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Agenda• Chad Cameroon Pipeline – Business Case Overview• Project Finance V/s Corporate Finance• Risk Analysis & Mitigation - Role of World Bank• Fairness of Distribution of Project Returns
• Chad & Cameroon• Private Equity Partners• World Bank
• Fairness of Distribution of Project Risks• Chad & Cameroon• Private Equity Partners• World Bank – Reasons for Opposition & support to the
deal
Chad-Cameroon Pipelines: Project Background
Oil first discovered in southern Chad by Conoco early in 1970’s
Initial consortium: Conoco, Exxon, Shell, Chevron
Additional discoveries brought reserves to ~1 billion barrels
Chad’s unique risk profile
Chad: 30 year civil war after independence; ruled by Gen. Indris Deby since 1990; unstable borders; $300 per capita income; 173/177 poverty
Landlocked country: oil must be pipelined to Atlantic coast for export
Best route: through Cameroon – ranked 148/177 on poverty, 99/99 on corruption – potential for pipeline to be held “hostage”
Oil companies declined to develop Chad’s reserves
Conoco withdrew in favor of Exxon; Chevron sold to Elf-Acquitaine
Elf & Shell dropped from consortium due to project risks ($10.00/barrel)
Chad-Cameroon Pipelines: Project Location
Chad-Cameroon Pipelines Scope & Consortium
$3.7B project, divided $1.5B for oil field development, $2.2B for pipeline and export infrastructure (1070 Km pipeline, 1mts below)
Private consortium (now ExxonMobil, Chevron and Petronas) financed oil field development on its own – Project to end by 2032
Pipeline financed with $1.4B project finance debt, $800 M equity
WB’s IFC lent $400 M of PF (as ‘A’ loan of $100M and ‘B’ loan of $300M) with banks providing similar amount
Other ECA/MLAs and banks lent $600 M
Chad and Cameroon had equity in the pipeline companies
WB and EIB lent both governments funds for their equity contributions
Chad-Cameroon Pipelines: Estimated Returns
Chad-Cameroon Pipelines: Finance Structure
Field work – On Balance sheet financingTransport work- Off balance sheet financing
Special Risks in Chad-Cameroon using Project Finance
Chad’s acute revenue needs for poverty/security; lack of rule of law.
High degree of political risk.
Nothing about EPMI suggested PF by itself would lower political risk.
Consortium’s concept: combine PF & World Bank deterrence WB’s status: “concessionary” lender, ties to IMF as
‘lender of last resort’
Track record where few if any countries failed to repay WB loans
Plan to combine WB participation with strategic ECA lenders
Project Finance Vs Corporate FinanceCorporate (Typical)Existing company borrower financing an expansionFull recourse to borrowerAnalyze historical & projected cash flowsLimited “perfection of security”Can have lower D/E ratio.On balance sheet.Lender is secured against risk vide borrower’s assets
Project FinanceSPV borrower financing a green-field project or expansionLimited recourse to parent companiesAnalyze project’s future cash flowsComplex documentation to perfect securityHigh D/E ratioOff balance sheet.High Risk as no security against borrower’s assets
The World Bank’s role Sponsors want World Bank involvement for risk mitigation
The world bank is primarily interested in Poverty alleviation
Sustainable economic development
There is no better place than Chad for poverty alleviation
The World Bank has the expertise to understand and impact the risk issues Corporate sponsors could not take on a project with these risks
because they do not have this expertise
The World Bank loans to projects it does not loan to companies.
The World Bank’s role World Bank Group played four key roles
Appraised the project for sponsors and other outside lenders to uncover important information
Assisted with the environmental assessment
Structured the project to ensure “fairness” and to minimize social and environmental impact
Policy advice to ensure long term sustainability
Made direct investments and mobilized other funding sources
Deter government interference
WB adds ‘Revenue Management Plan’ Concerned about Natural Resource ‘curse’, criticized by NGOs
for enabling oil development to help authoritarian regime, WB conditioned its presence (and future loans to Chad) on RMP
RMP’s terms:
Chad’s government anticipated $1.8B in revenues over project’s life
84% to be channeled to escrow accounts overseen by WB
10% to stay ‘offshore’ in Fund for Future Generations
76% to go for projects in designated priority development areas
14% to go for projects in Doba oil producing region
Oversight committee to review projects, annual budgets
2/9 members from ‘civil society’
Annual independent audits
Once approved, funds released from offshore accounts to Chad banks
Is this deal fair to Chad? Investment of capital is very low $47 million Equity investment is funded by loans Chad is using up one of its only natural resources Net present value.
Low expected oil price and low volume: $108 million High expected oil price and high volume $1,170 million Expected value $463 million
Internal Rate of return Relatively low investment therefore IRRs are high Low 42% High 90%
Chad makes more than the private sponsors in all of the low volume/low price scenarios
Chad has the greatest downside risk protection
Is this deal fair to Cameroon? Equity investment in pipeline project
Returns are essentially invariant to the price of oil
It is most sensitive to volume changes
Net present value (Low/High scenarios from Table 5) Low expected oil price and low volume: $92 million
High expected oil price and high volume $156 million
Internal Rate of return Relatively low investment therefore IRRs are high
Low 34%
High 40%
Much less variation than for Chad
Is this deal fair to Private Sponsors?Very sensitive to the change in oil price and
volume
Net present valueLow expected oil price and low volume: $(917)
million
High expected oil price and high volume $1,614 million
Internal Rate of returnLow less than zero%
High 27%
Fairness of distribution of project returnsTiming of the returns
Chad, Cameroon and private sponsors get 29.2%, 51.4% and 56.3% of its undiscounted cash flows respectively in the first 10 years
Chad’s receipts are back-loaded to protect against sovereign interference
This approach may be inappropriate given Chad’s needs to alleviate poverty
Chad is assuming reserve riskProven reserves last through year nine
If probable and possible reserves do not materialize then Chad suffers
Fairness of distribution of project returns(Cont’d)
Division of the returnsTotal $1.78 billion
Chad, Cameroon and private sponsors get 22%, 6.6% and 71.4% of the total distributable cash flows
Looks pretty good for Chad based on the amount invested
Chad’s position is driven by their inability to raise external capital
Risk ManagementReason for using project finance
Risk sharing and risk mitigationRisk sharing
Lead sponsor Exxon/Mobil brought in other sponsors (Chevron and Petronas)
Diversified borrowing through banks, bond holders and the World Bank
Fairness of distribution of project risksConstruction risk
Construction risk is low Sponsors know how to develop oil fields
They have certified variables related to the amount of reserves with independent consultants
Financial risks (excluding sovereign risk)Low given the debt service reserve fund
Low finding and development costs of $5.20/barrel
Risk of oil price fluctuations
Risk of quality of the oil extracted
Sovereign RisksPolitical risk
Potential to disrupt the project
Dependent on the political situation in both Chad and Cameroon
Environmental and social risk fall on the host nations
Sponsors bear the environmental and social risk indirectly through reputation damage
Could be large has shown by Exxon Valdez
Fairness of distribution of project risks(Cont’d)
Why Should World Bank Oppose the deal?
Revenue management plan has serious flawsEnvironmental and Social risks are excessiveDistribution of project returns is not fair
Chad’s returns are in distant years
Chad’s returns may not materialize if “probable reserves” do not materialize
Chad needs poverty alleviation now
Commercial viabilityHow high can the discount rate go before the NPV’s
turn negative
Lacks effective oversight mechanisms Is the money that goes to the Chadian banks guaranteed to be
used for the appropriate purpose?
Lacks credible enforcement mechanism
Represents an invasion of sovereign rights
Portion of funding to alleviate poverty is not enough
Portion of cash for restricted investment is 60% over the life of the project
Chad receives the bulk of its returns in later years in the form of upstream taxes
Why Should WB Oppose the deal?
Key participants have troublesome records Exxon/Mobil
Exxon Valdez
Chairman spoke against strict environmental standards in developing countries
The World Bank
Has not been successful structuring deals to manage oil booms
Revenue Management Plan is an experiment
Chad and President Deby
Civil war has stopped economic development on several occasions in the past
has a poor record on human rights
Can not be trusted to implement the revenue management plan
Why Should WB Oppose the deal?
Why Should WB Approve the Deal? Opportunity and need to alleviate poverty
Chad has few opportunities to alleviate poverty and spur economic development
Chad situation has deteriorated over the last decade
Chad situation is bad compared to other African nations
Opportunity to leverage $177 million from the World Bank for a $3.7 billion project (5% of the funding)
Commercially attractive project with conservative oil price and volume assumptions
In the view of some the project fairly allocates project risks and returns Chad puts in very little and stands to pull out a lot
Social and environmental issues have been adequately addressed 19 volumes of environmental assessment documents
Hundreds of meetings with experts, indigenous people and NGOs
Numerous contingency plans
The World Bank knows how to structure projects for success
The Revenue Management Plan will work Future lending to Chad is contingent on the Revenue Management
Plan
Built in auditing and oversight mechanisms
Why Should WB Approve the Deal?
What has been accomplished by the Chad Cameroon Project?
Very interesting consortium of parties to accomplish Economic development in a developing country
Shared financial returns
Sharing of risks
Poverty alleviation
Project development with concern for sustainable development
Partnership of Governments, Private Corporations, Private Banks and The World Bank
How much risk is acceptable in economic development situations that have severe environmental and social issues?