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 1970s
Initial consortium: Conoco, Exxon, Shell, Chevron

Additional discoveries brought reserves to ~1 billion barrels

Chads 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 Chads 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

WBs 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
Chads 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.
Consortiums concept: combine PF & World Bank
deterrence
WBs 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 financing
borrower financing an a green-field project or
expansion expansion
Full recourse to borrower Limited recourse to
Analyze historical & parent companies
projected cash flows Analyze projects future
Limited perfection of cash flows
security Complex documentation
Can have lower D/E ratio. to perfect security
On balance sheet. High D/E ratio
Lender is secured against Off balance sheet.
risk vide borrowers assets High Risk as no security
against borrowers assets
 The World Banks 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 Banks 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
RMPs terms:
Chads government anticipated $1.8B in revenues over projects 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
Chads receipts are back-loaded to protect against
sovereign interference
This approach may be inappropriate given Chads
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
(Contd)
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
Chads 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
(Contd)
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
Chads returns are in distant years
Chads returns 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 NPVs
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?