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?