The Singular Case of the Chad-Cameroon Pipeline

Presentation to the TJOGEL Symposium Stephen V. Arbogast, Executive Professor C.T. Bauer College of Business-UH January 23, 2009

Project Financing and Political Risk Mitigation

Discussion Topics  9/08: The World Bank quits the Chad-Cameroon Financing Project Finance as a Political Risk Mitigation Tool First Trials: Exxon and Malaysia Chad-Cameroon: Unique Risks to be Managed by including ECA/MLAs in the Project Financing Chad-Cameroon: Chronicle of Events – 2000-08 Evaluation & Implications:        Results for Chad Consortium. Implications for Private firms Lessons for World Bank. Implications for Other resource projects in risky places .

which were targeted towards specific development projects  WB‟s dissatisfaction w/Chad‟s conduct prompted demand for loan repayments  Does WB‟s withdrawal signal failure for Oil Companies‟ effort to mitigate project risk via WB‟s participating in financing? Does WB‟s withdrawal indicate RMP model is discredited for use in other energy projects in poor.The World Bank quits the Chad-Cameroon Pipeline Project Financing  September 9. risky locations?  . WB had oversight over Chad‟s spending of most project revenues.7 M to finance country‟s investment in pipeline Loans had been conditioned on Chad‟s agreement to complex “Revenue Management Plan” (RMP)  Under RMP. 2008: World Bank (WB) announces withdrawal   Bank had lent Chad $65.

Exxon. $300 per capita income.Chad-Cameroon Pipelines: Project Background  Oil first discovered in southern Chad by Conoco early in 1970‟s   Initial consortium: Conoco. Indris Deby since 1990. Chevron sold to Elf-Acquitaine . 99/99 on corruption – potential for pipeline to be held “hostage”  Chad: 30 year civil war after independence. 173/177 poverty  Oil companies declined to develop Chad‟s reserves  Conoco withdrew in favor of Exxon. ruled by Gen. Shell. Chevron Additional discoveries brought reserves to ~1 billion barrels  Chad‟s unique risk profile  Landlocked country: oil must be pipelined to Atlantic coast for export  Best route: through Cameroon – ranked 148/177 on poverty. unstable borders.

Terms Clarification: project finance process forces host government to clarify/document commitments  Ties commitments to NY/UK law and/or offshore arbitration  Private firms want deterrence to avoid unilateral contract revision .Key to Unlocking Chad’s Reserves – Risk Mitigation Project Finance one of few Available Tools  1. Deterrence: disrupting financing involves consequences that deter host government disruptive actions  Financing to include lenders which host governments don‟t want to offend 3. Project Finance can mitigate location/political risk in 3 ways: Stake Reduction: limiting project sponsor‟s capital at risk   Requires financing to be “non-recourse” to sponsor Also strengthens sponsor‟s ability to resist host government pressure 2.

First Test: Esso Production Malaysia (EPMI)1978  Concept: Cash flow allocated for debt service could be impacted by government changes in tax rates  Bank loan repayment at risk if government raises rates  Consortium: Top three international PF banks in lead   Citibank. JP Morgan. Chase Followed by top 3 Malaysian commercial banks  Result: Inconclusive   Malaysia raised rates. banks responded with mild protests Exxon repaid loans. Malaysia did not raise rates again  Result left Exxon disinclined to use PF for upstream risk mitigation .

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/MLA lenders  US Ex-Im. lack of rule of law Cameroon‟s potential to hold pipeline hostage once built. European Investment Bank (EIB) . demanding higher transit fees.Special Risks in Chad-Cameroon led Oil Company Consortium to reconsider using PF  Chad‟s acute revenue needs for poverty/security. equity participations Nothing about EPMI suggested PF by itself would deter such events Consortium‟s new concept: combine PF & World Bank deterrence       WB‟s status: “concessionary” lender. CoFACE.

Chevron and Petronas) financed oil field development on its own Pipeline financed with $1. $800 M equity     WB‟s IFC lent $200 M of PF as „A‟ loan with banks providing similar amount as „B‟ loan 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 . $2. divided $1.Chad-Cameroon PF Deal Structure  $3.5 G for oil field development.4 G project finance debt.7 G project.2 G for pipeline and export infrastructure Private consortium (now ExxonMobil.

WB adds „Revenue Management Plan‟ to the Deal  Concerned about Natural Resource „curse‟. annual budgets    Once approved. 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. funds released from offshore accounts to Chad banks .8 G 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 2/9 members from „civil society‟ Annual independent audits  Oversight committee to review projects.

unlikely to help Chad‟s poor”  Project proceeds. financing closed in mid-2000    WB: “new model for resource development”  NGOs: “disappointing WB would participate.Chad agreed to RMP  Recognized WB would not proceed without it and private consortium would not develop reserves w/o WB Agreed also to 50% cut in armed forces and privatization of most state companies in 1998 After extensive environmental. social impact studies & consultations. target oil thruput in 2004 . completes in 2003. and legal documentation.

how do PF & RMP perform?  Oil prices .37 2005 14.$/B:   2004 14.72 2007 14.94 64.04 35.64 50.20 49.66 23.40 2006 14.29 37.26 Project forecast Actual Differential  Strong test of PF‟s deterrence – large incentive for host governments to try to extract more „rents‟  Windfall also test of RMP    WB and Chad not ready to absorb revenues w/development projects Cash piling up in escrow Security threats on Chad‟s eastern border .78 58.50 43.Oil prices soar.

July 2006 – Interim MOU    70% all government revenues to go to development More flexibility on security spending Strengthened Oversight Committee to submit new national development strategy to be enacted by new legislation . suspend loans to Chad  Energetic WB diplomatic/publicity campaign. Kofi Anan urging Deby to show restraint  Deadlock ends in compromise deal.First Crisis: December 2005  Deby government unilaterally revises RMP    Law reduces funds escrowed for priority development Incorporates „security spending‟ into priority areas Chad repatriates Fund for Future Generations  WB response: freeze escrow accounts.

Conditions stabilized 2H‟06-2007  Over $440 M “transferred” to Chad for allocation to priority development sectors by end-2006 WB expands staff in-country. focusing on Chad‟s petroleum sector and administrative challenges NGOs focus on minor oil spill off Cameroon Chad threatens. but does not implement insertion of Chad‟s State oil company into private consortium     No general legislation finalized for 2006 MOU deal .

and after Chad fails to agree.February 2008 – Rebels Attack and RMP Collapses  Early February: Rebels drive across desert from Darfur and attack N‟Djamena. WB demands reversion to prior terms. WB approval and audits  Another suspension of WB lending   But remittances of oil revenues to Chad government accounts continue In discussions. Chad‟s capital  250 die in several days of street fighting  End-February: Acting under State of Emergency. requests that loans be repaid   IFC loans to pipeline remain in place Conversations among WB and Chad continue re: basis for resumption of a Bank program . Deby empowers himself to approve state budgets by decree  Eliminates Oversight Committee.

Sept.” Bank Information Center. 2008 “The World Bank‟s request [for loan repayment] amounts to an admission of failure in one of its most controversial and disastrous projects – once touted as a “model” for high-risk projects – after the Chadian government repeatedly used its newfound oil wealth in contravention of its agreements to invest in poverty reduction. 2008 .Public Assessments of WB‟s Withdrawal “Regrettably. 9. The Bank therefore concluded that it could not continue to support this project …While the payment ends the Bank‟s involvement in the pipeline project. it became evident that the arrangements that had underpinned the Bank‟s involvement…were not working. Sept. 12. the Bank has explained to the Government of Chad that it recognizes the country‟s significant development problems…If the Government of Chad wishes to focus its energies on a program to support inclusive development…the World Bank is willing to work with Chad to assist.” World Bank press release.

Assessment of Chad-Cameroon Financing as Risk Mitigation for Private Consortium  Essential deal terms survived period of peak oil prices   Fiscal terms essentially unchanged State oil company did not gain entry  WB deterrence did not work with Chad   Chad took unilateral actions twice in face of WB‟s opposition Cameroon was not provocative  RMP structurally insulated the private companies  Escrow account funds focused dispute between Chad and WB  WB‟s “diplomacy” and resistance were energetic  Contrast to banks in EPMI .

Assessment of RMP as new WB “Model” for Resource Projects  First time results disappointing – will WB care to repeat?   Little development accomplished. WB President  Chad-Cameroon project was carefully vetted and executed from environmental and human impact perspective  Fixable RMP design flaws . embarrassing withdrawal Severe test: security threats + peak oil prices  Enabled oil development to proceed: “We think that the project provides the best and perhaps only opportunity for Chad to reduce the severe poverty of most of its population…Chad‟s development prospects can only be improved significantly through the use of this traditional energy source.” James Wolfensohn.

RMP: Lessons Learned  Tighten control over remittance from Offshore Escrow accounts   Chad able to secure enough funds for lengthy confrontations w/WB All oil revenues initially to flow through offshore accounts  RMP structure should be less comprehensive. more flexible   Target lower % revenues for priority development. anticipate security Anticipate revenue windfalls/shortfalls with specific arrangement  Immediate attention to enhancing development project capabilities   WB did little between financing‟s close (6/00) & project startup (mid‟03) In-country staffing focused as much on execution as supervision  Don‟t overreach on next RMP – escrow lower % of revenue tied to project execution capabilities .

opportunity for improvement needed to rehabilitate RMP approach Scaled back RMP coupled with WB participation in financing would be best next step    .WB in Project Finance for High Risk Locations – Where from Here?  WB continues to be interested in role in Resource projects  Sees energy supply as key to development  Chad-Cameroon financing successful in getting Chad‟s oil developed and mitigating private firms‟ high risks RMP model discredited within WB and NGO community Recognition of flaws.

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