Chad-Cameroon Petroleum Development and Pipeline Project

Chad-Cameroon Petroleum

Development and Pipeline Project

Eric Shen Scott Shu Rebecca Wu Amber Zhang

Chad-Cameroon Pipeline Project

Project History

Ø  In the early 1970s, a group of oil companies such as Conoco, Chevron, Exxon and Shell discovered oil in Chad.

Ø But due to civil unrest in Chad, Conoco withdrew and Chevron sold it stake to Elf.

Ø Thus, the memoranda of understanding(MOU) was signed between the consortium and the government of two countries in Feb 1996.

Ø In November 1999, Shell and Elf dropped out.

Ø Petronas and Chevron joined the consortium with 35% and 25% respectively. Exxon remained leading shareholder with 40%.


Project Description Project

($3.7 billion)

Field System($1.5 billion) Export System($2.2 billion)

u Construction of 300 oil wells

u Financed by TOTCO(Tchad Oil transportation Company)

u Sponsor chose Corporate Finance

u Construction of 1070 km pipeline containing monitoring system to detect leakage

u Financed by COTCO( Cameroon Oil Transportation Company)

u Sponsor chose Project Finance


Ø  The proposed structure included $2.3 billion of equity, of which $2.2 billion would come from private sponsors.

Ø  The $1.4 billion of project debt would come from:

§  International Finance Corporation(IFC) §  Two export credit agencies(ECAs) §  Capital markets

Ø  International bank for Reconstruction and Development(IBRD), The World bank and European Investment Bank(EIB) agree to lend the host countries funds to finance the equity stakes.


Benefits and Roadmap of the project

Benefits Roadmap of the petroleum pipeline Ø  The expected revenue will be

invested in poverty reducing programs (health, education, and rural development).

Ø  The project was a revolutionary effort to reveal large scale crude oil project ,to ensure transparency and effective environment and social mitigation.


Benefits for each parties

Chad §  Poverty alleviation §  Employment opportunities §  Infrastructure development

Cameroon §  Poverty alleviation §  Employment opportunities §  Improvement in public infrastructure

Consortium of Oil Companies

§  The environment and social relations of the companies will be improved by providing the additional technical expertise.

§  Availability of the resources.


Project $3.7b

Field System $1.5b

Corporate Finance

Export System $2.2b

Project Finance


Private Sponsors ExxonMobil/Petronas/Chevron

Government of Chad

Government of Cameroon

Upstream Consortium

Tchad Pipeline Co. (TOTCO)

Cameroon Pipeline Co. (COTCO)

Debt $0 $199 $1,201 Equity 1,521 123 680 Total Capital 1,521 322 1,881 Debt/Total Capital 0% 62% 64%


Treasurer of Exxon Exploration Company:

“(We) most often borrow centrally. This has minimized borrowing costs by capitalizing on deep, efficient markets,

and drawing on the cash flow support of our global operations…despite our predilection for funding most

projects from central sources, we believe project finance can make a constructive contribution to managing risk of projects

in a number of area...However, project finance is not a panacea. We need to assess whether the added costs entailed

are worth the various risk mitigation steps achieved.”


•  The financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash flow generated by the project.

•  Sponsors: Equity investors •  Syndicate: Banks or other lending institutions that provide loans to

the operation.

Off-balance sheet financing: Generally, a special purpose entity is created for each project, thereby shielding other assets owned by a project sponsor from the detrimental effects of a project failure.


• Risk: lower in project finance(for borrowers) Project finance→ potential of a project Corporate finance→ the credit quality and profitability of the sponsors


•  Function: •  Project Finance: mostly debt; create special

purpose entity;loan repayment from future cash flow of the new project; non-recourse loans

•  Corporate Finance: mostly equity; funds

internally generated; the sponsors undertake whole responsibility


Why use Project Finance?

• Debt: Project finance could employ high leverage by debt design, since regular corporate finance would not permit such large debt ratio

Upstream Consortiu

m TOTCO COTCO ExxonMobi

l Chevron Petronas

Debt $0 $199 $1,201 $18,972 $8.608 $10,455 Equity 1,521 123 680 63,466 17,749 10,595 Total Capital 1,521 322 1,881 82,438 26,357 21,050

Debt/Total Capital 0% 62% 64% 23% 33% 50%


Why use Project Finance?

•  Risk:

• Significant distress costs of high risk projects if use

regular corporate finance

• Reducing sovereign risk: Participation of the

sovereign governments and multilateral agencies


Risk to Chad-Cameroon

Environmental risk: Ø  deforestation and oil spills Ø  leakage of 0.002% of the oil during the transportation,

namely 2,000 gallons leak Ø Ground water contamination

Social risk: Ø  civil war Ø Both Sudan and Libya threatened the oil export. Ø  The rebel opposition and fighting was based in northern

Chad, threatening the routes. Ø Cameroon governance had a human rights problem.


Risk to Chad-Cameroon Governance risk: Ø Compensation and Resettlement Plan, RMP lack of specific

details Ø Government could change the revenue allocation every 5

years. Ø  Sovereign rights: RMP did not specify how decisions would

be made or how voting power would be determined.

Sponsor risk: Ø  ExxonMobil had a tainted environmental record of oil spill in

1989. Ø  The sponsors might abandon the project and look to invest in

safer countries.


Ø  Except for oil, Chad had few natural resources and lacked infrastructure needed for development.

Ø  The project was commercially viable. Ø  The project could help jump start Chad’s listless economy. Ø Chad would receive $1.8 billion of cash flow from the project

according to projections.

Return to Chad-Cameroon

Ø Cameroon gets $ 535 million (based on Transit, Pipeline tax and Share of ROE)


What are the arguments for and against approving funding from the World Bank’s perspective?


Ø Poverty alleviation and region development

Ø Distinct opportunity for Chad

§  Leverage 177m for 3.7b investment from WB

Ø Essential influence of World bank

§  Protect the environment

§  Guarantee the benefit of indigenous people

FOR


Ø  Potential problems have been addressed

§  Environmental assessment document

§  Experts discussion

§  Contingent plans

Ø Revenue management plan

§  Supervise the use of revenue

Ø Commercially attractive project

§  Oil price

§  Volume assumption


Ø Risky to invest §  Challenging external environmental problems: oil spillover, forest

destroy §  Intensive internal political problems Key participants have adverse records §  ExxonMobil: economic development outweighs environmental

protection in developing countries

§  Chad and President Deby :

Continuous Civil war

Crime against humanity

Hinder revenue management plan

AGAINST


Ø Revenue management plan has flaws

§  Lack detailed expenditure guidelines

§  The oversight committee is biased

§  Distribution of the project return is not fair

§  Invasion of sovereign rights


World bank should approve funding of the project

A Q &

Documents

Chad-Cameroon Petroleum Development and Pipeline Project