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Chad-Cameroon Pipeline Project in financial perspective

Chad-Cameroon Pipeline Project in financial perspective

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Chad cameroon pipeline project Chad cameroon pipeline project Presentation Transcript

  • Chad-Cameroon PipelineProjectUJJWAL KUMAR JOSHI1
  • Contents Project Introduction Project History Project Description Benefits & Roadmap of the Project Benefits for each parties Proposed financial structure Estimated Project costs Difference between financing field and export system Role of IFC & The World Bank General summary of the Project Risks and Returns How Returns are calculated? Risks and Returns to each parties Returns from each party’s perspective Revenue Management Plan Will the revenue management plan work? Are there aspects that you think should be changed?Our Opinion Would you approve the deal as a World Bank/IFC Board Member? Classification of Project Risks2
  • Project IntroductionProject Introduction3 Project History Project Description Benefits & Roadmap of the Project Benefits for each parties Proposed financial structure Estimated Project costs Difference between financing field and export system Role of IFC & The World Bank General summary of the Project06/06/13Chad - Cameroon Pipeline Project View slide
  • Project History In the early 1970s, a group of oil companies such as Conoco,Chevron, Exxon and Shell discovered oil in Chad. But due to civil unrest in Chad, Conoco withdrew and Chevron soldits stake to Elf. Thus, the MOU was signed between the consortium and thegovernment of two countries in February 1996. In November 1999, Shell and Elf dropped out. Petronas and Chevron joined the consortium with 35% and 25%respectively. Exxon remained leading shareholder with 40%406/06/13Chad - Cameroon Pipeline Project View slide
  • Project DescriptionProject($ 3.7 billion)Field System ($1.5 billion)Construction of 300 oil wellsFinanced by TOTCO (Tchad OilTransportation Company)Sponsor chose CorporateFinanceExport System ($2.2 billion)Construction of 1070 km pipelinecontaining monitoring system todetect leakageFinanced by COTCO (Cameroon OilTransportation Company)Sponsor chose Project Finance1. The proposed structure included 2.3 billion of equity. Of which $2.2 billion comes from Private sponsor.2. International bank for Reconstruction and Development (IBRD), The World Bank and EuropeanInvestment Bank (EIB) to lend the host countries funds to finance the equity stakes.3. The $1.4 billion of project debt would come from : International Finance Corporation(IFC) Two export credit agencies Capital markets506/06/13Chad - Cameroon Pipeline Project
  • Benefits & Roadmap of the projectBenefits The expected revenue will be invested inpoverty reducing programs (health,education, and rural development). As ofthe end of 2006, over $440 million wastransferred to government to be allocatedto these development priorities. The project was a revolutionary effort toreveal large scale crude oil project, toensure transparency and effectiveenvironmental and social mitigation.Roadmap of the petroleumpipeline606/06/13Chad - Cameroon Pipeline Project
  • Benefits for each parties Chad Poverty Alleviation Employment opportunities Infrastructure development7 Cameroon Provide Employment Poverty Alleviation Improvement in public Infrastructure Consortium of Oil Companies The environmental and social relations of the companies will be improved byproviding the additional technical expertise. Availability of the resources.06/06/13Chad - Cameroon Pipeline Project
  • Proposed Financial StructureField Facilities Pipeline FacilitiesEXXON/Petronas/Chevron1,521 685Chad48Cameroon70Commercial BanksBonds400IFC400CoFace/EXIM600World Bank39,5 53,3EIB17 30Commercial Banks300COTCO / TOTCO2,203Field Companies1,521806/06/13Chad - Cameroon Pipeline Project
  • Development Drilling, Surface 43 1,054 1,097Logistics, Railroad Tariffs, Roads 16 143 159Project Management 7 96 103Operator & Start-up Costs 8 154 162Total Financing Required 74 1,447 1,521FIELD SYSTEM Local Foreign Total IBRDEXPORT SYSTEMPipeline Installation, Offshore Facilities 37 987 1,0247 %Railroads Upgrades, Logistics, Storage, Road 26 253 279Project Management 8 94 102Operator and Start-Up Costs 8 154 162Total Export System Project Costs 79 1,488 1,567@ International Bank for Reconstruction and Development (IBRD)Estimated Project Costs (in millionUS$) (Net of Taxes and Duties)906/06/13Chad - Cameroon Pipeline Project
  • Interest During Construction and Other costs -- 458 458Debt Service Reserve Funding -- 177 177Total Financing Required 79 2,123 2,202FIELD EXPORT SYSTEMLocal Foreign Total IBRDTotal Financing Required 153 3,570 3,723PROJECT PREPARATION COSTSChad 3 4 7Cameroon 6 2 8PROJECT GRAND TOTAL 162 3,576 3,738Source: www.worldbank.org/afr/ccproj/pro_document.htmlContinuation of Estimated Project CostsNet of Taxes and Duties)1006/06/13Chad - Cameroon Pipeline Project
  • How does financing Field systemdiffer from Export system? “Corporate finance” and “corporatefinancier” tend to be associated withtransactions in which capital is raisedin order to create, develop, grow oracquire businesses At its core, Project finance is amethod of financing where the lenderaccepts future revenues from aproject as a guarantee on a loan andfor projects worth more than 5 millionsdollars.1106/06/13Chad - Cameroon Pipeline Project
  • Role of the IFC/World Bank Without the IFC/World Bank‘s involvement, the Chad Cameroon PipelineProject would not have gotten off the ground. The IFC provided a $100 million loan and up to $300 million in syndicatedloans to COTCO & TOTCO. The IFC has been involved in catalysing $900 million of financing fromExport Credit Agencies. A $400 million bond issue from international capital markets. They stated in their project documentation that commercial lendershave indicated their unwillingness to proceed with the oil project withoutthe Bank Group‘s involvement. The world bank was involved in handling the revenue managementprogram.1206/06/13Chad - Cameroon Pipeline Project
  • Are they likely to be successful? The government violated agreements with the world bank and IMF bypurchasing weapons to fight rebels for $4.5 million. In June 2005, government actions effectively terminated the revenuemanagement program. After construction the revenues began accruing to the governmentbefore adequate capacity could be established. This led to cash flow problems, causing the government to accumulatesubstantial payment arrears.1306/06/13Chad - Cameroon Pipeline Project
  • Fairness to each party Chad High risk: Environment Impact, Possible re-location of indigenous population History shows Extraction of Oil does not equal development Returns: would receive $ 1.8 bill. of cash flow from the project in the form of income taxes,royalties and dividends. Over the 10 years of production (2004 to 2013), income taxes would represent 16% of the total& royalties and dividends would represent the remainder. Cameroon Most risk because of the pipeline going through their indigenous population, impact to theenvironment; Ground water contamination Natural reserves, Lob waterfalls getting affected Gets $ 535 million (based on Transit, Pipeline tax and Share of ROE)14
  • 15Field System(Corporate Finance)Export System(Project Finance)Asset 300 Oil wells Pipeline, off-shore anddetecting systemStructure Unincorporated JointVentureIncorporated joint Venture(TOTCO & COTCO)Leverage 0% 62%-64%Recourse No debt Limited- recourse debtOwnership 3 sponsors: Petronas,Chevron and Exxon3 sponsors+ 2 GovernmentsExxon Mobil Expenses 40%*1521=$608 m 40%*(123+680)= $321 mOrganization Simple (Functional) Complex (Matrix)Monitoring Internally Externally by World Banksand other banks, etc.General summary of the Project06/06/13Chad - Cameroon Pipeline Project
  • 16ReturnsReturns How Returns are calculated? Risks and Returns to each parties Returns from each party’s perspective06/06/13Chad - Cameroon Pipeline Project
  •  The project returns were driven by oil price and volume The Bank’s technical staff and independent consultants confirmed thatactual reserves could vary from 595 million barrels of proven reserves to1,038 million barrels . Price assumptions were based on Brent Crude prices, which had rangedfrom $9 to $42 per barrel over the last 18 years, with an average price of$20 per barrel. Given the acidic, corrosive nature of Doba Basin oil, analysts expected itwould sell at a discount of 10% to 20% below Brent Crude. Even with the discount, the price was well above the project’s findingand development costs of $5.20 per barrel. Hence, in overall, it can be considered as good returns for thestakeholders17How were the returns calculated?Chad - Cameroon Pipeline Project
  • How were the returns calculated? The return on equity can be calculated using a CAPM model and appropriate betas. CAPM Model: The Capital Asset Pricing Model (CAPM) is used to determine atheoretically appropriate required rate of return of an asset. Given ß=0.6 and Equity risk premium= 6%. We have, CAPM rcommon equity = rrisk free+ß*ERPmarket Given the projects’ debt/equity ratio of 60%, Equity ß= 0.6 x (1+0.6) =0.96 Therefore, required return on equity is 6 + 0.96 x 6 = 11.76% (assuming risk free rate =6%). This is the required return on equity. The required return on assets would be 6 + 0.6 x 6 = 9.6%.Since the equity return falls as the leverage ratio declines, the return on equity converges to thereturn on assets which is close to 10%. As long as the prices of oil are at least $15 and reserves are 900 million barrels , the project wouldget it’s return.1806/06/13Chad - Cameroon Pipeline Project
  • Risks and returns to Chad, Cameroonand the Private sponsors Risks Environmental Indigenous People political Impact Returns were calculated by, Oil price ($9 to $42 over the last 18 years with an average of $20 / barrel Volume consumptions (Could vary b/w 595 million barrels to 1,038 million barrels) Chad and Cameroon have low financial risks. Chad and Cameroon have high social environmental risks. Private Sponsors have substantial financial risks but are capped.1906/06/13Chad - Cameroon Pipeline Project
  •  Introduction Will the revenue management plan work? Are there aspects that you think should be changed?20Revenue Management PlanRevenue Management Plan06/06/13Chad - Cameroon Pipeline Project
  • Revenue Management Plan Revenue Management is an economic discipline appropriate to many serviceindustries in which “market segment pricing” is combined with the statistical analysisto consumer behavior at the micro-market level and optimize product availabilityand price to maximize revenue growth. The primary objective of the Revenue Management Plan is to sell the right productto the right customer at the right time for the right price. Initial elements of the Chad-Cameroon Revenue Management Plan included thefollowing: Targeting revenue to poverty-alleviation activities Improving local capacity to manage expected revenues Promoting transparency regarding use of revenue Increasing the participation of Parliament, civil society, and the private sector in revenue-managementdecisions Building an extensive information and education campaign regarding the oil project.2106/06/13Chad - Cameroon Pipeline Project
  • Will the revenue management planwork?We think, that this revenue management plan will not work because ithas not yet addressed the following: The plan is entirely blind to the question of ethnicity, race and religionand also the historical divisions in the country that have led to theprolonged civil war. There exists high risk of corruption after the distribution of the funds. The Governments can reallocate the revenue after 5 years. Inexperienced oversights of the committee and the government.2206/06/13Chad - Cameroon Pipeline Project
  • Are there aspects of the plan thatyou think should be changed? Funds need to be managed from start to finish by the IFC Small-phased disbursement amounts for specific developedprojects. Change allocation revenue to a ten-year cycle. Cap percentage change of allocations. Add board member oversight by NGO sponsor. Add subpoena and reporting power.2306/06/13Chad - Cameroon Pipeline Project
  • 24Our OpinionOur Opinion Would you approve the deal as a World Bank/IFC Board Member?06/06/13Chad - Cameroon Pipeline Project
  • Would you approve the deal as aWorld Bank/IFC board member?As a Board Member of the World Bank/IFC, and also a stakeholder with high interestin the project, I will approve the deal because Without the IFC/World Bank‘s involvement, the Chad Cameroon Pipeline Projectwould not have gotten off the ground. Project managers don’t quit, they stay in the project Study the project to addressed and corrected the most serious concerns Introduction of a change management plan and the use of the best changemanagement model Provision of Bond to reduces the need for equity financing from the two governmentsand attraction of foreign investment. Invitation of private sponsors to provide additional equity fund to fill the financing gap2506/06/13Chad - Cameroon Pipeline Project
  • 26(No Market Exists)Demand = f(GDP)InflationExchange RatesInterest RatesOil price(Market Exists)Force Majeure (politicalExpropriation(taxes, regulation, enforcement)Currency ConvertibilityCurrency DevaluationForce Majeure(Acts of Nature)Operator PerformanceLand Acquisition/PermitsCost Over-run/DelayReserve riskSupport Roads (Infrastructure)ExpropriationEnvironmental RisksMarketRisks(e.g., country)ProjectSpecificRisksAbility to ControlLow HighMacroeconomicandsome SovereignRisksConstruction,Operating,andsome SovereignRisks06/06/13Chad - Cameroon Pipeline ProjectClassification of Project Risks
  • Summary Did the project finance create value for the sponsors? Gross Value: at least $15 million + value of time structuring the deal. (It must have been worth it tospend the time and pay the $15 million in fees.) The fact that the sponsors used corporate finance for the field system suggests that transactioncosts of PF are high. The incremental benefit of arranging a PF for the field system is exceeded bythe incremental transaction cost. Important sources of the value World Bank/ECAs participation mitigated political risk. The RMP constrains the party (Chad gov’t)who controls the risks. Non-recourse debt shielded sponsors credit exposure. PF structure allowed the use of higher leverage (higher value of tax shields, and reduced equityexposure). Compared to the Busang/Bre-X deal in Indonesia, Chad and Cameroon all got a pretty good deal. But the cash flows that Chad receives is “back-loaded”—it gets more of the cash flows later, ratherthan earlier. In other words, it ends up bearing more of the reserve risk than the sponsors.2706/06/13Chad - Cameroon Pipeline Project
  • References Case study from Harvard University The Chad-Cameroon development and pipeline project: Capacity building. (n.d.a).Retrieved December 1, 2005, from http://www.worldbank.org Chad/Cameroon development project: Construction: Oilfields. (n.d.). Retrieved 2005,from http:// www.essochad.com/Chad/Construction/Chad_Construction.asp Fortin, R. Jay, Defining force majeure, Project and Trade Finance, Jan. 1995. THE WORLD BANK GROUP PROGRAM OF SUPPORT FOR THE CHAD-CAMEROONPETROLEUM DEVELOPMENT AND PIPELINE CONSTRUCTION (Report No.: 50315)September 16, 2009 Update: Chad-Cameroon Oil Pipeline:http://www.eib.org/infocentre/press/news/all/chad-cameroon-oil-pipeline.htm Susanne Breitkopf, Urgewald (September 2000) The Chad Cameroon PetroleumDevelopment and Pipeline Project:http://www.ciel.org/Intl_Financial_Inst/ifccasechadcameroon.html2806/06/13Chad - Cameroon Pipeline Project
  • Thank You!2906/06/13Chad - Cameroon Pipeline Project