Topic Tunisia

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number	26678
Company name	Topic SA
Country	Tunisia
Sector	Oil, Gas and Mining
Environmental category	B
Department	Oil, Gas, Mining And Chemicals
Status	Pending Approval

Date SPI disclosed	March 21, 2008
Projected board date	April 21, 2008

View Environmental & Social Review Summary (ESRS), click here

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

TOPIC, S.A. (TOPIC or the company) is a small Tunisian oil and gas exploration and production (E&P) company, with interest in three oil and gas blocks in Tunisia:

- 100% interest in the offshore Halk el Menzel (HelM) concession block;
- 15% interest in the onshore Jelma exploration block; and
- 50% interest in the onshore Douleb West prospecting block.

The company is not currently producing from any of its blocks.

IFC has been requested to provide a financing package to the company to partially fund TOPIC’s 2008-2011 investment program, which includes:

- the development of an oil discovery in HelM;
- acquisition of seismic data and drilling of exploration wells at HelM and TOPIC’s other blocks; and
- further business development activities.

Anticipated development impact of the project

- Fit with the World Bank Group Strategy:

The World Bank’s most recent Country Assistance Strategy (CAS) for Tunisia, proposes to help the Government of Tunisia (GoT) address three challenges:

- strengthen the business environment to support the development of a more competitive, internationally integrated private sector and improve competitiveness of the Tunisian economy;
- enhance skills and employability of graduates and labor force in a knowledge economy; and
- improve the quality of social services through increased efficiency of public expenditures. IFC’s strategy in Tunisia is to focus on where IFC can add value and foster private sector development especially in sectors currently not properly serviced by Tunisian commercial banks, including the oil and gas sector. The proposed IFC investment is therefore fully consistent with this strategy.

- Development Impact:

- Benefits to Government of Tunisia
The project is expected to provide GoT with considerable revenues from TOPIC’s operations in HelM, through the collection of a 10-15% royalty and a 50-75% profit tax (current estimate of about $133 million in revenues to GoT by end of 2012 under IFC’s base case). TOPIC will also have an obligation, as per Tunisia’s Hydrocarbon Code, to sell 20% of its oil production to the local Tunisian market at a 10% discount to international prices.

- Direct and indirect local employment and training:

The proposed project and continued growth of the company is expected to bring direct and indirect local employment and training. It is estimated that the development of HelM alone will generate 200 direct and indirect jobs during construction and 100 during operations. All TOPIC’s staff are currently Tunisian and it is expected that at least 90% of direct and indirect jobs created will be local.

- Local supplier linkages / community development:

The proposed project is expected to benefit local communities by way of purchases of local goods and services. For example, the construction of the production facility for HelM will be built at the port of Sfax, in Tunisia, and will require substantial inputs from local industrial and marine subcontractors. Over 50% of Project capex is expected to be sourced locally.

- Promoting local independent player:

The project will support one of the very few locally-owned private sector North African upstream companies and help it grow and reach international best practice on environmental and social issues and corporate governance.

Governance risks assessment

Benefits from this project accrue from a variety of sources, including employment, supply linkages, and contributions to government revenues. The project’s revenue contributions to the GoT are a small share - less than 0.35% - of total government revenues. The GoT’s share of revenues accrues entirely to the central government. The GoT manages these revenues together with all other government revenues. For 2008, GoT was expected to spend 38% of its budget on payment of salaries (mainly in administration, education, and healthcare sectors), 21% on development projects, and 23% on debt repayments. According to Transparency International, Tunisia has a Corruption Perception Index of 4.2 and is ranked in the 61st position out of 180 countries graded in 2007. In its assessment, IFC has considered the value of the Project’s benefits, and governance and other risks to these benefits. IFC believes the risks to Project benefits not being realized, is relatively small. The non-revenue benefits which are significant, such as strengthening domestic energy production, generating jobs, purchases of local goods and services are unlikely to be impacted by weak governance. The Project is also consistent with overall World Bank Group objectives in the oil and gas sector; including helping to strengthen private sector participation in the sector.

IFC's expected development contribution

- Mobilize financing:

IFC will provide financing to the company and help it mobilize additional equity financing to complete the project’s financial plan. As a small local company, TOPIC has limited ability to raise funds in the international capital markets and local financial institutions are not as familiar with the oil and gas sector. IFC’s participation in the transaction will therefore be key to catalyze co-investment from other potential investors.

- Long-term partnership:

IFC will play an important role as long term partner to TOPIC, capable of providing follow-up debt or equity financing across business cycles. The company will potentially be requiring significant additional financing if its exploration activities are successful. IFC will also be able to provide TOPIC with technical and strategic guidance for its future international expansion.

- Stamp of approval:

As a company in its early stages of development, TOPIC sees IFC’s investment as providing an important validation of its strategy and technical expertise for other investors. IFC is also expected to assist TOPIC in corporate governance matters, in preparation for a potential IPO.

- Environment and Social (“E&S”):

The company’s management is committed to high E&S standards and is eager for IFC’s advice and guidance on E&S international best practice, including on improving their E&S management systems, commissioning of Environment and Social Impact Assessments, etc.

Environmental and social issues - Category B

This is a Category B project according to IFC’s Procedure for Environmental and Social Review of Projects because a limited number of specific environmental and social impacts may result which can be avoided or mitigated by adhering to generally recognized performance standards, guidelines or design criteria. The review of this project comprised an appraisal of the Project’s technical, environmental and social information, visiting some of the key oil and gas operations in Tunisia, as well as interviews with company managers and operations’ personnel.

The information about how potential impacts of the project and how they will be addressed by the company is summarized in the Environmental and Social Review Summary (ESRS) and in the Action Plan agreed with the client.

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