Salamander UJV

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	27318
Company name	Salamander UJV
Country	East Asia and Pacific Region
Sector	Oil, Gas and Mining
Environmental category	B
Department	Oil, Gas, Mining And Chemicals
Status	Active

Date SPI disclosed	November 20, 2008
Projected board date	December 23, 2008
Previous Events	Invested: January 20, 2009 Signed: January 14, 2009 Approved: January 7, 2009

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”) has invited IFC to support certain of its exploration activities in South East Asia, by acquiring a project-level equity interest in:

- the Savannakhet production sharing contract (“Savannakhet PSC”) in Lao PDR (“Laos”) and the adjacent concession L26/50 in onshore Thailand, as well as,
- L15/50, another concession onshore Northeast Thailand (together known as the “Project”).

Currently, the company has a 70% interest in the Savannakhet PSC and a 100% interest in the Thai concessions, and is the operator of all three blocks.

Anticipated development impact of the project

Fit With World Bank Group Strategy:

The most recent World Bank Group Country Assistance Strategy for Laos (FY07-11WBG CAS) has four major aims:

- private sector development and finance;
- sustainable natural resource development;
- public financial management; and
- poverty reduction.

Thailand’s National Development Agenda, which forms the framework for a partnership between Thailand and the World Bank, is built around four pillars, including “Natural Resources and Environment”. The Bank has also been supporting Thailand’s emerging role as a development assistance donor and an advocate for strengthening regional cooperation. The Bank also supports the Lao-Thai Partnership in Sustainable Hydropower Development to ensure that future hydropower projects in Laos will be friendlier to the environment and the people affected by them. It also works with the Ayeyawady-Chao Phraya-Mekong Economic Cooperation Strategy Business Council to promote investments and strengthen private sector cooperation within the Greater Mekong Sub-region.

Within this overall framework, IFC’s strategic priorities in the region are to:

- increase impact in IDA countries;
- lead efforts to address climate change; and
- reach the underserved in frontier regions.

In the oil and gas sector, IFC’s focus is to pursue more early equity investments (for which capital from other sources is more limited) and to be a long-term partner for companies that seek to attain international standards in their operations, including environmental and social practices, while supporting countries in the sustainable development of their domestic sources of energy, especially natural gas (a clean source of fuel). This investment is consistent with both the World Bank and IFC strategies, since it supports a junior oil and gas company operating in an IDA country (Laos) and a frontier region (Northeast Thailand) and in a project focusing on development of natural gas resources.

Development Impact:

Should the project progress successfully to commercial production, it is expected to generate the following development impacts:

Pilot Development Of The Upstream Sector In Laos: Salamander’s activity represents the first investment in upstream oil and gas in Laos since 1998. If the Company is successful in its exploration efforts, the Project would help demonstrate the viability of investment by small independents in the Lao upstream sector and help catalyze the development of an upstream industry in the country.

Supporting Further Regional Cooperation Between Laos And Thailand Through Potential Export Of Gas/Electricity To Thailand And Cooperation In Other Infrastructure Development In The Bordering Area: Thailand is expected to be, at least initially, the principal market for Laotian gas. Discovery of gas may lead to development of gas-fired electricity generation in Laos, with any excess electricity exported to Thailand. This will help further development of the infrastructure in the region which already exists for the export of hydro power from Laos to Thailand and the import of gas-fired generated electricity from Thailand to Laos during the dry season.

Increased Supply Of Domestic Sources Of Energy, Import Substitution, Promoting The Development And Use Of Natural Gas As A Cleaner Fuel: The Project will increase the supply of domestic sources of energy in Laos and Thailand, helping reduce their need to use limited foreign currency reserves for expensive energy imports. The investment will support the exploration for and development of natural gas reserves, a cleaner source of fuel.

Supporting Local Economic Development Through Payments To The Government: The governments of Laos and Thailand will receive fiscal receipts from hydrocarbon production taxes, bonuses and corporate taxes generated by the investment. Under the Savannakhet PSC, the Government takes 45% of oil or 37% of gas as its share of profit petroleum and an income tax of 30% on taxable profits in addition to various production bonuses, rentals, training and government assistance payment. Under the Thai concessions, the Government takes a royalty of 5-15% of gross revenue and an income tax of 50% on taxable profits. Approximately 15% of royalties in Thailand are expected to ultimately accrue to the regions where the oil and gas activities are undertaken.

Creating Some Job Opportunities And Providing Training In Local Communities: The Project will generate some job opportunities in Laos and Northeast Thailand, where agriculture is the primary business and few other job opportunities are available. In addition, the Company will also contribute to training of local staff and development of a domestic labor force with knowledge of the oil and gas industry.

IFC plans to monitor the following development impacts:

- gas sales;
- payments to governments; and
- employment.

Governance risks assessment

It is expected that benefits from the project will accrue to different levels of government in Laos 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 each country 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 Laos, poverty reduction and government capacity building have been the priority for the WBG country strategy. 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

Long-term Partnership & Political Risk Mitigation: Salamander views IFC as a strategic partner and would like to have IFC’s presence in the proposed investment by building on its role as corporate debt provider and equity investor. Political and regulatory risks remain key factors which could affect Salamander’s business in South East Asia, including Laos and Thailand. The company believes IFC’s presence as a key long-term investor helps to mitigate these risks through IFC’s reputation and special relationship with governments in the region.

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 South East 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.

Environmental and Social (“E&S”) Risk Mitigation: The company views leadership in the area of environmental and social performance as a key differentiating factor (vis-�-vis other upstream players) when it negotiates for new licenses with governments and regulatory authorities. Management of environmental, social and reputation risks becomes more important as the Company is the operator in Laos, which has historically limited exposure to the oil and gas industry. The company has expressed a keen desire to tap IFC’s unique global experience and expertise on environmental, social, health, and safety issues and has also started discussions with IFC regarding additional value-added services that may be provided through IFC’s various Technical Assistance facilities in the region. In addition, IFC’s involvement and support also provides comfort to other financiers, regarding E&S risk management.

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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