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The Chad-Cameroon Petroleum Development and Pipeline Project (A)Analysed by: Abhi Krishna Shrestha 115343Akhilesh Sthapit 114263Shishir Bajracharya 1153441AgendaStory of Private SponsorsProject DebtIntroduction of SponsorsField System and Export System ComparedThe Financing Structure & LeverageBreak Down of InvestmentProject Finance Used In Export SystemReturns as of estimated CashflowVarying ScenariosDiscount Rate from CAPM MethodAgenda continuedIf the Project ended in 10 yearsFairness to each parties Risk (All Share Holders Will Have to Bear)World Bank and its InterestBenefit due to World BankWhy World Bank May not FundControl mechanismStory of Private Sponsors

4Project DebtProject debt: $1.4 billionInternational Finance Corporation (IFC)IFC (A): $100 MillionIFC (B): $300 MillionExport Credit Agencies (ECAs): $600 MillionCapital Markets: $400 Million5ExxonMobilTotal Revenue= $185 billionAAA debt ratingOperation in more than 100 countriesOne of the major players in oil industry.Operates in 4 major divisionsUpstream 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.

6ExxonMobilStrength in Upstream Operation.75% of companys earning from upstream Operation.58 major exploration projects in 1999

7PetronasOwned by Malaysian GovernmentResponsible 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.

8ChevronEngaged 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 CongoOwned 50% stake in Caltex, a downstream operator active in over 60 African, Asian, Middle Eastern countries.

9Field SystemExport systemExtract oil from Doba Basin in ChadTo transport oil to coastal city of Kribi.Budget: $1.5 billionBudget: $2.2 billionAssets: Consists of 300 wells in three fields, treatment facility to upgrade oil an operations centre's to support productionAssets: 670 miles pipeline buried 1 meter underground. Geological studies estimated total proven plus probable reserves of 917 million barrelsSponsors agreed to buy all of the outputs at market price in proportion to ownership sharesCorporate FinancingProject FinancingRecourseLimited RecourseUpstream ConsortiumTOTCO, COTCOLeverage: 0%Leverage: 63.5%Operated by EssoChadProject co-ordinated by EssoChad10The Financing Structure & LeverageUpstream Consortium100% owned by private sponsorExxon Mobil/Petronas/ChevronLeverage: 0%Tchad pipeline co (TOTCO)89% private sponsor11% government of chadLeverage: 62%Cameroon Pipeline co. (COTCO)85% private sponsors5% government of chad10% government of Cameroon.Leverage 64%

Debt: $0Equity: $1521Total capital $ 1521 Debt: $199Equity: $123Total capital $ 322 Debt: $1201Equity: $680Total capital $ 1881 11ExxonMobils wholly owned subsidiary EssoChad would be responsible for project coordination and upstream operations12Break Down of Investment (In Million Dollars)Private sponsor ExxonMobil/Petronas/ChevronGovernment of ChadGovernment of CameroonCameroon Pipeline Co.(COTCO) Tchad Pipeline Co.(TOTCO)Upstream Consortium100%89%11%85%5%10%89%3457813.53109.4715216813Field SystemOwned and financed by upstream consortium$1521 million.Transport System (Millions)Total equity= $803Private =109.47+578 =$687.47=85.6%Government of chad=$13.53+$34=$47.53=5.9%Government of Cameroon=$68= 8.5%

14Project Finance Used In Export SystemUse of contractual arrangement to redistribute project-related 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 sheet15

Returns as of estimated CashflowPrivate SponsorsIRR 17% NPV $637.60 Million (Discount Rate: 10%)Payback Period Private (Yrs) 10.07Chad GovernmentIRR 70% NPV $463.37 Million (Discount Rate: 10%)Payback Period Chad (Yrs) 5.30Cameroon GovernmentIRR 40% NPV $147.42 Million (Discount Rate: 10%)Payback Period Cameroon (Yrs) 6.19

16Returns as of estimated CashflowProject as a WholeIRR 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 ScenariosAs 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 MethodBeta: 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 InvestorsDiscount 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 MillionChads NPV: $526 MillionCameroons NPV: $166 Million

If the Project ended in 10 yearsPrivate SponsorsIRR 9.7%NPV -$15.20 Million (Discount Rate: 10%)Chad GovernmentIRR 68%NPV $210.50 Million (Discount Rate: 10%)Cameroon GovernmentIRR 37%NPV $81.28 Million (Discount Rate: 10%)

Fairness to each parties

Opinion based matterChads only opportunity to earnChad has no money to invest but has the resource, private sponsors are the major investorsChad receives resources value from Royalty, which is closely linked with revenueChad has high IRR, definitely above 42% under worst case scenario assumedInequality 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 alternativesShould 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 OilNeither high nor low is good for the project due to the increasing difference in NPV (Low revenue, Low profit, waste of resource)Volume of extractionNeither high nor low is good for the project due to the increasing difference in NPVInternational Dollar rate Will cross budget if local currency gets strongerPolitical Instability

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

23World Bank and its InterestConcern 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 beganExtensive lending and policy experience with developing countries.Participation in case of fair sharingNo 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%

24Benefit due to World BankMonetary (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 PlanCapacity building programs Incentive such as future World Bank lending with respect to the governments performance under RMP.

Why World Bank May not FundSeeing 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.

26Control mechanismTotal revenue =$1.8bTax=16% of $1.8b=$0.28bRoyalty and dividends=$1.52b

PlanSpecial Petroleum Revenue account10% in foreign financial institution.i.e 10% of 1.52b= $0.15b90% in Chadain commercial Bank in development of high priority sectors= $1.36bEducationHealthSocial ServiceRural developmentInfrastructureEnvironment and water resources

27Plan ImplementationForming Committee of 9 members7 government officials and 2 from civil societyCommittee should publish review of operation every year subject to review by external audit.28