THE CHAD-CAMEROON PETROLEUM DEVELOPMENT AND PIPELINE PROJECT (A)

Analysed by: Abhi Krishna Shrestha 115343 Akhilesh Sthapit 114263 Shishir Bajracharya 115344

AGENDA
Story of Private Sponsors Project Debt Introduction of Sponsors Field System and Export System Compared The Financing Structure & Leverage Break Down of Investment Project Finance Used In Export System Returns as of estimated Cashflow Varying Scenarios Discount Rate from CAPM Method

AGENDA CONTINUED
If the Project ended in 10 years Fairness to each parties Risk (All Share Holders Will Have to Bear) World Bank and its Interest Benefit due to World Bank Why World Bank May not Fund Control mechanism

STORY OF PRIVATE SPONSORS

1970
CONOCO CHEVRON EXXON ROYAL DUTCM/SHELL

1979

CONOCO --WITHDREW CHEVRON- SOLD OUT TO ELF EQUITAINE EXXON ROYAL DUTCM/SHELL

1999

ELF- WITHDREW EXXON MOBILE- 40% STAKE SHELL DROP OUT PETRONAS- 35%STAKE (New Entry) CHEVRON-25% STAKE (New entry)

PROJECT DEBT
Project debt: $1.4 billion International Finance Corporation (IFC) IFC (A): $100 Million IFC (B): $300 Million Export Credit Agencies (ECAs): $600 Million Capital Markets: $400 Million

EXXONMOBIL
Total Revenue= $185 billion AAA debt rating Operation in more than 100 countries One of the major players in oil industry. Operates in 4 major divisions

Upstream Operations: explored for and produced both crude oil and natural gases. Down stream operations: transportation and sales. Chemicals manufacture and marketing. Coal and minerals mining and power generation.

EXXONMOBIL

Strength in Upstream Operation.

75% of companys earning from upstream Operation. 58 major exploration projects in 1999

PETRONAS
Owned by Malaysian Government Responsible for developing the countrys oil and gas resources. Incorporated in 1974. Fully integrated oil and gas company engaged in upstream and downstream operations. Operated 40 fields in 24 countries throughout Asia and Africa.

CHEVRON
Engaged in broad range of energy related activities. Relied on its upstream business for current revenues and income as well as for its long term growth. Active in Africa with projects in Nigeria, Angola and the Republic of Congo Owned 50% stake in Caltex, a downstream operator active in over 60 African, Asian, Middle Eastern countries.

Field System Extract oil from Doba Basin in Chad Budget: $1.5 billion Assets: Consists of 300 wells in three fields, treatment facility to upgrade oil an operations centre's to support production

Export system To transport oil to coastal city of Kribi. Budget: $2.2 billion Assets: 670 miles pipeline buried 1 meter underground.

Geological studies estimated total proven plus probable reserves of 917 million barrels
Corporate Financing Recourse Upstream Consortium Leverage: 0% Operated by EssoChad

Sponsors agreed to buy all of the outputs at market price in proportion to ownership shares
Project Financing Limited Recourse TOTCO, COTCO Leverage: 63.5% Project co-ordinated by EssoChad

THE FINANCING STRUCTURE & LEVERAGE

Upstream Consortium
100% owned by private sponsor Exxon Mobil/Petronas/Chevron Leverage: 0%

Debt: $0 Equity: $1521 Total capital $ 1521

Tchad pipeline co (TOTCO)

89% private sponsor 11% government of chad Leverage: 62%

Debt: $199 Equity: $123 Total capital $ 322

Debt: $1201 Equity: $680 Total capital $ 1881

Cameroon Pipeline co. (COTCO)

85% private sponsors 5% government of chad 10% government of Cameroon. Leverage 64%

ExxonMobils wholly owned subsidiary EssoChad would be responsible for project coordination and upstream operations

BREAK DOWN OF INVESTMENT (IN MILLION DOLLARS)

Private sponsor ExxonMobil/Petrona s/Chevron Government of Chad Government of Cameroon

68 13.53 34 85%

1521
100%

109.47 89 89% % 578 11% Tchad Pipeline Co. (TOTCO) Cameroon Pipeline Co. (COTCO) 5% 10%

Upstream Consortium

Field System
Owned and financed by upstream consortium $1521 million.

Transport System (Millions)

Total equity= $803 Private =109.47+578 =$687.47=85.6% Government of chad=$13.53+$34=$47.53=5.9% Government of Cameroon=$68= 8.5%
8.50% 5.90% Chad Private

Cameroon

85.60%

PROJECT FINANCE USED IN EXPORT SYSTEM

Use of contractual arrangement to redistribute projectrelated risks. (Many Sponsors) Contractual arrangements governing the debt and equity investments contain covenants and other provisions that facilitate monitoring. (Many Sponsors) Management in closer monitoring than in typical corporation (670 miles of pipeline) In direct financing debt financing uses part of the sponsors debt capacity (Private sponsors may not have wanted to use its debt capacity) Field System is a more valuable asset (source of oil). Hence they have used no debt and will have the capacity to keep the asset until the right moment if any problems arise. Field Systems value will reflect in their balance sheet

RETURNS AS OF ESTIMATED CASHFLOW

Private Sponsors IRR 17% NPV $637.60 Million (Discount Rate: 10%) Payback Period Private (Yrs) 10.07 Chad Government IRR 70% NPV $463.37 Million (Discount Rate: 10%) Payback Period Chad (Yrs) 5.30 Cameroon Government IRR 40% NPV $147.42 Million (Discount Rate: 10%) Payback Period Cameroon (Yrs) 6.19

RETURNS AS OF ESTIMATED CASHFLOW

Project as a Whole IRR 16% NPV $940.67 Million (Discount Rate: 10%)

Reasonable IRR for the whole project for World Bank to believe that the project is beneficial. However, this is an IRR from an estimated cash flow and further analysis can be done under varying scenarios.

VARYING SCENARIOS

As the return is a function of price and volume, a brief scenario analysis has been done. Here, the estimated volume to be extracted and the estimated price is varied by different factors and its respective IRR and NPV (discount rate: 10%) is determined.

DISCOUNT RATE FROM CAPM METHOD

Beta: 0.83 (similar company) Risk free rate: 6.58% (Case Exhibit 4-6B) Market Risk Premium: 6.9% (Nigeria, 2011) Debt Ratio: 37.60% Cost of Borrowing: 5.48% (IRR of Debt cashflow) Tax Rate: 40% (Assumed) Discount rate: 8.915%

FOR FOREIGN INVESTORS

Discount rate: 8.915% Country Risk Premium: 8.25% Discount rate for foreign investors: 17.17%* *As local investors are involved and comparison may not be fair with different discount rates in the same project, same discount rate of 8.915% is used to calculate the following NPV.

Private Sponsors NPV: $797 Million Chads NPV: $526 Million Cameroons NPV: $166 Million

IF THE PROJECT ENDED IN 10 YEARS

Private Sponsors IRR 9.7% NPV -$15.20 Million (Discount Rate: 10%) Chad Government IRR 68% NPV $210.50 Million (Discount Rate: 10%) Cameroon Government IRR 37% NPV $81.28 Million (Discount Rate: 10%)

FAIRNESS TO EACH PARTIES

Opinion based matter Chads only opportunity to earn Chad has no money to invest but has the resource, private sponsors are the major investors Chad receives resources value from Royalty, which is closely linked with revenue Chad has high IRR, definitely above 42% under worst case scenario assumed Inequality in NPV between Chad and Private sponsors increases along with higher volume and higher prices (High Revenue) Cameroon is a medium to export and is one of many alternatives Should have flexible adjustments in case of situations, which may result in unfair distribution of costs and benefits.

RISK (ALL SHARE HOLDERS WILL HAVE TO BEAR)

Price of Oil

Neither high nor low is good for the project due to the increasing difference in NPV (Low revenue, Low profit, waste of resource)
Neither high nor low is good for the project due to the increasing difference in NPV Will cross budget if local currency gets stronger

Volume of extraction

International Dollar rate

Political Instability

Chad will have to bear most risk as the resource seems to be its last hope of alleviating poverty.

WORLD BANK AND ITS INTEREST

Concern over the use of Chads share of profit. Banks mission of alleviating poverty. During construction the project would employ 7000 people, it would employ 500 to 800 people once operations began Extensive lending and policy experience with developing countries. Participation in case of fair sharing No vested interest (Neutral Organization) Fear of sourcing fund from terrorist nations (as classified by U.S department) Government revenue may rise by more than 50%

BENEFIT DUE TO WORLD BANK

Monetary (Loan) Change of route in Cameroon to protect the natural habitat and human settlement in the Mbere Rift and Deng Deng forests. Sponsors also increased the benefits for the indigenous people under Compensation and Resettlement Plan Capacity building programs Incentive such as future World Bank lending with respect to the governments performance under RMP.

WHY WORLD BANK MAY NOT FUND

Seeing from other side this is one of the riskiest place to invest.

Protection to companies against political risk is needed. The route to the coastline consists of pipeline crossing 17 rivers and five habitat zones with rare plant life and endangered species. Resettlement question regarding 11000 Bakola people may create problem. Political instability in Northern Chad and also another potential oil transport route. Chad government might also misuse revenue like neighboring country for civil war, corruption and waste.

CONTROL MECHANISM

Total revenue =$1.8b

Tax=16% of $1.8b=$0.28b Royalty and dividends=$1.52b

Plan Special Petroleum Revenue account 10% in foreign financial institution.

i.e 10% of 1.52b= $0.15b

90% in Chadain commercial Bank in development of high priority sectors= $1.36b

Education Health Social Service Rural development Infrastructure Environment and water resources

Plan Implementation

Forming Committee of 9 members

7 government officials and 2 from civil society

Committee should publish review of operation every year subject to review by external audit.