Agenda

Timeline
Introduction to international debt and debt
ratings
Description of the PDVSA and Conoco joint
venture
Petrozuatas debt rating
Debt financing: 144A Bonds
Project financing: advantages and
disadvantages
Three types of project financing risks
The aftermath: Duponts sale of Conoco and
state of Petrozuata today
Q&A

Timeline

1976

Venezuelan
government
nationalizes
interests of oil
companies
and forms
PDVSA

1997

Petrozuata was
formed

1998

Dupont sold
Conoco
and first set
of cost
overruns

1999

Second
cost
overruns

The Case of Petrozuata

Petrleos de
Venezuela
(PDVSA)
(49.9%
Interest)

Conoco
Incorporated
(USA)

Petrolera
Zuata

(50.1%
Interest)

The Partners - PDVSA

Currently 4th largest oil company in the world

State-owned and formed through the

nationalization of other companies assets
(Mobil, Exxon, etc)

Despite government instabilities, PDVSA has a

strong track record

The Partners - Conoco

Subsidiary of Dupont (USA)

Has operations in over 200 countries

Known for expertise in technology and

extraction processes

The Joint Venture

Petrozuata was formed in 1997 by PDVSA and

Conoco

Three key components

Production of heavy oil from a new field in

Venezuelas interior

Transportation of the oil to coast via pipeline

Transportation of oil to refineries along the US

Gulf Coast

The Joint Venture (contd)

Estimated $2.425 billion in costs

Conoco (50.1%) and PDVSA (49.9%) together

invest $975 million

Remainder $1.450 billion to be financed through

debt

Why International Debt?

In liquid markets, greater availability of capital

Diversification effects similar to that of

diversifying portfolios

But there are risks

Illiquid markets

Foreign Exchange Risk

Debt Ratings

An evaluation of the possibility of default by a

bond issuer

It is based on an analysis of the issuer's

financial condition and profit potential

Main providers: S&P, Moodys, Fitch

Debt Ratings (contd)

AAA

highest
possible rating

Bond Rating

Aaa

AAA

Investment

Lowest
Risk

Aa

AA

Investment

Low Risk

Investment

Low Risk

Baa

BBB

Investment

Medium
Risk

Ba, B

BB, B

Junk

High Risk

Caa/Ca/C

CCC/CC/C

Junk

Highest
Risk

Junk

In Default

junk bonds

Venezuela
Long

term: B-

Short

term: B

Risk

Moody's

Default

<BBB

Grade

Standard &
Poor's

Petrozuatas debt rating

Conoco was rated single A

PDVSA was rated single B

Junk Bond (it is state-owned company)

Its target is to get a BBB rating

How?

Crude Oil Price

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
The project passed six completion tests (to make
sure that the project can produce syncrude at
pre-determined quantities and qualities)
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%

What is Rule 144A bond

Is

a relatively new security gaining

popularity

Has

greatly increased the liquidity of 144A

bonds

Can

waive the time consuming SEC

registration process (implied it is less
expensive to issue Rule 144A bond
compared to other types of bonds)

Can

only be sold to professional investors

(at least has $100 million in investible

assets)

Project Financing

Popular in emerging markets

Often involves syndicates
Project is separate from legal and financial
responsibilities of investors
Used for large investments that are long-term
and singular (cannot be commingled)
Cash-flow from third parties is predictable
Projects and their lives are finite
Petrozuata used project financing to pay down
large debts without the owners being
accountable for deficits

Three types of risk

Precompletion risk

Postcompletion risk

No operations = no cash flow coming from the

investment
Occur when project is operating and effect the
cash flows

Political risk

Macroeconomic events in Venezuela

Why Project Finance?

Project finance holds less risk for the

partners in the joint venture than simply
financing it themselves

too expensive
local governments offer loans to develop oil
fields

Protects the companies from bankruptcy

risks because they have limited
responsibility

the project is regarded as legally independent

equity returns are increased and the
companies own debt capacity isnt used up.

Why not Project Finance?

Project finance seems perfect as it allows the

company to rid itself of responsibility and
increase equity returns

However, it eliminates co-insurance and

diversification benefits within the company so the
free lunch is a myth.

High legal costs associated with the setup

Difficult to exit syndications

Another example

British Petroleum: North Sea and

Trans-Atlantic Pipeline

Constructed to move oil from the North

Slope of Alaska to the northern most icefree port- Valdez, Alaska

Joint venture between BP, Standard Oil

of Ohio, Atlantic Richfield, Exxon, Mobil
Oil, Philips Petroleum, Union Oil and
Amerada Hess

Cost: $1 billiontoo much for any one

firm to handle

Duponts sale of Conoco

Dupont purchased Conoco in 1981
after high oil prices hurt profits
during the 1970s
Dupont decided to sell Conoco in
1998, shortly after the Petrozuata
deal, when oil prices were at their
lowest levels in a decade
The sale lowered Duponts debt
Spinning off Conoco would help it be
an industry leader, which was
impossible under Dupontconflicted
with Duponts strategic positioning

The Aftermath

Benchmark price of crude oil falls $5 per barrel

over 6 months

Inflation in Venezuela causes interest rates to

jump from 25% to 70%

Cost overrun for Petrozuata is announced

Were Investors Correct?

Petrozuata encountered some of the types of

risk mentioned earlier

Cost of project increases by $553 million

The costs ended up being covered by sponsors

Petrozuata is able to produce larger quantities

than expected

Investors made the right choice

Where Are They Now

Conoco has merged with Philips Petroleum and

is the 3rd largest integrated energy company

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
rating