The Chad-Cameroon Petroleum Development and Pipeline Project

Transcription

The Chad-Cameroon Petroleum
Development and Pipeline Project
Professor Doug Cerf
Donald Bren Graduate School of Environmental
Science and Management
Environmental Risk Management (ESM 286)
Winter 2008
What has been accomplished by the
Chad Cameroon Project?
• Very interesting consortium of parties to accomplish
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Economic development in a developing country
Shared financial returns
Sharing of risks
Poverty alleviation
Project development with concern for sustainable development
Partnership of Governments, Private Corporations, Private Banks
and The World Bank
• How much risk is acceptable in economic development
situations that have severe environmental and social
issues?
Printed on recycled paper-actually
better, not printed at all
How did the financing differ?
• Review Corporate Structure in Exhibit 3a
• Review Sources / Uses of Cash Exhibit 3b
• Field System
– Oil wells and drilling equipment
• Export System
– Pipeline and off-shore loading system
Corporate Finance for the Field
System
• No debt all equity
• 3 sponsors (upstream consortium)
• Exxon/Mobil exposure 608m
– 40% of $1,521m
– Market value of equity $280b
• High discretion over cash flows
• Monitoring is done internally
– As opposed to the external monitoring similar to the
equator principles
Equator Principles
• A new voluntary framework to guide “project
financing” decisions
• Endorsed in 2003 by ten leading banks
• Non government organizations (NGO) wanted
financers of large projects to take legal and moral
responsibility for the social and environmental
impact on local communities and host nations
caused by the projects that they financed
Project Finance
• Project finance involves the use of limited
or fully non-recourse debt by a corporate
partner (the sponsor or sponsors) to finance
investment in and ownership of a legally
independent, single purpose industrial asset
usually with a limited life.
Key elements of the project finance
agreement
• Key elements:
– An investment in an industrial asset
– An organizational decision to create a new, legallyindependent entity
– Financing decision involving non-recourse debt
• The project financing arrangement is limited non-recourse debt
because it provides a guarantee for debt repayment through
completion
• After completion there is no recourse to sponsors
• The debt is an obligation of the project companies, Techad
(TOTCO) and Cameroon (COTCO) pipeline projects
• Repayment is a function of project cash flows
Key elements of the project finance
agreement
• By creating a legally-independent entity the
borrowing entities (the sponsors) are able to
protect their balance sheets
– Off balance sheet financing
– Exxon/Mobil has a debt to equity capital ratio on its
balance sheet of 23%
– Export system debt to equity ratio is 62-64%
– Would Exxon/Mobil do this deal on their balance sheet?
Exxon Review
• Look on Google finance to determine:
– Total Market capitalization
– Balance sheet debt and equity
Risk Management
• Reason for using project finance
– Risk sharing and risk mitigation
• Risk sharing
– Lead sponsor Exxon/Mobil brought in other
sponsors (Chevron and Petronas)
– Diversified borrowing through banks, bond
holders and the World Bank
Risk Mitigation
• Risk mitigation
– Inclusion of the World Bank /IFC to help mitigate
political and reputation risk
– The world bank ..
• as the lender of last resort for impoverished countries the
World Bank has leverage over these countries that private
sponsors do not have.
• has the experience and technology to deal with environmental,
social and political risk that is superior to that of a private
sponsor
• the world bank can sort through the propaganda to determine
the actual behavior on environmental and social issues
How much risk mitigation is
needed?
• How much involvement by the world bank is
needed to get the risk mitigation benefits that
Exxon/Mobil (sponsors) are looking for?
• Generally, for highly rated companies like
Exxon/Mobil project finance is more expensive
than corporate finance
– The extra costs are in the costs to structure and fund the
project finance ($15 million of preparation costs)
• See quote under financial projections on page 3 of case
The World Bank’s role
• Sponsors want World Bank involvement for risk mitigation
• The world bank is primarily interested in
– Poverty alleviation
– Sustainable economic development
– There is no better place than Chad for poverty alleviation
• The World Bank has the expertise to understand and
impact the risk issues
– Corporate sponsors could not take on a project with these risks
because they do not have this expertise
• The World Bank loans to projects it does not loan to
companies.
The World Bank’s role
• World Bank Group played four key roles
– It appraised the project for sponsors and other outside
lenders to uncover important information
• It assisted with the environmental assessment
– It structured the project to ensure “fairness” and to
minimize social and environmental impact
• Policy advice to ensure long term sustainability
– It made direct investments and mobilized other funding
sources
– Deter government interference
Is this deal fair to Chad?
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Investment of capital is very low $47 million
Equity investment is funded by loans
Chad is using up one of its only natural resources
Net present value (Low/High scenarios from Table 5)
– Low expected oil price and low volume: $108 million
– High expected oil price and high volume $1,170 million
– Expected value $463 million
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Internal Rate of return
– Relatively low investment therefore IRRs are high
– Low 42%
– High 90%
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Chad makes more than the private sponsors in all of the low volume/low price
scenarios
Chad has the greatest downside risk protection
Is this deal fair to Cameroon?
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Equity investment in pipeline project
Returns are essentially invariant to the price of oil
It is most sensitive to volume changes
Net present value (Low/High scenarios from Table 5)
– Low expected oil price and low volume: $92 million
– High expected oil price and high volume $156 million
• Internal Rate of return
– Relatively low investment therefore IRRs are high
– Low 34%
– High 40%
• Much less variation than for Chad
Is this deal fair to Private Sponsors?
• Very sensitive to the change in oil price and
volume
• Net present value (Low/High scenarios Table 5)
– Low expected oil price and low volume: $(917) million
– High expected oil price and high volume $1,614 million
• Internal Rate of return
– Low less than zero%
– High 27%
• The largest upside in dollar return
Fairness and the distribution of
project returns
• Timing of the returns
– Chad, Cameroon and private sponsors get 29.2%, 51.4% and
56.3% of its undiscounted cash flows respectively in the first 10
years
• Chad’s receipts are back-loaded to protect against
sovereign interference
• This approach may be inappropriate given Chad’s needs to
alleviate poverty
• Chad is assuming reserve risk
– Proven reserves last through year nine
– If probable and possible reserves do not materialize then Chad
suffers
Fairness and the distribution of
project returns
• Division of the returns
– Total $1.78 billion
– Chad, Cameroon and private sponsors get 22%, 6.6%
and 71.4% of the total distributable cash flows
– Looks pretty good for Chad based on the amount
invested
– Chad’s position is driven by their inability to raise
external capital
• If they could raise external capital would they have needed the
private sponsors (Exxon/Mobil etc.)?
• Cash flows would have tripled without the private sponsors
(assumes inclusion of Cameroon)
Fairness and distribution of project risks
• Construction risk
– Construction risk is low
• Sponsors know how to develop oil fields
• They have certified variables related to the amount of reserves
with independent consultants
• Financial risks (excluding sovereign risk)
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Low given the debt service reserve fund
Debt service coverage ratio is 2.1% or higher
Low finding and development costs of $5.20/barrel
Risk of oil price fluctuations
Risk of quality of the oil extracted
Fairness and distribution of project risks
• Sovereign Risks
– Political risk
• Potential to disrupt the project
• Dependent on the political situation in both Chad and
Cameroon
– Environmental and social risk fall on the host nations
– Sponsors bear the environmental and social risk
indirectly through reputation damage
• Could be large has shown by Exxon Valdez
Is the sharing of the risks and returns fair?
• Is World Bank involvement evidence of fairness?
• Would you approve the deal as a World Bank/IFC
board member?
– Three slides follow on why the plan should be approved
– Three slides follow on why the plan should not be
approved
• What are the alternatives?
Reasons for the World bank to approve the deal
• Opportunity and need to alleviate poverty
– Chad has few opportunities to alleviate poverty and
spur economic development
– Chad situation has deteriorated over the last decade
– Chad situation is bad compared to other African nations
• Opportunity to leverage $177 million from the
World Bank for a $3.7 billion project (5% of the
funding)
• Commercially attractive project with conservative
oil price and volume assumptions
• In the view of some the project fairly allocates project risks
and returns
– Chad puts in very little and stands to pull out a lot
• Social and environmental issues have been adequately
addressed
– 19 volumes of environmental assessment documents
– Hundreds of meetings with experts, indigenous people and NGOs
– Numerous contingency plans
• The World Bank knows how to structure projects for
success
• The Revenue Management Plan will work
– Future lending to Chad is contingent on the
Revenue Management Plan
– Built in auditing and oversight mechanisms
Reasons for the World bank to oppose the deal
• Pipeline revenues may displace existing aid
– Chad will have used up the natural resource and
be in the same “aid” position
– Current aid is $188 million per year
– Expected project cash flows are about half
during the main part of the project
• Key participants have troublesome records
– Exxon/Mobil
• Exxon Valdez
• Chairman spoke against strict environmental standards in developing
countries
– The World Bank
• Has not been successful structuring deals to manage oil booms
• Revenue Management Plan is an experiment
– Chad and President Deby
• Civil war has stopped economic development on several occasions in
the past
• has a poor record on human rights
• Can not be trusted to implement the revenue management plan
• Revenue management plan has serious flaws
– Lacks specificity
• Does not provide detailed expenditure guidelines
– Lacks effective oversight mechanisms
• Is the oversight committee unbiased?
• Is the money that goes to the Chadian banks guaranteed to be
used for the appropriate purpose?
– Lacks credible enforcement mechanisms
• No subpoena power or investigatory powers
• Revenue management plan has serious flaws (continued)
– Represents an invasion of sovereign rights
• Chad owns the oil reserves and should be allowed to spend the
country’s wealth as it sees fit
• Analogy: few employees would agree to employment contracts that
dictated how they should spend their disposable income
– Portion of funding to alleviate poverty is not enough
• Portion of cash for restricted investment is 60% over the life of the
project
• Chad receives the bulk of its returns in later years in the form of
upstream taxes
– These flows are not subject to oversight and control
• Revenue management plan has serious flaws
(continued)
– Environmental and Social risks are excessive
– Distribution of project returns is not fair
• Chad’s returns are in distant years
• Chad’s returns may not materialize if “probable reserves” do
not materialize
• Chad needs poverty alleviation now
– Commercial viability
• How high can the discount rate go before the NPV’s turn
negative
What has been accomplished by the
Chad Cameroon Project?
• Very interesting consortium of parties to accomplish
–
–
–
–
–
–
Economic development in a developing country
Shared financial returns
Sharing of risks
Poverty alleviation
Project development with concern for sustainable development
Partnership of Governments, Private Corporations, Private Banks
and The World Bank
• How much risk is acceptable in economic development
situations that have severe environmental and social
issues?
Case questions
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How are the sponsors financing this deal?
How does the financing of the Field
System differ from the financing of the
Export System?
What is the World Bank/IFC’s role in this
deal? Are they likely to be successful?
Case questions
• Analyze the risks and the returns to Chad,
Cameroon, and the Private Sponsors. How were
the returns calculated? Are the risks and the
returns fair from each party’s perspective?
• Will the Revenue Management Plan work? Are
there aspects of the plan that you think should be
changed?
• Would you approve the deal as a World Bank/IFC
board member?

The Chad-Cameroon Petroleum Development and Pipeline Project

Transcription

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