2. 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 Risks
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3. Project IntroductionProject Introduction
3
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
06/06/13Chad - Cameroon Pipeline Project
4. 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 sold
its stake to Elf.
Thus, the MOU was signed between the consortium and the
government 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%
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5. Project Description
Project
($ 3.7 billion)
Field System ($1.5 billion)
Construction of 300 oil wells
Financed by TOTCO (Tchad Oil
Transportation Company)
Sponsor chose Corporate
Finance
Export System ($2.2 billion)
Construction of 1070 km pipeline
containing monitoring system to
detect leakage
Financed by COTCO (Cameroon Oil
Transportation Company)
Sponsor chose Project Finance
1. 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 European
Investment 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 markets
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6. Benefits & Roadmap of the project
Benefits
The expected revenue will be invested in
poverty reducing programs (health,
education, and rural development). As of
the end of 2006, over $440 million was
transferred to government to be allocated
to these development priorities.
The project was a revolutionary effort to
reveal large scale crude oil project, to
ensure transparency and effective
environmental and social mitigation.
Roadmap of the petroleum
pipeline
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7. Benefits for each parties
Chad
Poverty Alleviation
Employment opportunities
Infrastructure development
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Cameroon
Provide Employment
Poverty Alleviation
Improvement in public Infrastructure
Consortium of Oil Companies
The environmental and social relations of the companies will be improved by
providing the additional technical expertise.
Availability of the resources.
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8. Proposed Financial Structure
Field Facilities Pipeline Facilities
EXXON/Petronas/Chevron
1,521 685
Chad
48
Cameroon
70
Commercial Banks
Bonds
400
IFC
400
CoFace/EXIM
600
World Bank
39,5 53,3
EIB
17 30
Commercial Banks
300
COTCO / TOTCO
2,203
Field Companies
1,521
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9. Development Drilling, Surface 43 1,054 1,097
Logistics, Railroad Tariffs, Roads 16 143 159
Project Management 7 96 103
Operator & Start-up Costs 8 154 162
Total Financing Required 74 1,447 1,521
FIELD SYSTEM Local Foreign Total IBRD
EXPORT SYSTEM
Pipeline Installation, Offshore Facilities 37 987 1,024
7 %
Railroads Upgrades, Logistics, Storage, Road 26 253 279
Project Management 8 94 102
Operator and Start-Up Costs 8 154 162
Total Export System Project Costs 79 1,488 1,567
@ International Bank for Reconstruction and Development (IBRD)
Estimated Project Costs (in million
US$) (Net of Taxes and Duties)
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10. Interest During Construction and Other costs -- 458 458
Debt Service Reserve Funding -- 177 177
Total Financing Required 79 2,123 2,202
FIELD EXPORT SYSTEM
Local Foreign Total IBRD
Total Financing Required 153 3,570 3,723
PROJECT PREPARATION COSTS
Chad 3 4 7
Cameroon 6 2 8
PROJECT GRAND TOTAL 162 3,576 3,738
Source: www.worldbank.org/afr/ccproj/pro_document.html
Continuation of Estimated Project Costs
Net of Taxes and Duties)
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11. How does financing Field system
differ from Export system?
“Corporate finance” and “corporate
financier” tend to be associated with
transactions in which capital is raised
in order to create, develop, grow or
acquire businesses
At its core, Project finance is a
method of financing where the lender
accepts future revenues from a
project as a guarantee on a loan and
for projects worth more than 5 millions
dollars.
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12. Role of the IFC/World Bank
Without the IFC/World Bank‘s involvement, the Chad Cameroon Pipeline
Project would not have gotten off the ground.
The IFC provided a $100 million loan and up to $300 million in syndicated
loans to COTCO & TOTCO.
The IFC has been involved in catalysing $900 million of financing from
Export Credit Agencies.
A $400 million bond issue from international capital markets.
They stated in their project documentation that commercial lenders
have indicated their unwillingness to proceed with the oil project without
the Bank Group‘s involvement.
The world bank was involved in handling the revenue management
program.
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13. Are they likely to be successful?
The government violated agreements with the world bank and IMF by
purchasing weapons to fight rebels for $4.5 million.
In June 2005, government actions effectively terminated the revenue
management program.
After construction the revenues began accruing to the government
before adequate capacity could be established.
This led to cash flow problems, causing the government to accumulate
substantial payment arrears.
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14. 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 the
environment;
Ground water contamination
Natural reserves, Lob waterfalls getting affected
Gets $ 535 million (based on Transit, Pipeline tax and Share of ROE)
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15. 15
Field System
(Corporate Finance)
Export System
(Project Finance)
Asset 300 Oil wells Pipeline, off-shore and
detecting system
Structure Unincorporated Joint
Venture
Incorporated joint Venture
(TOTCO & COTCO)
Leverage 0% 62%-64%
Recourse No debt Limited- recourse debt
Ownership 3 sponsors: Petronas,
Chevron and Exxon
3 sponsors+ 2 Governments
Exxon Mobil Expenses 40%*1521=$608 m 40%*(123+680)= $321 m
Organization Simple (Functional) Complex (Matrix)
Monitoring Internally Externally by World Banks
and other banks, etc.
General summary of the Project
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16. 16
ReturnsReturns
How Returns are calculated?
Risks and Returns to each parties
Returns from each party’s perspective
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17. The project returns were driven by oil price and volume
The Bank’s technical staff and independent consultants confirmed that
actual reserves could vary from 595 million barrels of proven reserves to
1,038 million barrels .
Price assumptions were based on Brent Crude prices, which had ranged
from $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 it
would sell at a discount of 10% to 20% below Brent Crude.
Even with the discount, the price was well above the project’s finding
and development costs of $5.20 per barrel.
Hence, in overall, it can be considered as good returns for the
stakeholders
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How were the returns calculated?
Chad - Cameroon Pipeline Project
18. 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 a
theoretically 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 the
return 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 would
get it’s return.
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19. Risks and returns to Chad, Cameroon
and 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.
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20. Introduction
Will the revenue management plan work?
Are there aspects that you think should be changed?
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Revenue Management PlanRevenue Management Plan
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21. Revenue Management Plan
Revenue Management is an economic discipline appropriate to many service
industries in which “market segment pricing” is combined with the statistical analysis
to consumer behavior at the micro-market level and optimize product availability
and price to maximize revenue growth.
The primary objective of the Revenue Management Plan is to sell the right product
to the right customer at the right time for the right price.
Initial elements of the Chad-Cameroon Revenue Management Plan included the
following:
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-management
decisions
Building an extensive information and education campaign regarding the oil project.
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22. Will the revenue management plan
work?
We think, that this revenue management plan will not work because it
has not yet addressed the following:
The plan is entirely blind to the question of ethnicity, race and religion
and also the historical divisions in the country that have led to the
prolonged 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.
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23. Are there aspects of the plan that
you think should be changed?
Funds need to be managed from start to finish by the IFC
Small-phased disbursement amounts for specific developed
projects.
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.
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24. 24
Our OpinionOur Opinion
Would you approve the deal as a World Bank/IFC Board Member?
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25. Would you approve the deal as a
World Bank/IFC board member?
As a Board Member of the World Bank/IFC, and also a stakeholder with high interest
in the project, I will approve the deal because
Without the IFC/World Bank‘s involvement, the Chad Cameroon Pipeline Project
would 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 change
management model
Provision of Bond to reduces the need for equity financing from the two governments
and attraction of foreign investment.
Invitation of private sponsors to provide additional equity fund to fill the financing gap
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26. 26
(No Market Exists)
Demand = f(GDP)
Inflation
Exchange Rates
Interest Rates
Oil price
(Market Exists)
Force Majeure (political
Expropriation
(taxes, regulation, enforcement)
Currency Convertibility
Currency Devaluation
Force Majeure
(Acts of Nature)
Operator Performance
Land Acquisition/Permits
Cost Over-run/Delay
Reserve risk
Support Roads (Infrastructure)
Expropriation
Environmental Risks
Market
Risks
(e.g., country)
Project
Specific
Risks
Ability to ControlLow High
Macroeconomic
and
some Sovereign
Risks
Construction,
Operating,
and
some Sovereign
Risks
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Classification of Project Risks
27. 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 to
spend the time and pay the $15 million in fees.)
The fact that the sponsors used corporate finance for the field system suggests that transaction
costs of PF are high. The incremental benefit of arranging a PF for the field system is exceeded by
the 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 equity
exposure).
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, rather
than earlier. In other words, it ends up bearing more of the reserve risk than the sponsors.
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28. 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-CAMEROON
PETROLEUM 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 Petroleum
Development and Pipeline Project:
http://www.ciel.org/Intl_Financial_Inst/ifccasechadcameroon.html
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