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The Case of Petrozuata
Petrleos de
The Sponsors - PDVSA
Currently 3
largest oil refinery and gasoline network in
State-owned and formed through the nationalization of
other companies assets (Mobil, Exxon, etc) in 1976 of
$1 billion bonds and cash.
Purpose of PDVSA is to mange country resource and
promote economic development
PDVSA is a member of (OPEC) organization of
petroleum exporting countries.

The Sponsors Conoco Inc.
Subsidiary of Dupont (USA)
Has operations in over 200 countries in
Known for expertise in technology and
extraction processes
Conoco was recognized world leader in
both refinery technology and project

The Joint Venture
PDVSA & Conoco began early feasibility
studies for joint project in 1992.
Three key components
A series of inland wells to produce the extra
heavy crude.
Transportation of the crude oil to coast via
An upgrader facility to partially refine the
extra heavy crude.

The Joint Venture (contd)
Estimated cost is $2.4 billion
Conoco (50.1%) and PDVSA (49.9%)
together invest $975 million
Remainder $1.450 billion to be financed
through debt

Petrozuatas debt rating
Conoco was rated single AA-
PDVSA was rated single B
Its target is to get a BBB rating
Petrozuatas debt rating (Contd)
Conoco guaranteed to buy all the output that
Petrozuata would produce for the next 35 yrs (priced in
All costs (ie: water, electricity and gas) are also under
long-term contracts, except labor (but it only
represented a small fraction of total cost)
Conoco & PDVSA guaranteed to pay project
expenses, including any unexpected cost overruns
stable revenue + stable cost + no extra costs BBB
Debt Financing
High leverage ratio (60%)
Bank debt, the traditional source of debt and
Rule 144A project bonds

Sources of Funds in million %

Commercial Bank Debt $450 18.6
Rule 144A Project Bond $1,000 41.2
Paid-in Capital (incl. shareholder loans) $445 18.4
Operating Cash Flow $530 21.9
Total $2,425 100%
Where Are They Now
Conoco has merged with Philips Petroleum
and is the 3
largest integrated energy
PDVSA is starting to collect oil from some
newly found sources despite a worker strike at
the end of 2002
Petrozuata is making new contracts and
continues to run well they still have an their B

Question no: 1
Whether Petrozuata should use traditional (Internal Finance or
Project Finance (External) to fund the Petrozuata development?

Project finance is the long-term financing of infrastructure and
industrial projects based upon the projected cash flows of
the project rather than the balance sheets of its sponsors.
Petrozuata should use project finance Because many of reasons
For example project finance allows firms to isolate project risk,
to increase equity return,
to preserve debt capacity,
to mitigate sovereign.
Project finance create value by resolving agency problems and
improving risk management.
Project finance allow the firm to minimize the net cost associated
with market imperfections such as transaction cost, asymmetric
information, incentive conflicts, financial distress and taxes.

Question no: 2
What are identifications of major risks, assessment of their
severity and attempts to mitigate important risks faced while using
project finance in case of Petrozuata?
Project finance create value is by improving risk management.
Risk management consists of identifying, assessing, and
allocating risks with the goal of reducing cost and of ensuring
proper incentives.
The identification of project risks and the assessment of severity
are typically done by the sponsors in conjunction with their
financial advisors.
Then to add credibility to the process the key assumption are
verified using independent experts.

Question no: 2
What are identifications of major risks, assessment of their
severity and attempts to mitigate important risks faced while using
project finance in case of Petrozuata?
In this case the sponsors hired three independent consultant to
analysis the oil reserve, project design, construction schedule,
operating cost, syncrude demand, and price.
in this case there are some risks that are identified in project
finance that are pre-completion risk, operating risks, sovereign
.risk, and financial risks.
allocate residual risk return to the party best able to influence the
outcomes. By thus joining risk and return you increase the
probability that parties will act in ways that maximize efficiency.

Question no: 3
Keeping in mind the financial risk, how much leverage should the
project have?
Financial risk is an umbrella term for multiple types
of risk associated with financing, including financial transactions
that include company loans in risk of default. Risk is a term often
used to imply downside risk, meaning the uncertainty of a return
and the potential for financial loss.
There are three primary financial risk, interest rate risk, funding
risk and credit risk.
Initially the sponsors hoped to finance 70% of the project.
Firstly they discussed whether to use 60% or 70% leverage. They
chose 60% leverage to show their commitment to the project and
to improve the project minimum debt service coverage ratio.

Question no: 4
Does Petrozuata financing strategy make sense?

Yes Petrozuata financing strategy make sense.
The sponsors achieved high leverage ratios, attracted new source
of capital and obtain better capital and obtain better pricing then
previous deal.
Because The sponsors agreed to use $975 million of equity
(40%) and $1.45 billion of debt (60%) to finance the project $2.425
billion total cost.
In the end the sponsor raised $450 million in bank finance and $1
billion in rule 144A bonds all of which was non-resource to the
sponsors following completion of the project.

Question no: 5
Do you think whether Petrozuata can pierce the sovereign risks?
Project finance is most valuable as an instrument for mitigation
sovereign risks.
Indeed it is the one feature that cannot be replicated under
conventional corporate financing scheme.
Sovereign risk was one of the biggest concern about the
Petrozuata deal because of Venezuela historical macroeconomic
and political instability.
The Venezuela government has more influence over political and
economic factors than any other entity if the government fails to
mitigate sovereign risk then it will lose the monetary benefits from
taxes royalties and dividend as well as accompanying benefits of
increased employment and access to refining technology.

Question no: 5
Do you think whether Petrozuata can pierce the sovereign risks?
The final reason why project structure helps mitigate sovereign
risk is that it facilities participation by local government local
financial institutions, multilateral agencies like the international
finance corporation and bilateral agencies like the U.S export
import banks.
The deal had many feature to mitigate risk one of the key feature
was the decision to keep oil revenue out of country.

Question no: 6
Whether Petrozuata would invest in the project?
Yes Petrozuata would invest in this project because this project
has many benefits and hallmarks like,.
it was an economically and legal independent entity.
it was an operating company with limited life (35) year.
it was funded with non-recourse debt for the least part of the life.