BRIEFING DOCUMENT TO PORTFOLIO COMMITTEE ON FINANCING OF BEE IN THE EXPLORATION PETROLEUM, GAS

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BRIEFING DOCUMENT TO PORTFOLIO COMMITTEE ON
FINANCING OF BEE IN THE EXPLORATION PETROLEUM,
GAS MINERALS SECTORS in association with

SEITLHAMO ENERGY
March 2003
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CONTENTS

• Presentation Purpose and Presentor Introduction -
  AMEF
• Current Status of BEE in the SA Exploration
  Industry - SE
• Barriers to BEE Entry - SE
• Key BEE Financing Risk Barriers - BOR
• Red Herrings of some BEE Financing Structures -
  BOR
• Financing Other Mitigation Strategies - BOR
• Sample BEE Exploration Financing Structure BOR
• Questions Answers - ALL
• Presentors Contact Details
• Annexures

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THE PURPOSE OF THIS PRESENTATION IS TO

• Discuss some of the barriers to BEE financing in
  the exploration sectors of the SA Petroleum,
  Liquid Fuels, Gas and Minerals industries and
• Present discuss possible solutions relating to
  financing of BEE in these critical and essential
  SA economy industries

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ABOUT AMEF

• AMEF was established to assist and promote BEE in
  the mineral and energy sectors of SA economy to
• To promote active participation of Black Business
  in the Minerals and Energy sector
• To rapidly achieve commercially sustainable
  market share of at least 25 by BEE companies in
  the relevant sectors
• To assist in overcoming barriers to entry and
  building capacity of AMEF members
• To create forums for networking with government,
  industry and other BEE initiates
• To address disparities in the availability of
  energy services and
• To promote training and development programmes

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ABOUT BORONGWA

• Borongwa is a majority black female owned,
  operated and managed entity formed to exploit
  sustainable income and dividend investment
  opportunities in the ENERGY, RESOURCES,
  Infrastructure Logistics and Trading arenas
• The entrepreneur founders have acquired vast and
  valuable experience in business and corporates
  during their careers and business ventures
• As a South African womens group Borongwas focus
  is to invest and be meaningfully involved in
  profitable long term appreciable investment
  opportunities and
• Borongwa is committed to the sustainable economic
  growth, transformation and entrepreneurial and
  SMME development of South Africa through an
  integrated partnership approach

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ABOUT SEITLHAMO

• Seitlhamo Energy is wholly black energy company
  focused on the SA gas market with emphasis on
  developing the HDE in the Liquefied Petroleum Gas
  market
• Seitlhamos primary mission is to positively
  impact the lives of South Africans through the
  economic, social and safety of investing in the
  SA LPG market
• Seeks to positioning itself to become the leader
  in the Liquid Petroleum Gas market in mainstream
  South Africa and
• The company has begun to develop extensive
  distribution networks. Essential relationships
  are being established with the people these
  companies serve. These relationships are
  expected to hold great potential for ensuring the
  advancement of HDEs in the SA Gas Market

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CURRENT STATUS OF BEE IN OFFSHORE EXPLORATION

• There are no known established BEE companys in
  the SA Offshore Exploration Petroleum or Gas
  Arenas
• Only a few Historically Disadvantaged SA (HDSA)
  companies have started to penetrated the
  downstream SA Liquid Gas Petroleum arenas
• To help facilitate BEE in the SA Upstream market,
  PASA requires that each SA offshore exploration
  licensee have
• At least a 10 BEE partner and
• At least a 10 co-nominated free carry by the
  state

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BARRIERS TO BEE ENTRY
Illustrative example
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KEY BEE FINANCING BARRIERS
Illustrative example
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RED HERRINGS OF SOME BEE STRUCTURES

• Deliberate Cash Traps
• Dividends Only Structures
• Transfer Pricing Schemes
• Exorbitant Management Fee Contracts
• IRR Returns less than the Cost of Capital (Ke)
• Exclusion of BEE from High Value / High Margin
  Operational Activities
• High Funding Costs / Exorbitant Financial
  Institution Rates
• Excessive Debt Covenants / Debt Service Provision
  Restrictions
• Inflexible Repayment Terms
• Double Dipping (i.e. Inflation Linked Mark-ups)
  and
• Inappropriate Balance of Risk Return (i.e. up
  side carry on concessions)

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FINANCING MITIGATION STRATEGIES

• PPPs
• Assured off-take agreement contracts
• Sponsor support agreement
• Full Allocation of New Exploration permits and
  licenses to HDSA companies
• Extraordinary BEE Investment Tax Credits
• Tax Free Special Project Bonds
• Structure debt to enhance shareholder returns
  (prefs, lower Ke)
• Fund Equity Stake out of Future Operational
  Revenues
• Higher Energy Prices
• Exploration Fund for Jr. BEE Companies
• Preference and Cumulative Dividend Distribution
  Policy
• Fixed Rate Debt and/or funding from favorable tax
  rate payers
• Increase GTL Market Incentives / demand

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OTHER MITIGATION STRATEGIES

• Participation by BEEs in High Value Chain Areas
• BEE Regulatory Framework
• Create a Petroleum, Gas Minerals studies
  curriculum
• Formation of accredited SA exploration training
  programs
• Broader participation by industry players in
  various BEE summits and colloquiums
• BEE measuring and monitoring system /
  Comprehensive industry Scorecards
• Encourage and Support early participation by BEE
  in these industries

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RISK MITIGATION MATRIX
Illustrative example
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EXPLORATION FINANCING STRUCTURE
A variety of financing structures need to be
thoroughly considered when evaluating exploration
opportunities for BEE
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TRANSACTION OPERATION STEPS

• A BEENewCo to be formed, with ordinary shares
  members including empowerment shareholders (say
  26)
• Members to contribute an agreed cash capital
  infusion amount to a newly formed Project Co JV
• Empowerment partners could raise investment
  capital in the following ways
• A. BEENewCo to issue BEENewCo CPI-linked debt,
  P/Ns or pref shares to the market whereby
  lenders could look solely to the proceeds of
  income from the ProjectCo JV or
• B. In the alternative, a funder could provide a
  predetermined amount of debt and/or subscribe for
  cumulative redeemable preference shares in
  BEENewCo with attached calls for developed
  production. Such call Options would grant a
  sponsor the right to buy a predetermined amount
  of annual production attributable to the BEENewCo
  at a pre-agreed price or
• C. Non-HDE sponsor to consider utilizing its own
  Balance Sheet to fund a significant portion of
  BEENewCo funding by issuing different class
  shares and then on lends to BEENewCo at par or
  with a markup or 
• D. Construct tax efficient annuity insurance
  policy to procure BEE funding

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TRANSACTION OPERATION STEPS

• BEENewCo to utilize the funder proceeds to
  acquire stakes in Project Co JV
• BEENewCo consortium members would be operational
  and create a value proposition in the Project Co
  JV. Revenue stream from these activities will
  flow through the various BEENewCo Project Co
  JVs
• Agreed Net Profit Dividend Allocations,
  Management and Debt Service fees from ProjectCo
  JV to flow directly into BEENewCo Escrow
  Sinking fund.
• Trustees of BEENewCo Escrow sinking fund to use
  the income to cover reasonable BEENewCo
  operational management agreement costs and also
  settle in order of priority its debt and
  preference equity redemption requirements to
  lenders

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KEY FEATURES OF SUCH STRUCTURES

• Such structures take into account the follow key
• characteristics and assumptions
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• Complies with the legislative requirements of the
  RSA government for the Petroleum, Gas and
  Minerals industries
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• Offers a more tax efficient and value proposition
  for shareholders
•  
• Allows for funding flexibility as well as broader
  based empowerment
• Effective value for money proposition for
  existing shareholders

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KEY FEATURES OF SUCH STRUCTURES

• Such structures takes into account the follow key
  
• characteristics and assumptions
•   
• Outside funder ability to underwrite the equity
  contributions of BEENewCo consortium members
• Strong demand from the market and pension funds
  for higher yielding inflation linked debt
•  
• The revenue payable profits procured by the
  BEENewCo should be sufficient to pay principal
  and interest (or at least interest) on the
  BEENewCo funding

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QUESTIONS AND ANSWERS
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PRESENTORS CONTACT DETAILS
Siviwe Mafanya - AMEF Telephone [phone]
5583 Mobile [phone] Fax [phone]
5588 E-mail siviwe_at_africoil.co.za Janice Van
Wyk Borongwa Holdings Investments (Womens
Group) Telephone [phone]
0408 Mobile [phone] Fax [phone]
0407 E-mail jvwyk_at_yasny.co.za Borongwaj_at_yasny.co.
za Rudy Roberts Seitlhamo Energy
Group Mobile [phone] E-mail
rudyr_at_telkomsa.net
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ANNEXURE
RELATIONSHIP STRUCTURE BREAKDOWN OF SAMPLE
BEE FINANCING STRUCTURE
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CONTRACTUAL RELATIONSHIP
HDSAs/HDEs
Other Strategic Third Party Investors
Lenders
Equity and/or Project Company Cash Infusion
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Provider of BEENewCo Debt/Pref./Equity Funding
Redemption by BEENewCo trustees of BEESPV
shareholder loans preference share funding
BEENewCo Consortium
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Operations Asset Management Agreement
Acquisition of Equity Stake in Project Co.
BEE Escrow Sinking Fund Account
ProjectCo JV
Production Call option
Non HDE Sponsor/Partners
Put option Convertible stock swap into the the
Non-HDE sponsors stcck in event of default of
principal and interest
Equity and/or Project Company Cash Infusion
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OPERATIONS CASHFLOW RELATIONSHIP
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Redemption of HDEs debt equity Funding
HDSAs
FUNDER
Allocation of portion excess operational profits
dividends
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Put / Call Option
Put option
Net Profit Proceeds
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BEENewCo ESCROW SINKING FUND ACCOUNT
BEENewCo
ProjectCO JV
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BEE Value Proposition and Operations Management
Agreement
Reinvestment of portion excess operational
profits dividends
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Reasonable operational costs
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SEITLHAMO ENERGY
THANKS YOU
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