Aamir AnsariHimanshu saigal

Petrozuata is offered $ 2.5 billion oil development project in Venezuela. It takes place in 1997 as a project sponsor, Conoco and PDVSA (Venezuela’s national oil company), plan to meet with various development agencies and credit rating agencies in respect of the proposed financial structure. The authors hope to raise part of the $ 1.5 billion of debt in the capital markets, which will require an investment rating.

.1.

Economical instability

before 1960s

2.Nationalization of oil companies

3. Formation of PDVSA

4. In 1993 Conoco came in

joint venture

5. Petrozuata planned to build 125

mile pipeline

6. DuPont & Conoco agreed to purchase 104,000 BCDP from

Petrozuata

Petrolera Zuata

Conoco Incorporated

(USA)

Petróleos de Venezuela (PDVSA)

(50.1% Interest)

(49.9% Interest)

Currently 10th largest oil company in the world

State-owned and formed through the nationalization of other companies’ assets (Mobil, Exxon, etc)

Despite government instabilities, PDVSA has a strong track record

Subsidiary of DuPont (USA) Has operations in over 200 countries 15000 employees in over 40 countries. Known for expertise in technology and

extraction processes

Petrozuata was formed in 1997 by PDVSA and Conoco

Three key components Production of heavy oil from a new field in

Venezuela’s interior Transportation of the oil to coast via pipeline Transportation of oil to refineries along the US

Gulf Coast

Estimated $2.425 billion in costs Conoco (50.1%) and PDVSA (49.9%)

together invest $975 million Remainder $1.450 billion to be financed

through debt

1. Saudi Arabia2. Russia3. United Arab Emirates4. Kuwait5. Iraq6. Nigeria7. Qatar8. Iran9. Angola10. Venezuela

In liquid markets, greater availability of capital

Developing countries. But there are risks -

Illiquid markets Foreign Exchange Risk

A credit rating is an evaluation of the credit worthiness of a debtor, especially a business (company) or a government.

The evaluation is made by a credit rating agency of the debtor's ability to pay back the debt

It is based on an analysis of the issuer's financial condition and profit potential

Main providers: S&P, Moody’s, Fitch

Conoco was rated single A PDVSA was rated single B

High leverage ratio (60%) Bank debt, the traditional source of debt and

Rule 144A project bonds

Sources of Funds   in million %

 

Commercial Bank Debt $450 18.6

Rule 144A Project Bond $1,000 41.2

Paid-in Capital (incl. shareholder loans) $445 18.4

Operating Cash Flow $530 21.9

Total $2,425 100%

Is a relatively new security gaining popularity

Has greatly increased the liquidity of 144A bonds

Can waive the time consuming SEC registration process (implied it is less expensive to issue Rule 144A bond compared to other types of bonds)

Can only be sold to professional investors

(at least has $100 million in investible assets)

Popular in emerging markets Often involves syndicates Project is separate from legal and financial

responsibilities of investors Used for large investments that are long-

term and singular (cannot be commingled) Cash-flow from third parties is predictable Projects and their lives are finite Petrozuata used project financing to pay

down large debts without the owners being accountable for deficits

Precompletion risk No operations = no cash flow coming from the

investment Postcompletion risk

Occur when project is operating and effect the cash flows

Political risk Macroeconomic events in Venezuela

Project finance holds less risk for the partners in the joint venture than simply financing it themselves too expensive local governments offer loans to develop oil fields

Protects the companies from bankruptcy risks because they have limited responsibility the project is regarded as legally independent equity returns are increased and the companies’

own debt capacity isn’t used up.

Project finance seems perfect as it allows the company to rid itself of responsibility and increase equity returns However, it eliminates co-insurance and

diversification benefits within the company so the free lunch is a myth.

High legal costs associated with the setup

Difficult to exit syndications

Dupont purchased Conoco in 1981 after high oil prices hurt profits during the 1970s

Dupont decided to sell Conoco in 1998, shortly after the Petrozuata deal, when oil prices were at their lowest levels in a decade

The sale lowered Dupont’s debt Spinning off Conoco would help it be an

industry leader, which was impossible under Dupont—conflicted with Dupont’s strategic positioning

Benchmark price of crude oil falls $5 per barrel over 6 months

Inflation in Venezuela causes interest rates to jump from 25% to 70%

Cost overrun for Petrozuata is announced

Petrozuata encountered some of the types of risk mentioned earlier

Cost of project increases by $553 million The costs ended up being covered by

sponsors Petrozuata is able to produce larger

quantities than expected Investors made the right choice

Conoco has merged with Philips Petroleum and is the 3rd largest integrated energy company

PDVSA is starting to collect oil from some newly found sources despite a worker strike at the end of 2002

Petrozuata is making new contracts and continues to run well they still have an their B rating

Any questions?