The Convergence of Commodities and Capital Markets George

The Convergence of Commodities and Capital Markets George Manahilov, Barclays Capital Commodities January 18, 2007

The Big Picture: Commodity markets vs. capital raising Market Fundamentals: § Growth Global growth prospects are looking strong } Increase in demand for commodities } China } § Volatility Commodities are the most volatile asset class } Cyclicality } Geopolitical tensions } § Infrastructure scarcity § No “Bubble” Implications on Capital Raising: § New investors Private equity – driving force } New investors – pension funds, institutional } Commodity as an asset class } § Evolution of commodity markets Complexity } Volatility } Liquidity } Execution risk } § Financing and credit – a direct link to commodity hedging 2

Investing in Commodities as an “Asset Class”? 3

Commodities: the new “Asset Class” § Asian demand } China is currently the biggest user of coal, iron ore, steel, copper, nickel and aluminum § Shortages } Oil supply peaking? } Coltan – columbite-tantalite (for mobile phones) is tight } Copper } Water § § Current Environment: New Asset Class Climate change } CO 2 emissions and global warming } Near-term impact on M&A and IPO valuations still driven by short-term factors such as weather From food to biofuel } Brazil is putting half of its sugar crop into ethanol production } Up to a third of US corn crop will soon be used to make ethanol 4

Capital demands to alleviate the scarcity are enormous § IEA estimate until 2030 is US$16. 5 trn, } equivalent to 1% of global GDP or 4. 5% of global investment } for the next 25 years at least …. and we believe this is far too conservative Source: IEA 2003 World Energy Investment Outlook 5

Supply constraints: there is not a huge excess of oil in storage Global inventory change and oil prices Global oil supply and demand Non–OPEC supply well below forecast Source: Barclays Capital Research, ICE 6

China: commodity demand is getting stronger Chinese oil demand relative to others (mb/d) Thousand b/d China oil demand growth has improved in 2006 (Y/Y Change) Source: Barclays Capital Research 7

Ultimately, investors search for diversification US equity market sector weighting for oil and gas, % total market 1973 -05 UK equity market, industry sector performance, geometric annual return versus market return, 1970 -80 Investors are looking more and more towards increasing investment in commodities in periods of persistently high energy inflation Source: Barclays Capital Research 8

and the flows will continue: institutional investors are underinvested in commodities Total assets held by institutional investors are around $US 50 trillion globally. Direct commodity investments at just $US 120 billion represents less than one quarter of one percent of this global portfolio. Commodity investments are one tenth the amount invested in hedge funds and around one quarter the market cap of Exxon. Mobil. Source: Barclays Capital Research 9

Institutional investors are a major force in Commodities Hedge fund activity in commodity markets is still growing, both long and short Net speculative futures position and price in NYMEX WTI crude oil Source: Barclays Capital Research 10

…and investor-focused commodity-linked issuances are exploding Investor Products USD Value of Commodity-linked MTN Issuances ($mm) Barclays Capital provides an extensive range of products to address the requirements of investor clients across a range of asset classes and sectors § Underlying Markets include: Individual commodities, e. g. WTI, nat gas, aluminum, gold, cocoa, coffee, cotton, orange juice, wheat, dry freight } Combinations in a basket, e. g. Metals and Petroleum baskets } Indices, e. g. GSCI ®, DJ AIG CISM } § Products are wrapped as: } } } Index Swaps, e. g. against the GSCI ® TR Index certificates, e. g. Fully funded total return swap Commodity linked notes, e. g. Principal Protected note issued by Barclays Commodity Options – Call, Put, Exotic on basket of commodities or indices Collateralized Commodity Obligations (CCO) – Commodity CDO Mutual Funds – offered by BGI Dealer League Table for Commodity-linked Medium Term Notes Dealer USD(M) equiv No. MTNs % 1 Barclays Capital Group 4, 914 129 51. 32 2 Morgan Stanley 829 25 8. 66 3 Goldman Sachs 587 34 6. 14 4 UBS 548 50 5. 72 5 Merrill Lynch 504 8 5. 27 … … … 20 Commerzbank 20 4 0. 21 Total 9, 477 499 98. 98 This table includes Dealer self-placed transactions Source: www. mtn-i. com 11

The “Ask” from Commodity Dealers – a New Paradigm 12

The evolution of commodity markets § The evolution of commodity traded markets has accelerated the development of commoditylinked financial structures § Commodity dealers have become the predominant source of market liquidity § Banks’ balance sheet extension and commodity structuring capabilities have supplanted Oil & Gas Trading • IPE was founded and the first oil futures contract was launched the following year Metals Trading • Merger of NYMEX • Opening of the Royal Exchange in and COMEX 1571 which eventually evolved into the London Metal Exchange • NYMEX officially formed in 1882 Power Trading • PJM Interconnection Association formed in 1993 to administer power pool • Merchant IPP's most active Power and Gas traders Trading • Banks step in post merchant energy collapse • ICE acquired IPE Today 2001 Mid 1990 s 1980 s Pre 1900 industry participants such as oil companies and utilities in large structured transactions New Markets • Emissions • Chemicals • Plastics • Pulp and paper • Renewables 13

Integration of financing & commodity markets Old World New World Commodity Hedging Financing Capabilit y Financing Capability Commodity Credit Extension 14

Commodity Hedging: ability to deliver the commodity market expertise Select Markets in which Barclays trades: Crude & Products: Crude • Fuel Oil • Heating Oil • Gasoline • Diesel/Gas Oil • Jet Fuel/Kerosene • Naptha NGLs : Mont. Belvieu (TET & Non-TET) • Propane • Butane • Iso-Butane • Ethane • Natural Gasoline Barclays Capital Commodities operates globally across a broad range of asset classes US Natural Gas: NYMEX • US Basis • AECO • Canadian Basis US Power: ISO-NE • PJM • NYISO • ERCOT • MISO • Mid C • PV • Mead • Four Corners • SP-15 • NP-15 • COB Petchems: Benzene • Ethylene • Styrene European Power: UK • France • Germany • Netherlands • Belgium • Spain • Nordic Region European Natural Gas: UK • Zeebrugge Coal & Dry Freight: API 2 • API 4 • Baltic Exchange Routes • Baltic Exchange Time Charters • NYMEX • PRB Emissions: EU ETS • CERs Base Metals: Copper • Aluminum • Nickel • Zinc • Tin • Lead • Aluminum Alloy Precious Metals: Gold • Silver • Platinum Group Metals Other: European Weather Derivatives Commodity Indices Including: Energy • Metals • Agricultural • Softs • Livestock 15

Commodity Hedging: Barclays North American gas coverage Physical & Financial Gas Coverage: § Texas Eastern (M 3/ELA/STX) § Transco § PGE (City Gate) § Socal § § § § § (Z 6 NY/Z 6 non. NY/Sta 65 Z 3) Houston (HSC) Gulf Terra (Waha) Sabine (Henry-hub) Columbia (TCO) Nova (AECO) Trans. Canada Mainline (Niagara/Iroquois/Empress) Opal (Opal) Union Gas (Dawn) Dominion (South Pool) NGPL (Mid. Con) Tennessee (500 L/0 L) El Paso (San Juan/Permian) § § § (Topack/Wheeler/Needles) CIG (Mainline/Cheyenne) West. Coast (Sumas) Gas Transmission NW (Malin) Kern River (Muddy Creek) Northwest Pipe (Sumas) Transwestern Pipeline (Blanco/WTX/Central) Questar (Questar North) Columbia Gulf Transmission (On Shore/LA) Socal (Ehrenberg) West. Coast Energy (Station 2) Tennessee (Z 6/800 L) Gas Locations 16

Financing Capability: Barclays Capital offers full suite of products Borrowing Base Revolving Credit § Very active bank market has put pressure on covenants Volumetric Production Payments § Old technology which keeps evolving – can be principalled or broadly distributed to deliver aggressive pricing; structural features to include non-PDP reserves Second Lien Leveraged Loans § Explosive growth from 2006 continues High Yield Debt § Ability to bridge gap between bank price decks and forward curve by aggressive hedging § Can be structured as both a monetization tool or in acquisition context § Broad distribution platform required to deliver optimal execution § Less flexible than leveraged loans, but can be more aggressively priced than leveraged loans § Broad interest towards oil and gas – Chesapeake did first deal in Europe Mezzanine Loans § Can be principalled or distributed to deliver aggressive pricing § Can be tailored to client needs 17

Case Study: LBO financing § Private equity client was looking to raise capital to finance an oil and gas acquisition from a privately held Transaction Overview seller § Barclays structured a package that included senior secured 1 st lien/2 nd lien structure for approximately 70% of the purchase price § Structure included a 5 -year hedge for approximately 75 -80% of the PDP production from the properties that covered: } Natural gas at the respective basis locations } Natural gas liquids } Crude oil § Barclays was able to leverage its structuring and distribution expertise and offer various financing alternatives as well as very aggressive commodity hedge execution Barclays Delivery to Client – the Pressure Points ü Commitment of Capital ü Speed of Execution Optimizing the financing economics – what matters? ü Underwriter co-ordination ü Covenant flexibility as related to prepayment, capital spending and future acquisitions ü Flexibility on amendments and modifications ü Aggressive commodity execution 18

Commodity credit extension Step 1: Monte Carlo Simulations are run on MTM Exposure Step 2: Take positive MTM exposures and multiply by probabilities to generate credit exposure Probability of each exposure (negative are ignored) Commodity Price Positive MTM Exposures (1/1000 in this case) Credit Exposure (USD) Commodity volatility – a direct corollary to credit exposure? Peak Credit Exposure Mark-to-market Time The challenging part: how to fit commodity credit into capital structure Credit Exposure (USD) Credit Exposure Peak Credit Exposure Risk Allocation Capital Structure Tail Risk Equity Asset Value Correlated with Price Moves Pari passu 1 st / 2 nd Lien Mark-to-market Hedge Settlement Temporary Shortfall Due to Operational Issues 19

Case Study: asset-linked hedge trading line § Client was looking for a dedicated trading line which would allow for hedging significant volumes of its Transaction Overview production at opportune market prices; liquidity from bank group under its revolver was insufficient § Barclays structured a bilateral hedge trading line secured by mortgages over identified unencumbered proved reserves } Client required to maintain certain reserve and production coverage ratios of forecasted production to production hedged } The trading line specifies acceptable parameters for commodity transactions in respect of tenor and volume relative to production forecasts § Trading line was structured to exploit the “right-way risk” nature of commodity assets, thereby maximizing the client’s liquidity through eliminating the need for posting collateral Barclays Delivery to Client – the Pressure Points ü Dedicated extension of credit capacity that is The mismatch – asset value vs. credit? Value (USD) Asset Value Peak Credit Exposure multiples of the size of the revolver capacity ü Hedging flexibility within the parameters of the trading line – NYMEX, basis, oil and gas ü Solved the inherent mismatch between asset values and credit exposure ü Trading line can be converted into a funded VPP at fair market value in the future 20

Other select structured transactions § In 2006 Barclays structured and underwrote $335 million of senior secured facilities to finance the upgrades and expansion of two high-deliverability multi-cycle underground natural gas storage facilities in Texas § Barclays also structured hedges to support the financing European Utility § Barclays’ client had physical LNG contracts which contained embedded optionality related to delivering LNG into various points around the world; contracts were linked to both Dated Brent and Henry Hub § Barclays’ structured option hedge allowed the client to capture the optionality in its contract § In 2005 Pioneer Natural Resources announced the sale of a volumetric production payment in oil and gas assets located within the Spraberry field in Texas to an affiliate of Barclays Bank PLC for $300 million § The VPP interest is to approximately 7. 3 MMboe, consisting of 6. 3 MMbbls of crude oil and 6. 0 Bcf of natural gas $300, 402, 967 Volumetric Production Payment Sole Arranger § based on a monthly schedule through December 2010 Barclays structured and underwrote the financing for the VPP transaction and acted as sole hedge provider § In 2005 Carlyle/Riverstone purchased Petroplus International N. V. ; Petroplus owns refineries in Belgium, § Switzerland the UK with maximum capacity of approximately 240, 000 barrels a day The purchase price of € 475 million was financed with a € 320 million senior bridge debt package underwritten by Barclays Capital; Barclays also provided a crack spread hedge on a significant portion of the refinery output § In 2005 Duke Energy announced it signed an agreement to transfer substantially all of Duke Energy North America's (DENA) portfolio of derivatives contracts to Barclays Capital § Transaction was structured to facilitate the sale of generation plants to LS Power in January of 2006 and Duke’s rapid wind-down of the DENA operation Large Utility owner of oil & gas reserves § Client wished to monetize the value of long-lived reserves and re-invest proceeds in drilling § Barclays’ structure involved the conveyance of a net profits interest in identified oil and gas fields funded by the § issuance of senior notes and equity Client was able to lock in the economics of the transaction via a long-term hedge without consuming corporate liquidity through posting collateral 21

Appendix: Barclays Capital Overview 22

Global Debt Financing Platform 2004 IFR Bank of the Year Recognition by the market and our customers includes 2005 "In an industry with increasingly high barriers to entry, precious few firms have the courage and confidence to challenge the incumbent investment banking oligopoly on its own terms. One firm did just that in 2004, forcing its way towards the top of its chosen businesses and aggressively pushing its own agenda, with stunning results. Barclays Capital is IFR's 2004 Bank of the Year. “ IFR, Dec 2004 2000 2001 rankings Global All Debt, 4 th (up from #10 in 2000); Europe All Debt – 2 nd (up from #8 in 1999); Sterling Bonds -1 st (past five years running); Global Loans - European Investment Bank of the Year 4 th; Euro Bonds – 4 th; US Investment Grade – 5 th; European Loan House of the Year – IFR December, 2004; Sterling Bond House of the Year – IFR, Bob Diamond – European Banker of the Year (2 nd year running) December 2004; Asia-Pacific Bond House of the Year – The Banker, 2005; Best Euro Commercial Paper House- Treasury Management Int’l, 2005. 2002 2003 2004 2005 Manager or Group % Share Manager or Group % Share 1 JP Morgan 12. 7 1 Citigroup 12. 3 1 JP Morgan 10. 0 1 Citigroup 10. 6 1 JP Morgan 9. 1 1 Citigroup 8. 4 2 Citigroup 11. 5 2 JP Morgan 11. 4 2 Citigroup 9. 9 2 JP Morgan 8. 4 2 Citigroup 9. 0 2 JP Morgan 8. 4 3 Bank of America 7. 6 3 Deutsche Bank 8. 4 3 Deutsche Bank 7. 5 3 Deutsche Bank 7. 3 3 Deutsche Bank 6. 4 3 Deutsche Bank 6. 0 4 Deutsche Bank 6. 7 4 Bank of America 5. 3 4 Barclays Capital 4. 7 4 Barclays Capital 5. 3 4 Barclays Capital 5. 1 5 Morgan Stanley 5. 4 5 Merrill Lynch 5. 1 5 Barclays Capital 4. 5 5 Morgan Stanley 4. 3 5 Bank of America 5. 1 5 Bank of America 4. 9 6 Merrill Lynch 5. 0 6 CSFB 4. 9 6 Morgan Stanley 3. 8 6 BNP Paribas 4. 1 6 BNP Paribas 3. 9 6 BNP Paribas 4. 4 7 CSFB 4. 7 7 Morgan Stanley 4. 6 7 CSFB 3. 7 7 Bank of America 3. 9 7 ABN AMRO 3. 8 7 HSBC 3. 8 8 UBS Warburg 3. 9 8 Barclays Capital 4. 2 8 Lehman Brothers 3. 5 8 HSBC 3. 8 8 Merrill Lynch 3. 7 8 ABN AMRO 3. 8 9 ABN AMRO 3. 9 9 Lehman Brothers 3. 7 9 Goldman Sachs 3. 5 9 ABN AMRO 3. 6 9 CSFB 3. 7 9 RBS 3. 7 3. 5 10 HSBC 3. 6 10 CSFB 2. 9 10 Barclays Capital 3. 9 10 Goldman Sachs 3. 5 10 ABN AMRO 3. 5 10 CSFB Source: Dealogic Bondware, Loanware, MTNWare and Euromoney 23

Global Commodities Platform Awards 2005 Commodity Derivatives House of the Year January 2006 Commodities House of the Year Energy Research House of the Year November 2005 November 2006 May 2005 #1 Amongst Lending Banks • Top 3 Financial Institution in Commodities Energy Other Speciality Markets Industrial Materials Investor Products § § § Base Metals § Precious Metals § Plastics § Index Swaps § Commodity Notes § Funds Crude Oil Refined Products U. S. Power & Gas Eur Power & Gas Coal Environmental products Agricultural products Softs Weather Freight 24

Wide Network of Clients Our broad network of client relationships, with natural offsets between industries, allows Barclays to provide all clients with the most aggressive transaction economics Commercial Banks Central Banks Private Banks Beverage Companies Fund Managers Hedge Funds Pension Funds Brokers Airlines Insurance Railroads Telecoms Freight Companies Commodity Dealers Industrials Utilities Transport Retail Oil & Gas Coal Producers Power Generators Manufacturing Jewellery Manufacturers Automobile Companies Mining Oil Refiners Local Government Metal Refiners Travel Sovereigns Barclays Commodities deals with over 1, 000 clients in a wide range of sectors 25

Proven Track Record and Wide Recognition § Barclays Capital Commodities has received a lot of external recognition for its depth of product capabilities Awards 2006 Energy and Commodity Rankings Metals House of the Year Carbon Market Awards 2006 European Natural Gas House of the Year Best Trading Company No 3 Overall No 1 in Metals No 1 in European Emissions Trading No 1 in European Coal May 2006 March 2006 February 2006 January 2006 Awards 2005 Energy Research House of the Year Emissions House of the Year Highly Commended May 2005 Awards 2005 Best Trading Company for the EU Emission Scheme – Runner-up December 2005 Commodities House of the Year November 2005 November 2006 Awards 2005 Commodity Derivatives House of the Year Best Commodity Derivative Provider, Europe December 2005 Gold Award Winner Excellence in Emission Markets Pioneers in Investor Structuring Pioneers in Emission Dealing December 2005 Awards 2004 Risk Awards 2004 Gold Award Winner Energy Trading European Natural Gas House of the Year Energy and Commodity Derivatives House of the Year December 2004 March 2004 February 2004 SL 039 26

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