Salamander

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	26478
Company name	Salamander Energy plc.
Country	Indonesia
Sector	Oil, Gas and Mining
Environmental category	B
Department	Oil, Gas, Mining And Chemicals
Status	Active

Date SPI disclosed	May 5, 2008
Projected board date	June 5, 2008
Date revised SPI disclosed	June 30, 2008
Previous Events	Invested: June 30, 2008 Signed: June 13, 2008 Approved: June 6, 2008

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

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

Salamander Energy plc (Salamander or the company) is a young rapidly-growing independent oil and gas company exclusively focused on Southeast Asia. The company’s strategy is to build a sustainable upstream business through leveraging its regional knowledge and relationships; maintaining a balanced portfolio of production, development, appraisal and exploration assets; enforcing strict capital allocation discipline; and pursuing targeted acquisitions in addition to organic-led growth. Since its foundation in early 2005, Salamander has developed a broad set of assets, including producing and near-production interests in Indonesia and Thailand as well as exploration and appraisal properties in Indonesia, Thailand, Vietnam, Lao and the Philippines. As of end-2007, the company reported net reserves of 56.6 million barrels of oil equivalent (boe) and average daily production of 7,820 boe. Salamander is largely owned by institutional investors, with no single investor holding a stake of over 10%, and is listed on the London Stock Exchange.

IFC has been requested by the management of Salamander to provide up to $75 million of financing to help fund the company’s planned 2008-2010 investment program. The project is primarily expected to cover the capital and operating expenditure needs of the following producing and near-production assets:

- the E5-N and EU-1 Concessions (Sinphuhorm) and the Block B8/38 Concession (Bualuang) in Thailand; and
- the Offshore North West Java (ONWJ) and South East Sumatra (SES) Production Sharing Contracts as well as the Glagah Kambuna Technical Assistance Contract in Indonesia.

It will include:

- the drilling of new wells;
- the selective work over of existing wells;
- the deployment of a floating production storage and offloading (FPSO) vessel;
- the installation of two offshore production platforms;
- the laying of connection pipelines; and
- the construction of gas processing facilities and other field infrastructure.

The project will also include capital expenditure on exploration and appraisal in the company’s other interests in Southeast Asia, the potential acquisition of additional oil and gas properties, the refinancing of existing indebtedness and other general corporate uses. Salamander projects that the project will help it to increase its production more than twofold – to reach over 16,000 boe per day by 2010.

Anticipated development impact of the project

Fit with World Bank Group (WBG) Strategy

In Thailand, the World Bank’s role has evolved from lending towards facilitating knowledge sharing and providing policy advice. Within this broad framework, IFC seeks to provide long-term finance and risk management products for increased investment in infrastructure, as well as support viable projects in key growth sectors. In Indonesia, WBG assistance aims at public sector reform, disaster risk management, increased financing for poverty alleviation, and stronger partnerships to improve the business environment and infrastructure development. IFC’s proposed engagement with a smaller regional company in the upstream oil and gas sector investment is therefore aligned with strategic objectives for the WBG engagement in Indonesia and Thailand.

Development Impact:

- Enhanced Availability of a Cleaner Fuel:

The Project will support the development of natural gas reserves, in line with WBG commitments following the EIR. The increased availability of natural gas will promote the use of a cleaner fuel (given that natural gas has much lower carbon emissions than coal which is frequently the alternative fuel for power generation in Southeast Asia).

- Preservation and Creation of Employment:

The Project will have a sustaining impact on existing employment levels in producing assets and will contribute to the creation of new jobs in assets about to enter into production. For example,

- the ONWJ and SES assets currently provide more than 1,400 permanent jobs and over 1,000 temporary/construction jobs, and
- the bringing into production of the Kambuna and Bualuang assets is expected to generate an additional 150 permanent jobs.

Salamander staff positions are generally remunerated at a 25%-30% premium to other comparable employment. The percentage of nationals in managerial positions tends to be high, mostly above 75%.

Contribution to Central and Local Government Revenues:

The project will generate significant fiscal receipts from a combination of royalties (12.5%), corporate taxes (41.5%-50.0%), production sharing (42% to 71%) and obligations to supply domestic consumers at below-market prices. A material portion of these – approximately 15% of royalties in Thailand and 15-30% of total government payments in Indonesia – is expected to ultimately accrue to the regions where the oil and gas activities are undertaken.

Generating Additional Business for Local and National Suppliers:

The project is expected to have a positive impact on national and regional economic activity through the purchasing of equipment, products and services. For example, in 2008 contracts worth more than $45 million are expected to be sourced from regional and national suppliers in Indonesia and Thailand.

Promoting Competition and Attracting FDI in Frontier Countries:

The project promotes competition in the oil and gas sector through the growth of one of very few independent E&P companies exclusively focused on Southeast Asia. The participation of smaller privately-owned companies is important to the industry, as they

- often focus on reserves deemed too small to be of interest to the majors and the national oil companies which dominate the sector in Southeast Asia, and
- deliver production and recovery rates which tend to be above industry averages.

In addition, if the company is successful in its exploration efforts in frontier/IDA countries such as Vietnam and Lao, the project will help demonstrate the viability of investment by small independents in their upstream sectors.

Governance risks assessment

It is expected that benefits from the project will accrue to different levels of government in Indonesia and Thailand in the form of royalties and taxes. In evaluating this project, IFC took into consideration the value of the project’s benefits and governance and other risks to these benefits. In particular, it utilized a range of governance assessment methodologies, including but not limited to Transparency International’s Corruption Perceptions Index and the World Bank Institute’s Governance Indicators, as well as the current relationship between Indonesia/Thailand and the WBG. For the past several years, the WBG has been partnering with Thai public and private institutions on a range of important developmental challenges, including governance and public sector reform. In Indonesia, governance concerns have been a major driver of the WBG country strategy. To support reforms in local governance, the World Bank has established a multi-donor Decentralization Support Facility. On balance, given the governance context, the expected development impact and the projected benefits, IFC believes that this is a project which it should support.

IFC's expected development contribution

- E&S Risk Management and Best Practice:

The company has expressed a strong interest in IFC’s experience and expertise on environmental, social, health, and safety (ESHS) issues. In its initial stages, the company was mainly focused on acquiring minority interests in large producing assets operated by third parties. However, with the addition of a new development asset in Thailand and new exploration and appraisal assets in Vietnam, Lao and Indonesia, in which the company is the operator, Salamander is increasingly focused on the management of environmental, social and reputational risks, as well as the opportunities to enhance value through appropriate responses in these areas. This is of particular relevance in Vietnam and Lao, two countries with historically limited exposure to the oil and gas industry. Salamander is interested in IFC’s unique global expertise on ESHS issues and has also started discussions with IFC regarding additional value-added services that may be provided through either IFC’s various Technical Assistance facilities in the region or through the CommDev facility which focuses on extractive industries globally.

- Provision/mobilization of financing:

As a young upstream company with robust growth plans but limited operational track record, Salamander requires considerable capital and yet has limited financial resources. By providing financing to Salamander, IFC is increasing significantly Salamander’s chances of successfully pursuing its development plans.

- Long-term partnership:

Salamander has stated that it views the upcoming financing as a platform for a long-term relationship with IFC, given the fit between its growth objectives and IFC’s development mandate and unique set of capabilities (both on the financing and advisory sides). Potential forms of further collaboration which have been considered include IFC equity investment at the asset level in frontier/IDA countries, and technical assistance with the preparation of a Community Development Strategy.

- Local knowledge and sector expertise:

The company values IFC’s advice on country and sector issues given its on-the-ground presence and extensive past history of engagement in Southeast Asia with both private and public counterparties. For example, Salamander has sought feedback from IFC on a major power market study of the Mekong Delta region which it had commissioned in order to identify potential monetization strategies for gas reserves in the area.

- Political Risk Mitigation:

Salamander has identified political and regulatory risks among certain key factors which could affect its business in Southeast Asia. The company believes IFC’s presence as a key long-term stakeholder offers certain protection against arbitrary political action through its reputation and special relationship with governments in the region.

Environmental and social issues - Category B

The project is a Category B project according to IFC’s Policy for Environmental and Social Review of Projects because it has limited adverse social or environmental impacts that are few in number, are site specific and will largely be reversible and readily addressed through mitigation measures. Key issues include completion of a comprehensive environmental and social management system, oil spill response, waste management; labor and working conditions; land acquisition and compensation, public consultation and disclosure and community development which are described in detail in the Environmental and Social Review Summary (ESRS).

Salamander has committed to an Action Plan, pursuant to which it will finalize a detailed Corporate Environmental and Social Management System. This will include labor and working conditions, liquid and solid waste management and managing third party performance, and the preparation of emergency response and oil spill response plans.

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