Aamir Ansari

Himanshu saigal
 Petrozuata is offered $ 2.5 billion oil
development project in Venezuela. It
takes place in 1997 as a project sponsor,
Conoco and PDVSA (Venezuelas national
oil company), plan to meet with various
development agencies and credit rating
agencies in respect of the proposed
financial structure. The authors hope to
raise part of the $ 1.5 billion of debt in
the capital markets, which will require an
investment rating.
 1.
.Economical 2.Nationaliz 3.
instability ation of oil Formation
before companies of PDVSA
1960s

5. Petrozuata 6. DuPont & Conoco

4. In 1993
planned to agreed to purchase
Conoco came in
build 125 104,000 BCDP from
joint venture
mile pipeline Petrozuata
Petrleos de Conoco
Venezuela Incorporated
(PDVSA) (USA)

(49.9% (50.1%
Interest) Interest)
Petrolera
Zuata
 Currently 10th largest oil company in the
world
State-owned and formed through the
nationalization of other companies
assets (Mobil, Exxon, etc)
Despite government instabilities, PDVSA
has a strong track record
 Subsidiary of DuPont (USA)
Has operations in over 200 countries
15000 employees in over 40 countries.
Known for expertise in technology and
extraction processes
 Petrozuata was formed in 1997 by PDVSA
and Conoco
Three key components
Production of heavy oil from a new field in
Venezuelas interior
Transportation of the oil to coast via pipeline
Transportation of oil to refineries along the US
Gulf Coast
 Estimated $2.425 billion in costs
Conoco (50.1%) and PDVSA (49.9%)
together invest $975 million
Remainder $1.450 billion to be financed
through debt
1. Saudi Arabia
2. Russia
3. United Arab Emirates
4. Kuwait
5. Iraq
6. Nigeria
7. Qatar
8. Iran
9. Angola
10. Venezuela
 In liquid markets, greater availability of
capital
Developing countries.
But there are risks -
Illiquid markets
Foreign Exchange Risk
 Acredit ratingis an evaluation of thecredit
worthinessof adebtor, especially
abusiness(company) or a government.
The evaluation is made by acredit rating
agencyof the debtor's ability to pay back the
debt
It is based on an analysis of the issuer's financial
condition and profit potential
Main providers: S&P, Moodys, Fitch
 Conoco was rated single A
PDVSA was rated single B
 High leverage ratio (60%)
Bank debt, the traditional source of debt and
Rule 144A project bonds

Sources of Funds in million %

Commercial Bank Debt $450 18.6

Rule 144A Project Bond $1,000 41.2

Paid-in Capital (incl. shareholder loans) $445 18.4

Operating Cash Flow $530 21.9

Total $2,425 100%

 Is a relatively new security gaining
popularity
Has greatly increased the liquidity of 144A
bonds
Can waive the time consuming SEC
registration process (implied it is less
expensive to issue Rule 144A bond
compared to other types of bonds)
Can only be sold to professional investors
(at least has $100 million in investible
assets)
 Popular in emerging markets
Often involves syndicates
Project is separate from legal and financial
responsibilities of investors
Used for large investments that are long-
term and singular (cannot be commingled)
Cash-flow from third parties is predictable
Projects and their lives are finite
Petrozuata used project financing to pay
down large debts without the owners being
accountable for deficits
 Precompletion risk
No operations = no cash flow coming from the
investment
Postcompletion risk
Occur when project is operating and effect the
cash flows
Political risk
Macroeconomic events in Venezuela
 Project finance holds less risk for the
partners in the joint venture than simply
financing it themselves
too expensive
local governments offer loans to develop oil fields
Protects the companies from bankruptcy
risks because they have limited
responsibility
the project is regarded as legally independent
equity returns are increased and the companies
own debt capacity isnt used up.
 Project finance seems perfect as it allows
the company to rid itself of responsibility
and increase equity returns
However, it eliminates co-insurance and
diversification benefits within the company so
the free lunch is a myth.
High legal costs associated with the
setup
Difficult to exit syndications
 Dupont purchased Conoco in 1981 after
high oil prices hurt profits during the 1970s
Dupont decided to sell Conoco in 1998,
shortly after the Petrozuata deal, when oil
prices were at their lowest levels in a
decade
The sale lowered Duponts debt
Spinning off Conoco would help it be an
industry leader, which was impossible
under Dupontconflicted with Duponts
strategic positioning
 Benchmark price of crude oil falls $5 per
barrel over 6 months
Inflation in Venezuela causes interest
rates to jump from 25% to 70%
Cost overrun for Petrozuata is announced
 Petrozuata encountered some of the
types of risk mentioned earlier
Cost of project increases by $553 million
The costs ended up being covered by
sponsors
Petrozuata is able to produce larger
quantities than expected
Investors made the right choice
 Conoco has merged with Philips
Petroleum and is the 3rd largest
integrated energy company
PDVSA is starting to collect oil from some
newly found sources despite a worker
strike at the end of 2002
Petrozuata is making new contracts and
continues to run well they still have an
their B rating
 Any questions?