presentation by Aamir and Himanshu on petrolera zuata project, venezuala.

1. Aamir Ansari
Himanshu saigal

2. Petrozuata is offered $ 2.5 billion oil
development project in Venezuela. It takes
place in 1997 as a project sponsor, Conoco and
PDVSA (Venezuela’s 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.

3. .1
. Economical
instability
before 1960s
2.Nationaliza
tion of oil
companies
3. Formation
of PDVSA
4. In 1993 Conoco
came in joint
venture
5. Petrozuata
planned to
build 125 mile
pipeline
6. DuPont & Conoco
agreed to purchase
104,000 BCDP from
Petrozuata

4. Conoco
Incorporated
Petrolera
Zuata
(USA)
Petróleos de
Venezuela
(PDVSA)
(50.1%
Interest)
(49.9%
Interest)

5.  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

6.  Subsidiary of DuPont (USA)
 Has operations in over 200 countries
 15000 employees in over 40 countries.
 Known for expertise in technology and
extraction processes

7.  Petrozuata was formed in 1997 by PDVSA and
Conoco
 Three key components
 Production of heavy oil from a new field in
Venezuela’s interior
 Transportation of the oil to coast via pipeline
 Transportation of oil to refineries along the US Gulf
Coast

8.  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

9. 1. Saudi Arabia
2. Russia
3. United Arab Emirates
4. Kuwait
5. Iraq
6. Nigeria
7. Qatar
8. Iran
9. Angola
10. Venezuela

10.  In liquid markets, greater availability of capital
 Developing countries.
 But there are risks -
 Illiquid markets
 Foreign Exchange Risk

11.  A credit rating is an evaluation of the credit
worthiness of a debtor, especially a business (company)
or a government.
 The evaluation is made by a credit rating agency of 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, Moody’s, Fitch

13.  Conoco was rated single A
 PDVSA was rated single B

15.  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%

16.  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)

17.  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

18.  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

19.  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 isn’t used up.

20.  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

21.  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 Dupont’s debt
 Spinning off Conoco would help it be an
industry leader, which was impossible under
Dupont—conflicted with Dupont’s strategic
positioning

22.  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

23.  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

24.  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

25.  Any questions?