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BP-AMOCO CASE -B

G R O U P -1

AJAY SAHU(M-09-36) KUMAR SIDDHARTH(M-09-13) NITIN SINGH RAWAT(M-09-21) PAWANPREET KAUR(M-09-22) SWATI SINGH(M-09-33)

Case overview

Decision Problems :

Whether to prepay the Amocos project finance loan for Early Oil Project.
If yes, then how?

Bank loan Medium term bonds Long term Bonds

How

to finance BP Amoco Share of Full Development Project i.e. $2.8 billion Stagewise?
Corporate finance Project finance Dual finance

Financing Early Oil Project


(Scenario Before 12/3/98) IFC EBRD $400(<10%, loan A+B) MUTUAL INTEREST GROUP Uncol Turkish Petroleum Itochu Corp. EXXON LUKoil Amerada Hess Ramco PLC Statoil INTERNAL FUNDS RAISED

Penzoil

Socar

AMOCO

BP

AIOC

Financing Early Oil Project


BP needs to consider the loan prepayment of $73.8 million Analysis:


Pros

of prepayment:

Interest rate is less as per past experience. Aligned financial structure.

5.6%-6.2% on midterm bonds and 5.3% on bank loan in comparison to 10%

Cons

of prepayment:

Negative signal to MIG members and jeopardize AIOCs relationship with the IFC and EBRD as imp for long term financing. Would not relieve BP from its administrative responsibilities and reporting duties as project operator. Risk is involved.

Conclusion: BP should not prepay the loan.

Financing Full Field development Project

Project is divided in three stages:

1st Stage: Development of Azeri field 2nd Stage: Development of deepwater

Gunashli field 3rd Stage: Further development of above fields

Financing options for Project:


Corporate

financing Project financing Dual financing

Corporate finance and project finance as a subsidiary independent of MIG Corporate finance and project finance as a subsidiary which is a part of MIG

Analysis:
Pros

of dual financing:

Reduces Risk No incomplete syndication as cash will be available from both company and banks Obtain a better tax treatment for the benefit of the both project & the sponsors Better position in MIG. Strong indication to the market to be an investor.

Cons

of dual financing:

Complicates the BP AMOCOs management of asset Impair its effectiveness as a leader of the joint

Financing Full Field development Project

Conclusion:

Corporate finance and project finance as a subsidiary which is independent of MIG as they are more capable of raising debt alone as other companies are either unrated or low rated. NPV of project is positive so effectively it should go for Corporate finance but there are high risks involved like govt. is unstable, transportation is questionable, oil prices can deviate from expected and production can also go down. So, only corporate financing is not preferable.