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 financing

Transport 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 Finance
Corporate (Typical) Project Finance
Existing company SPV borrower
borrower financing an financing a green-field
expansion project or expansion
Full recourse to Limited recourse to
borrower parent companies
Analyze historical & Analyze project’s future
projected cash flows cash flows
Limited “perfection of Complex
security” documentation to perfect
Can have lower D/E security
ratio. High D/E ratio
On balance sheet. Off balance sheet.
Lender is secured High Risk as no
against risk vide security against
borrower’s assets 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 value
 Low expected oil price and low volume: $(917) million
 High expected oil price and high volume $1,614 million

Internal Rate of return

 Low less than zero%
 High 27%
Fairness of distribution of project returns
Timing 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 risk
 Proven 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 returns
 Total $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 Management
Reason for using project finance
Risk sharing and risk mitigation
Risk 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 risks
Construction 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

Fairness of distribution of project risks
(Cont’d)
Sovereign Risks
Political 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
 Why Should World Bank Oppose the
deal?
Revenue management plan has serious flaws
Environmental and Social risks are excessive
Distribution of project returns is not fair
 Chad’s returns are in distant years
 Chad’sreturns may not materialize if “probable reserves” do not
materialize
 Chad needs poverty alleviation now
Commercial viability
 How high can the discount rate go before the NPV’s turn negative
 Why Should WB Oppose the deal?
 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 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
 Why Should WB Approve the Deal?
 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

 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?