal Reserve of the U.S. begins to raise the Federal Funds Rate, LIBOR is expected to
follow with this upward movement. The current indications are that Yellen and Co. are looking
to increase interest rates towards the end of 2016 to stimulate economic growth within the US
(Reuters, 2016). With the 2016 US Presidential Election casting a deep uncertainty on the
economic policies that are to come in the near future, it would be prudent to take up certain
measures to hedge against the uncertain future of LIBOR.
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Mitigation Measures
Interest Rate Swap
An interest rate swap results in a fixed interest rate being agreed with the Lenders. This allows
the SPV to retain a firm grip on their future interest repayment cost. As PT Suribian expects
LIBOR to increase in the coming years, it would be wise to fix it when it is currently low. This
would ensure that interest repayments can be fixed at least for the next 3 years instead of letting
it float with LIBOR rates. This protects our downsides as rising interest rates for the period of of
the swap would have minimal effect on PT Suribians interest expense. Not to mention, the swap
will also reduce potential upsides in the event of a plunge in interest rates. However, the
probability of a further reduction of LIBOR is low as current rates are deemed to be around the
lowest in history.
Renewal periods of 3 years will mitigate LIBOR risks away for the period, allowing them to be
certain of their interest expenses and refine budget forecast during the same period. Although the
fixed rate will be higher than that of the floating rate at that point of time, it is important that the
agreed rate has to protect PT Suribian from the expected rising LIBOR within the 3 year periods.
As such, the SPV is able to do away with rising Interest Rate risk from the list of uncertainties.
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Risk: Cost Escalation
It is industry practice to engage the O&M services provider with a fixed price lump sum contract
containing a built-in inflation indexation fee adjustment clause. However, this arrangement
exposes the SPV operating profit to the risk of inflation-driven OPEX escalation. As captured in
the chart above, the variability range of Indonesias domestic inflation rate can span over a large
quantum of basis points. Historical records have shown that inflation rates have attained a high
of approximately 9% and an approximate average of 5% over the past 5 years. The repercussions
can be detrimental and dire on SPVs bottom line and resultant IRR due to the sensitive nature of
IRR to movements in the Cost escalation rate. With a cost escalation factor of 1.05 (5%), the
consequential IRR would plunge to an undesirable level of 11.19%, falling well below the hurdle
rate of 12.5%. Essentially, based on the sensitivity analysis, if the average cost escalation growth
rate> 4.03%, IRR< Hurdle
Cost escalation could also be due to repair cost for equipment breakdowns. If the equipment is
critical to the operation, it may halt the extraction and thus affecting the sales. In this case, the
SPV is importing machineries for oil and gas extraction from Germany.
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Mitigation Measures
In view of the precarious nature of this risk factor, as any slight upward movements from the
base case would result the project IRR to be less than the hurdle rate, it is imperative to devise
risk mitigation measures to cement the foothold of our acquisition proposal at an investment
grade level. Listed below are the mitigation strategies that will be employed.
Fixed price (Lump sum) O&M contract w/ Cap and Floor on inflation-indexation
The O&M agreement for upstream oil and gas exploration usually functions on a fixed fee/lump
sum basis which is indexed for domestic inflation and renewable every 5 years. The lump sum
feature of the industrys O&M contracts does indeed grant certain degree of price (expenses)
certainty to the SPV, however, its effectiveness is often undermined by the built-in inflation-
indexation component which transfers the risk of inflation over to the SPV.
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In order to mitigate our downside exposure, this inflation-driven cost escalation risk should be
shared between both the SPV and the O&M service provider. This could be achieved by
imposing both a resistance and support (ceiling and floor) to the amount of adjustment the
operating fees are allowed to fluctuate because of inflation. Based on the sensitivity analysis, an
adjustment limit of 6% should be imposed on the OPEX so as to maintain our DSCR levels
above our target level of 1.2. However this still has an inherent detrimental impact on the IRR, as
IRR levels will fall to approximately 10%, which lies outside our hurdle rate.
The asset class of energy commodities is infamous for their high beta/volatility due to their
inherent elastic inter-dependency with a myriad of macroeconomic and systematic risk factors.
The iconic peak and trough prices recorded before and after the 2008 financial crisis stands
testament to its unpredictability and reflects a jarring concern Brent oil price movements have on
the top line of our business P/L statement.
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For reference, long term average nominal Brent Oil Spot Prices is US$41.65/bbl for 1980 to
2015 (35 years), US$54.10/bbl for 1995 to 2015 (20 years), US$82.55/bbl for period 2005 to
2015 (10 years), US$93.17/bbl for 2010 to 2015 (5 years) and US$42.28/bbl for 2016 YTD.
Though it is possible that Brent oil prices may drop towards the 30-year average, however the
Oil and gas industry structure has changed over this period. Upstream exploration and production
costs have increased over the years and Brent Oil demand is now not only driven by
industrialisation of emerging markets as a conventional energy source but has also been
propelled by significant growth in oil-based investment fund (e.g. Oil ETFs). In present times, oil
price trends tend to be predisposed around the resistance-support band of US$40-50/bbl, which
mirrors more closely to the 35-year and 20-year average price, however, fuelled by upbeat
information on OPECs commitment to curtail overall output to 32.5million bbl/d, and with
optimistic economic growth forecasts of emerging markets from China and India bolstering
confidence in oil demand, the route to recovery seems less uncertain.
The recovery of oil prices may paint a comforting picture of revenue streams for PT Suribian,
especially since the formers high correlation with the latter. However, if Brent prices were to
skyrocket back to 2015 levels or beyond, off takers might cut back on their demand as their cost
prices go up as well. This will cause unstable revenue streams due to the elastic nature of oil.
A downside scenario which simulates a -10% reduction in average prices to USD$41 per barrel
of Brent Oil, would drive DSCR and IRR down to dangerous levels of 1.23 and 8.83%
respectively. If average oil prices were to plummet further to 10-year historical low levels of
USD$33.70 as in Q1 2016 (EIA, 2016), it will expose the project to even greater risks than the
aforementioned. The low revenue streams will make continuing operations unsustainable as the
DCSR will fall to levels of 0.7, deeming obligatory debt repayments impossible and resulting in
a potential cessation/termination of the project in its entirety due to the breach of contractual
covenants. As such, our comprehensive mitigation measures strives to reduce and eliminate the
potential risks that arises from volatile Brent oil prices.
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Mitigation Measures
Hedging with Derivatives
SPV will ensure that there will be a rigorous system of market research and Brent oil price
modelling in place such that timely hedging could be planned for and executed to perfection.
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underlying commodity or the financial equivalent of said commodity, on or before a
specific date or period of time.
In the event that forward looking market research reports revealed that Brent Oil Spot
prices would fall below the base level of USD$46/bbl for the upcoming month of
delivery, SPV would proceed to attain approval from the hedging committee to purchase
a USD$46 Brent Oil Put Option at a premium.
If Brent Oil Spot prices were indeed to fall to levels below the strike price of $46/bbl, say
$36/bbl, our hedge would be in the money and the SPV would incur a net hedging gain
of $10 less premium paid. However, conversely, if spot prices were to exceed strike
levels, not only will the option not be exercised, but the net revenue received by SPV will
suffer a hit equivalent to the premium paid. Evident from the chart above, as much as
hedging with options will diminish (slightly) the potential gains of a bullish oil market, it
provides a reliable cushion in bearish times, by securing stable streams of revenue at the
strike price, ensuring that our debt could be service in a timely fashion.
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Derivatives Strategy 2: Futures
Futures contract traded on the Intercontinental Exchange (ICE) serves as another viable strategy
to hedge the SPVs exposure to volatile Brent oil prices. When oil projections reveals a steep
downturn in prices, we will short the Brent oil Futures contract only to buy back the futures
contract at its trough point. The hedging gain on the futures contract, which equals to the
difference in both transaction prices, would be used to offset the actual loss in revenue from
Brent oil production due to the season of bearish times (low spot prices). In order to perform a
perfect hedge, one important complexity to grasp when dabbling in the futures market is the
calendar basis risk. To counteract the calendar basis risk, it entails the hedger to short a
combination of December and November 2017 contracts to properly hedge October 2017 Brent
oil production as the November futures contract will expire somewhere during the middle of the
October production month.
Mitigation Measures
Take-or-Pay Contract
A take-or-pay contract is an agreement whereby the offtaker (BP) has to either take, and pay the
contract price for, a minimum contract quantity of commodity each year; or pay the applicable
contract price for such quantity if it is not taken during the applicable year. This places the risk
of deteriorating global demand on the offtaker-BP by requiring them to always be responsible for
the payment for a minimum purchase commitment, leaving PT Suribian with only the market
price risks to manage, which as mentioned above, will be hedged.
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The take quantity for healthy cash flow generation based on our projection is fixated at
484,000bbl/quarter, however, to capitalise on periods when oil prices stampede into bull-market
territory, production output and resultant take quantity can be ramped up (to a maximum
capacity of 16,000bbl/day or 1.44million bbl/ quarter) so as to generate more cash flows, albeit
in a hastened reserve-depleting manner.
Mitigation Measures
Political Risk Insurance
To mitigate such risk, PT Suribian will procure Political Risk Insurance (PRI) from Barclays. In
the scenario that the Indonesian government expropriate the working assets of the project, the
replacement cost or book value of the equipment or inventory that is lost will be insured under
the PRI. If the project experiences loss of realizable value of exported products, the PRI would
cover the book value of the crude oil or the replacement costs. Agencies also provide dispute
resolution services which prevents disputes from escalating and keeps important investments on
track. However, it should be noted that the PRI coverage is limited and does not holistically
cover the entire loss suffered by the project (IE Singapore, 2016).
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ECA Loans Counter Guarantee
Loans obtained from ECA agencies would come with a counter guarantee from the host
government which incentivise them to abide by their promised commitments. As such, GOI
would be less probable to perform acts of expropriation, pre-mature termination or any other
unprecedented manoeuvres to undermine the success of the project.
Offshore Account
To avoid the government stopping the repatriation of profits overseas, the SPV may consider
setting up an offshore account. By having accounts set up overseas, the Indonesian government
would not be able to interfere in any transactions conducting by the SPV. However, in view of
the prevailing tax amnesty, Indonesian government may not give approval after knowing the
existence of such arrangement. This could be resolved through having an Implementation
Agreement with the Indonesian government, which will be mentioned in the next section.
Implementation Agreement
Implementation agreements provide for direct contractual obligations and undertakings between
the Indonesian government and the SPV. An example of a clause, extracted from World Bank
(2016), for preventing expropriation could be,
For repatriation of profits, the SPV could include the following clause,
PT Suribian shall have the right to open any type of foreign or local bank accounts and
shall have the right to freely convert an amount in [ ] or any type of foreign currency
into any other currency and transfer any such amount abroad.
More clauses could be added to obtain assurance from the Indonesian government to prevent or
minimise effects coming from Political risks.
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involves local companies. In PT Suribian, we have Samudera Indonesia as one of our partner
within the consortium and Bank Mandiri within the syndicate of commercial banks (lenders).
Risk: Force Majuere
Some of the Force Majeure risk identified for the Kakap PSC are listed as follows,
Natural disasters, e.g. earthquakes, tsunami, leading to the destruction of oil platforms
War, e.g. recent China and Indonesia confrontation around Natuna islands that may result
in future skirmishes on territorial disputes, leading to stoppage of operations
Civil disturbance, e.g. strike and riots that leads to stoppage of works
Mitigation Measures
Concessions in Offtake Agreement and Loan Agreement
One way the risk of Force Majeure may impact the success of the project is the extraction and
production rate/capacity of the oil and gas resources from the PSC. PT Suribian would be
penalised if we are not able to keep up with the production and delivery, i.e. Liquidated Damages
as stated in the Offtake Agreement. To mitigate this risk, the SPV would negotiate for
concessions, written into the Agreement that states that in the event of Force Majeure, the SPV
will not be penalised for the duration of operations that was affected by the incident.
With Force Majeure taking place, more resources would definitely be needed to recover the
facilities back to state for safe operations. As such, PT Suribian may not have the ability to
service the debt for certain period. To mitigate this risk, the SPV would negotiate with the
lenders that refinancing of loans will be guaranteed, in the event of Force Majeure.
Implementation Agreement
Within an Implementation Agreement, a clause should be added that in the event of Force
Majeure, the Indonesian government will come in to support. The contract shall allow for an
extension of concessionary rights to the land and resources in the event of a force majeure. The
duration of extension shall be the period from the event of force majeure which results in the
cease of operations to the restart of operations. The host government shall also be obliged
provide for concessionary loans of US$200 million in contingency to relieve the financial burden
of the SPV to restart the operations.
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resort to selling Catastrophe Bonds (known as Cat Bonds) to raise funds; diversifying their risk
by selling it as a bond to investors.
Re-Financing
In the instance that LIBOR rates, which function as the base benchmark rate for both tranches of
commercial loan, were to skyrocket to 20-year high levels of 7%, the nominal interest expense
borne by the SPV would catapult to unreasonable heights, after factoring in the interest margin
payable. As such, even if our base projections on future cash flow (CFADS) were to hold true,
the exorbitant interest repayment would drive the projects DSCR into dangerous territories of
less than 1.
In this scenario, PT Suribian has the options to either renegotiate new contract terms with
existing lenders for a longer loan tenure to further spread out loan repayments, or apply for a
rate-and-term refinancing to procure additional funds from other commercial banks to service
outstanding debt and interest repayment.
The option to refinance will be kept as a last resort given that the other measures would have
already helped mitigate LIBOR fluctuations. However, additional risk stemming from
refinancing will arise in a climate of high LIBOR which put PT Suribian in an unfavourable
position; refinancing in such a situation will only cause the project to take on more debt at a
higher cost.
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The graph above summarizes the effective valuation range of KAKAP PSC in present value
after sensitizing the three principal variables, namely Brent oil prices, 6-Month LIBOR and Cost
escalation rate to a fluctuation range of +/- 10%, +/- 50% and +/- 25% respectively. Evidently,
Oil prices prove to be the most impactful and sensitive risk factor with its wider valuation range
and highly elastic change in valuation with every unit change in Oil price. However, in light of
the sufficiency of mitigation measures established earlier to protect the downside of this
investment, the action to acquire is still recommended. The acquisition bid of USD$ 398 million
proves to be a conservative yet competitive one as any previously identified downside exposure,
as shown on the left side of the maroon divider, has been substantially mitigated while any
probable upside gains (in addition to the 12.53% IRR) as indicated on the right side of the
maroon line are still very well preserved.
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5. Financing Structure
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Special Purpose Vehicle (SPV)
The SPV would allow Glenville to isolate the needed funds to assure investors that the
companys assets are duly protected, as are the designated funds for the SPV. Once an SPV is
created, it must be managed and owned separately from the company, because otherwise it
would act like a subsidiary. As an independent entity, an SPV is now responsible for managing
its funds, decisions, and risk capital. However, many SPVs run on auto-mode, which means they
have a pre-punched program, which requires minimal, or no management decisions. They may
even have no actual office; just documents that contain a shareholder agreement, joint venture
contract, or Deed of Trust.
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Purposes of the SPV
To be used for synthesizing a lease, which is considered an expense in the income
statement rather than a liability on the balance sheet. This is also known as On-
Balance versus Off-Balance SPV, which are the 2 types of SPVs.
To secure a project from possible financial or operational failures of the company
To gain independence from the company in terms of funding, ownership, and
management
SPVs also make it easier to manage funds. Instead of expanding a business, one can just
create special projects even if only to test the market for new business opportunities. One
can also sidestep certain regulatory requirements that block investment opportunities such
as the case of the Foreign Institutional Investors. Finance management is improved
because Glenville could be more tax efficient through manipulation of financial
statements and the windows of opportunity for companies to choose a more favourable
tax resident for their SPV where assets can be better secured. Finally, SPVs provide the
added advantages of creative accounting and an effective way of cloaking any secret
project that competitors would do anything to know about.
The disadvantages of the SPVs include the cost of setting up the SPV, loss in tax benefits
for the mother company (Glenville), compliance with the rigid FASB rules, lack of
funding options, and the legal obligations of a limited company.
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Government
The Government of Indonesia is the owner of the four major oil and gas production fields (KF
field, KRA field, KH field and KG field). The government provides the concession for the SPV
to explore, develop and market oil and gas resources in Indonesia.
Lenders
The loans for the project are obtained from two sources:
Australia and New Zealand Banking Group (ANZ) USD 59.6 million (20%)
The syndicate of banks comprise of secured creditors, headed by the lead arranger
Development Bank of Singapore (DBS). DBS is approached to be our lead arranger
because, like Glenville, it is incorporated in Singapore and this would streamline the loan
structuring and agreement process due to commonalities in their geographical locale.
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Bank Mandiri is the largest bank in Indonesia in terms of assets, loans and deposits. Bank
Mandiri has been approached largely due to its knowledge in the Indonesian markets.
Since it is also an Indonesian owned bank, their involvement in the syndicate could
facilitate the concession agreement with the Government of Indonesia.
Lastly, all the above-mentioned chosen banks command respectable rankings in the
International financing review PFI league table.
The German Development Bank (KfW Entwicklungsbank) will provide the CAPEX loan
that we require for replacement of capital expenditure. The equipment and plants used in
the project will be purchased from Bechtel, a leading oil, gas and chemical company in
Germany. KfW will cover loans and insurance that Bechtel requires for export of
equipment to Indonesia. Bechtels vested interest in the project will ensure the
performance, as well as the operations & maintenance of the equipment be carried out to
its best effect.
A HERMES cover (usually 85% of the loan amount) is an Export Credit Guarantee by
the German Federal Government, and forms an important part of the German foreign
trade policy and protect German companies in the event of non-payment by foreign
debtors. HERMES guarantees enable exporters to cover themselves against economic
risks and political risks and the purpose is for the promotion of exports and helping to
provide for jobs in Germany. Risks covered by the HERMES cover includes political
risks such as bad debt losses due to legislative measures, war and civil commotion, losses
due to inability to convert or transfer sums paid in local currency by the debtor due to
restrictions in the international payment system, inability to fulfil the contract, and loss of
goods due to political circumstances. Also covered is the commercial risks such as
protracted default and bankruptcy of buyer.
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Indonesia-German Double Taxation Avoidance Agreement
The bilateral economic agreement between Indonesia and Germany eliminates double
taxation of the same income in the two countries. Exporters under the HERMES Cover
will enjoy the benefits of the Double Taxation Avoidance. Exporters of German
companies will be safeguarded against the risks as mentioned, and at the same time be
able to expand their business overseas.
Sponsors
The Sponsors of the project are Samudera Indonesia, Royal Dutch Shell, Glenville Petroleum,
British Petroleum and Sembcorp Gas Pte Ltd.
Samudera and Royal Dutch Shell are companies with vested interest in the oil and gas industry
and this Kakap PSC project of a huge scale and lucrative returns would be of interest to them.
These equity investors will provide capital infusions to the project. The success of this project
can potentially lead to expansion and growth of their respective core businesses.
British Petroleum and Sembcorp holds dual roles as offtakers and sponsors as well. As offtakers,
they chose to double up as sponsors because they have a vested interest to keep the project going.
Operators
The Operator for this project is Glenville Petroleum, a Singapore-based petroleum company
investing in this project to increase its acreage of oil and gas producing fields in the region.
Glenville is also the largest shareholder of the SPV for this project.
Offtakers
There are 2 offtakers in this project structure - for crude oil sales (British Petroleum) and gas
sales (Sembcorp Gas Pte Ltd). They are the existing offtakers for the Kakap PSC project and
have been approached to continue their offtaking roles because of their experience and
knowledge in the project.
33
Key Contractual Agreements
The participating contractors in Kakap PSC are:
Contractor Equity Contribution Percentage Ownership
Glenville will spearhead the formation of the SPV before submitting a collective bid for the
Kakap PSC. Glenville, alongside the identified partnering contractors in the table above, has
worked out the ownership distribution structure as such. The percentage ownership shall dictate
the amount of capital each partner has to provide as equity to finance the bid submission as well.
Even though Glenville has the largest ownership in the consortium, it was decided that Glenville
should have less than 25% ownership of the consortium so that the accounts and debts of
Glenvilles involvement in this project will be kept independent from the parent company. The
parent companys balance sheet is thus insulated from any profits or loss arising from the project.
The major contracts and agreements between the partnering contractors of the SPV are further
elaborated on in the following sections.
Shareholders Agreement
As means of financing the project, shares from the project will be sold to all parties in the SPV.
In return, the SPV will pay out dividends based on the parties stake in the project company from
the profit made from the oil and gas sales.
Cash sweep
Cash sweeping gives PT Suribian the option to use excess free cash flows to pay down
outstanding debt rather than distribute it to shareholders. The shareholders will be paid
their dividends in the order as below.
34
Order Items
3 Payment to agents
The contract shall allow for an extension of concessionary rights to the land and resources in the
event of a force majeure. The duration of extension shall be the period from the event of force
majeure which results in the cease of operations to the restart of operations. The host government
shall also be obliged provide for concessionary loans of US$200 million in contingency to
relieve the financial burden of the SPV to restart the operations.
Loan Agreement
The loan agreement between the syndicate of banks and the Kakap PSC consortium is an
underwritten deal, whereby the syndicate of banks will guarantee the entire loan commitment
of 10 years (from 2017 to 2026). Traditionally banks would not prefer such an arrangement
because of the high risk on the loan arrangers to ensure full subscription of the loan amount of
USD 298 million. However, the consortium believes that this is the most optimal loan
35
arrangement to handle the loan amount of such a scale, and to better manage borrowing risks as
well.
This loan agreement with the syndicate of banks is further split into two tranches - Commercial
Loan A and Commercial Loan B. Loan A, with a facility amount of USD 115 million, will be
fully drawn down in year 2016, prior to the acquisition. The interest margin is stipulated at a
variable floating rate of 6 month LIBOR + 3.50% (premium), amortized over the entire loan
tenure of 5 years from 2017 to 2021. Loan B with a facility amount of USD 183 million, will be
fully drawn down in year 2016 as well. The interest margin is stipulated at a variable floating
rate of 6 month LIBOR + 4.75% (premium), amortized over the entire loan tenure of 10 years
from 2017 to 2026. The repayment of loan will commence in year 2017, taking into
considerations the operation period in year 2016 is only three months.
The ECA loan of USD 50 million will be fully drawn down in year 2016 on the date of
Operational Commencement. The interest margin is stipulated at a fixed rate of 6.50%, to be
repaid over the loan tenure of 15 years from 2017 to 2031.
Assets of the Kakap PSC project are to be used as collaterals in return for the loan agreement.
Both agreements are non-recourse loans. Both loans require a minimum Debt Service Coverage
Ratio of 1.1.
Clauses within the loan agreement will provide for mitigation against force majeure risks. In the
event of a force majeure, the SPV has the right to refinance with the syndication of banks at
amicable terms to tide over the crisis when no revenue is generated during the period which is
affected by the event of a force majeure.
In the event the SPV has excess cash, the terms of the debt allows for early repayment at the
borrowers option. This option to use excess cash to periodically repay debt ahead of schedule is
called cash sweep. Essentially, cash sweep enables front loading of as much of the debt
repayment (pre-payment) early in the project so as to reduce or eliminate the risks of loan default
in the future, with respective to detrimental scenarios such as higher LIBOR jacking up interest
repayments. This option makes the disbursement of dividends more stringent. For example,
dividends will be disbursed only if the DSCR exceed 1.2. The excess cash for the first 3 years
will be used for pre-payment of loans to reduce leverage and lower the gearing ratio
When DSCR is below 1, i.e. CFADS< debt service, the DSRA will be tapped to bridge the
shortfall. The debt service reserve account (DSRA) works as an additional security measure for
lenders. It comprises of a deposit equivalent to 12 months of projected debt service obligations,
funded by excess cashflow after all preceding payments have been made.
36
Operations & Maintenance Agreement
The Operations & Maintenance (O&M) Agreement between the SPV and Glennville specifies
the responsibilities of Glenville as the O&M Contractor, the period of operation, the maintenance
and repairs required, and any other fees. Glenville is required to secure the necessary permits to
operate and maintain the fields and platforms. Transportation of crude oil and gas from the fields
to the offtakers will be managed by Glenville as well.
Under this agreement, a performance guarantee is provided by Glenville to sustain extraction and
production of crude oil and gas above a predefined stipulated value of 700,000 barrels/year and
11,770,000,000 cubic feet/year respectively, to ensure the minimum projected revenue stream is
met.
Glenville will be contracted at a fixed price to mitigate the risk of cost escalation in the event of
unexpected increase in cost for operations to maintain its production. However, provisions will
be made for the increase in cost due to inflation and will be capped at 6%.
Service Level Agreements will also be included to bind the service providers such as the
operators and equipment supplier. Under the agreement, the Operator shall be obliged to perform
optimally to produce the quantity of oil as scheduled. The equipment supplier shall also be
responsible to provide a guarantee that the equipment supplied shall function at the agreed
availability rate and shall provide technical support to ensure the functionality.
A take-or-pay clause is to be included to ensure a guarantee on the revenue stream from the
proceeds of oil sales. Under this provision, BP has to unconditionally pay for the quantity of
crude oil as stipulated in the contract whether or not the actual sale of crude oil has taken place.
However, the take-or-pay clause comes with a concession, allowing BP to receive a make-up
quantity for the amount that BP failed to consume which corresponds to the quantity for which a
take-or-pay payment was made.
Crude oil prices will be in accordance to the prices as indicated by Brent Crude. The crude oil
prices will be committed on the day in which the sale and purchase of crude oil is to be made.
37
In the agreement, provisions shall be made to exclude the liability of the Operator and SPV as an
entity to supply to minimum amount of oil required to be sold to BP in the event of a force
majeure that disrupted the operations. No liquidated damages or any losses can be claimed
against the Operator and SPV.
A take-or-pay clause shall be included to ensure a guarantee on the revenue stream from the
proceeds of gas sales. From this clause, SembGas has to unconditionally pay for the quantity of
gas as stipulated in the contract whether or not the actual sale of gas has taken place. However,
the take-or-pay clause comes with a concession, allowing SembGas to receive a make-up
quantity for the amount that SembGas failed to consume which corresponds to the quantity for
which a take-or-pay payment was made.
The measurement of gas will be converted from per cubic feet into oil per barrel for the purpose
of determining the price of gas using the oil prices. The conversion rate of gas per cubic feet to
per barrel will be 1:6,000. In other words, 6,000 cubic feet of gas is equivalent to 1 barrel oil.
Crude oil prices will be in accordance to the prices as indicated by Brent Crude. The crude oil
prices will be committed on the day in which the sale and purchase of crude oil is to be made.
In the agreement, provisions shall be made to exclude the liability of the Operator and SPV as an
entity to supply to minimum amount of gas required to be sold to SembGas in the event of a
force majeure that disrupted the operations. No liquidated damages or any losses can be claimed
against the Operator and SPV.
Historically, all domestic gas had to be sold to Pertamina under a gas supply agreement.
Pertamina then in turn sold the gas to the end-user (e.g. State Electricity Company (PLN) and
PGN). Prices were fixed for a designated supply for the duration of the contract.
Today, Indonesias principal oil and gas law is Law No. 22/2001 (Oentoeng Suria & Partners,
2011). Under this law, the government now has the power to grant rights to mine which such
power used to be held by Pertamina. Now, individual producers can sell directly to end users
with contract terms and conditions negotiated directly between the producer and the buyer (with
assistance from SKK Migas). There continues however to be government involvement in
steering contracts towards certain domestic buyers rather than the producers preference to
export due to favourable pricing and terms (PWC, 2016).
38
References
Chan, F and Soeriaatmajda, W. (2016). Indonesia passes tax amnesty Bill. The Straits Times.
Retrieved 18 October 2016 from http://www.straitstimes.com/asia/se-asia/indonesia-
passes-tax-amnesty-bill
IE Singapore. (2016). Political Risk Insurance Scheme. Retrieved 11 October 2016 from
http://www.iesingapore.gov.sg/Assistance/Global-Company-Partnership/Access-to-
Financing/Political-Risk-Insurance-Scheme
Insurance Times. (2015). The political risks of doing business in Indonesia. Retrieved 15
October 2016 from http://www.insurancetimes.co.uk/the-political-risks-of-doing-
business-in-indonesia/1415241.article
Knoema (2016). World Bank Commodity Forecast Price Data. Retrieved 16 October 2016 from
https://knoema.com/WBCFPD2015Oct/world-bank-commodity-forecast-price-data-july-2016
Oentoeng Suria & Partners. (2011). Indonesias Oil and Gas Laws A legal introduction.
Attorneys at Law.
PWC. (2016). Oil and gas in Indonesia. Investment and Taxation Guide. 7th edition. Retrieved 21
October 2016 from https://www.pwc.com/id/en/energy-utilities-
mining/assets/May%202016/PwC%20Indonesia-oil-and-gas-guide-2016.pdf
Reuters. (2016). Oil industry welcomes Indonesia's tax reform, but says it's not enough from
http://www.reuters.com/article/us-indonesia-oil-gas-idUSKCN11T0E9
World Bank. (2016). Implementation Agreement (Example 1). World Bank Group. Retrieved 20
October 2016 from https://ppp.worldbank.org/public-private-
partnership/library/implementation-agreement-example-1
39
Appendix
Appendix A1_ Risk Register with Mitigation Measures
Type of Risks Descriptions Mitigation Descriptions Risk Allocation
40
gas due to exploding be any loopholes. Signing Service Consortium
of PSC - Energy Level Agreement.
Digital
Pre-explosion
risk analysis
and precaution
measures Consortium/
External
Contractors
Technology Risk Equipments not able Service Level Claiming from Suppliers or O&M Suppliers or O&M
to perform up to Agreement / Contractor when equipments are not Contractor
specifications (e.g. Equipment performing up to
pumps) Performance standard/specification.
Agreement or
Product
Warranty
Market (Price and Higher than expected Fixed-Price Contract the Operator at a fixed price Operator
Quantity) & operating cost Contract for to transfer the risk of having higher
Operating Risk escalation rate due to Operator OPEX .
macroeconomic
factors such as
surging inflation rates
- Investopedia
Hedging the
risk of price
fluctuations
with futures
contracts in the
derivatives
41
market.
Take short position in brent oil
futures, to mitigate any form of
1. Long Term downside exposure. Consortium
Contracts
Inability to retain key
personnel in running 2. Establish
the PSC - equates to Proper
higher OPEX - Succession
Energy Digital Plans
3. Penalties and
LD
42
Financial Risk Forex Risk Defining the Clauses in the long term sales Consortium/
currency agreement of oil and gas should
denomination specify the transaction currency to be Offtakers
of revenue in USD.
streams in
USD.
Interest rate
swap Fixing the interest rate payable to
lenders, albeit at a higher nominal
Interest Risk- rising rate. Consortium /
LIBOR due to global Lenders
economic recovery
Performance of
Insolvency risk of Undertaking / Signing Letters of Performance of
Sponsors and Corporate Undertaking or Guarantees by the
offtakers - Energy Guarantees Parent Companies.
Members of the
Digital Consortium /
Parent Companies
Set up a contingency fund for senior
debt service - DSRA (Debt service
reserve account).
Political Risk Expropriation, or Political Risk (From IES) - PRI is able to cover Consortium/
blocking expatriation Insurance / risks such as expropriation, currency
of profits overseas by Memorandum inconvertibility, political violence, Agencies providing
Indonesian Govt; lack of breach of contract by host the PRI (KFW)
of electricity in Understanding / government and non honouring of
Indonesia - Guarantees and sovereign financial obligation.
Kabupaten Muara assurances from However, up to a certain amount
Enim . May take over host country ($500,000SGD in the case of IES).
the PSC or demand
part of the supply to
Indonesia; reduces ECA loan
the profit forecast counter
because prices is guarantee ECA Loans come with a counter
fixed by PLN. guarantee from the host government
which incentivise them to abide by
Rising Taxes (e.g. their promised commitments; less
Labour, Property and probable to perform acts of
etc) - Energy Digital. expropriation, pre-mature termination
Rising Tax is or any other unprecedented ECA/ Government
probable due to the manoeuvres to undermine the success
environment damages of the project.
during the BP Oil
Spill
Signing a bilateral agreement with
the Government to garner support
43
during the years of operations.
Implementation
Agreement
Having accounts and transactions
taking place overseas so that
Indonesian government have no
control.
Offshore
Account Consortium/
Having local Indonesian company Government
within the Consortium. Less likely
government will undermine business
with local entities
Strategic
Consortium Consortium
Structure
Consortium
Legal Risk Changes in World- Loan SPV can only accept the risk. SPV Consortium
wide Energy Policy - Refinancing, can source for additional funds
Clover Cash Sweep, through loan refinancing, Cash
DSRA Sweep, or from the DSRA when
more money are needed to pay the
policy changes e.g. tax, or machinery
that are more environmental friendly.
Environmental Methane and black Service Level Vapor recovery units that reduce Service Provider
Risk carbon, two potent Agreement emissions from the well or tighter
greenhouses gases, (SLA) with valves that prevent fugitive
will likely be emitted Vapour emissions. Fine the Service Provider
in significant amounts Recovery Unit if they are not able to limit emissions
during drilling to a level according to the SLA.
44
Oil spill - BP Case
Establish A well trained, properly resourced
Oversight and adequately funded team should
Committee / be set up to carry out effective and
Independent Oil efficient supervision of oil
Rig Inspectors drilling.This will provide necessary
checks and balances and avoid Consortium
oversights as well as offer
recommendations where necessary.
45
Force Majeure Having Hurricane/ Insurance Purchasing Insurance SPV will get Consortium/
Risk Typhoon/ Storms. payout in the event of Force Majeure.
May affect extraction However, such insurance might not Insurer
operations. be available, or payout will be
limited.
46
Appendix A2_ Oil and 6-Month LIBOR Model
47