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How much is enough? Practical experiences and insights of

an audited company

29 October 2014, Vilnius

Gabija Kuncytė, Head of Legal Division

Rytis Valūnas, Head of LNGT Legal Affairs

SC Klaipėdos Nafta

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Klaipėdos Nafta

Profile

• Founded in 1994

• Oil Terminal (in operation since 1959 in

Klaipeda Seaport)

• 72,32% of shares belong to the State

• Publicly Listed (NASDAQ Vilnius SE)

• Also in charge of strategic national project

(Government Decree of 2010 June 21)

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Klaipeda Seaport / Lithuania

2014 October 27

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Lithuania’s gas transmission system

Dependency on a single supplier

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LNG Terminal Project

Visualization of the project

Features

• Technology: FSRU

• Location: Klaipeda Seaport / Lithuania

• Volume: 170 000 m3

• Annual capability: up to 4 bcm3

• Commercial model: FSRU rented on

10 year basis with purchase option

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LNG Terminal Project

Aims and benefits

Third party access will spur competition

Will help to diversify energy sources

Ensures security of energy supply

Import prices will reflect the global market price level

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LNG Terminal Project

Key features implying the need for auditing

Subject to auditing

• State owned and supervised;

• Enshired in the laws of Lithuania as a strategic and national project;

• Fully regulated activity by the National Regulator (costs are

socialized onto consumers via gas transmission tariff);

• Subject to Public Procurement regulations;

• Part of financing comes from institutional banks;

• Encompasses EU element (compliance with EU law);

• Value: ~0,7 bln. EUR (for the operation of 10 years);

• International contractors;

• Extremely tight execution timeline.

Set deadline for completion in the Law on the LNG Terminal

3rd of December 2014 to implement N-1 (EU) standard

Potential for the future (2015 / 2016)

Regional Terminal

Additional commercial activities

• Fueling ships

• LNG auto-trailer reloading

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LNG Terminal Project

Challenges for execution

Jetty

„Independence“

Pipeline

Environmental procedures and

permits

2011 2012 2013 2014

Financing and state aid

EPC

Regulatory environment

EPC Public

procurement

FEED

FEED

EIA, SEIA

Construction and delivery to Klaipėda

Territory planning

Terminal operator development

EIB financing

Creation and implementation of financing plan

People, training, org. structure, procedures

Development of legislation

Technical

specification

Public

procurement

State

guarantee

Amendment of LNG

law

LNG law

Public

procurement

Finished tasks Ongoing tasks

Third party infrastructure Port infrastructure

Gas transmission grid

NIB financing

Deadline set in the LNG

Terminal Law: 3 December

2014 to implement N-1

(EU) standard

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Acting environment is the first thing to consider in doing audit of the

company or particular project

LNG Terminal Project

What is important when considering a project‘s audit?

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Klaipėdos Nafta

Every day's Acting Environment for company‘s activities

For Klaipėdos Nafta

Normally up to 10 audits a year – is a regular thing;

Independent financial audit (including interim financial audits) is obligatory under the International Accounting Standards and International Financial Reporting Standards;

Various case-by-case target or more profound regular audits by Public Procurement office (at least 5 different audits since 2011);

Audits by the National Regulator (LNG Terminal activities regulated under the law with fixed margin of income possible from the Project) – profound full-scope audit is planed after the project is completed;

Regular state audits under the laws by National Audit Office of Lithuania;

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Klaipėdos Nafta

Every day's Acting Environment for company‘s activities

For Klaipėdos Nafta Acting Supervisory Board and Audit Committee – quarterly reviews under the

request of the main shareholder – the State;

Various other both obligatory and regular check-ups by official state

institutions – inspections, offices, others;

Contractual audits under the agreements with financial institutions and major

contractors;

Un-obligatory (but in truth – necessary) environmental, risk management,

insurance and so on and so on audits...

Resume:

In total more than 40 audits in the period of time since 2011 on casual day-to-day activities

basis

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Klaipėdos Nafta

Basic questions

Who?

When? Why?

How much is really enough?

Who should be entitled to audit

these kind of major projects?

Why are such audits

performed?

Should projects like LNG Terminal

Project be audited during execution

phase or afterwards?

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• The first key circumstance – the Project is not

yet completed and should be completed by 3

December 2014.

• Today‘s score – at least 12 various Project

audits, that makes it the most audited national

project before end-up-date.

• The Project yet subject to various audits in

the future (i.e. the Government initiated

international audit).

LNG Terminal Project

Some basic facts on LNG Terminal Project audits

AUDIT SCORE

0 1 2

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• “The FSRU should be the most economical and fastest

solution to implement, granting the lowest regasification tariff

and requiring the lowest capital expenditures”.

<…>

• “A 4 Bcm LNG terminal would be the optimal size to meet

Baltic current limited gas demand and to exploit the likely

increase in future demand through scalability of the investment.”

- EC Report “Analysis of costs and benefits of regional LNG solution in the East-Baltic Area”, 20 November 2013.

• “The Commission welcomes the forthcoming commissioning of

the Klaipeda LNG terminal in Lithuania. The existence of such

infrastructure enabling supply diversification is vital both in

order to diversify supply but also to ensure a more flexible

gas network.” - EC Communication “Preparedness for a possible disruption of supplies from the East

during the fall and winter of 2014/2015”, 16 October 2014.

LNG Terminal Project

Foundings at EU level

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• „<... complies with EU state aid rules; No undue distortions

of competition due to openess to third parties.“

• „<...the development of the LNG terminal will integrate

Lithuania into the EU gas market and will stimulate

competition on the Lithuanian gas markets.“

• „<...the investment contributes to the security of supply and

that the aid is necessary and proportionate to realise the

investment“.

• „<...compensation for maintenance costs is in line with the

EU Framework on services of general economic interest.“ - EC Decision of 20 November 2013.

LNG Terminal Project

European Commission review of state aid case

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LNG Terminal Project

Example of one Project‘s auditing periods

73

questions received (most of them complex, encompassing, from 3 to 5, or more questions)

3564

pages of materials provided in replies

52

days that the Company spent answering the questions

208

human work hours spent (oral replies and participation in various oral proceedings not included)

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company’s employees involved on average

During the time period from 11 July 2013 to 17 October 2013:

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Practical recommendations

Save time of the

audited company

Avoid duplication

• Data room;

• Initial questionnaires (the more detailed, the better);

• Check documents in electronic versions (minimizes human recourses

from the company's side during audit);

• Make a list of company‘s specialists needed for interviews (leave top

management for the last instance to ask only essential questions);

• Make most efforts to make use of company‘s adopted form of

information and do not ask unnecessarily to prepare everything in a

special form if the content is suitable for audit purposes;

• The audit pace should be taking into account the phase of the project.

• Decide on the scope of the audit beforehand;

• Ask the company on the audits already performed (if possible, get their

conclusions or at least identify the scope of the audit);

• Avoid duplication of auditing the same time period or the same scope

(smart audit periods).

1.

2.

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Klaipėdos Nafta

Practical recommendations

Be a realist

Let the audited

company help you

• Decide on the amount of documentation and information realistic to

check during the allocated audit time involving the audited subject;

• Include top audit specialist on most important questions to be

answered during audit;

• Ask the audited company in advance (as much as possible) to start

preparing necessary documentation for audit;

• Identify particular number of topics you want to check.

• Always let the company make comments on the project or at least

main conclusions to avoid biased or even wrong findings.

3.

4.

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1. Project audit as well as any activity performed shall not be an end in itself,

that is it shall not be made for the sole purpose of an audit;

2. It shall not be centered on finding only negative aspects or shortcomings of a

project;

3. What most audits still lack – is the purposeful view, that is to find best

practices and good performance examples in a project, and highlight them in

order to make life-long useful for other projects (of similar nature and projects

in different areas);

4. A company-based view – not to be an obstacle for the project stealing

precious time and human recourses but a soft and flexible interactive

measure.

Klaipėdos Nafta

Conclusions

The Main Conclusion:

Positive attitude towards the project being audited, working on

cooperation and partnership basis with the audited company. !

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Thank you for your attention

Your questions are kindly welcome

Gabija Kuncytė, Head of Legal Division, g.kuncyte@oil.lt

Rytis Valunas, Head of LNGT Legal Affairs, r.valunas@oil.lt

www.oil.lt, www.sgd.lt