The Chad-Cameroon Petroleum Development and Pipeline ProjectProfessor Doug Cerf Donald Bren Graduate School of Environmental Science and Management Environmental Risk Management (ESM 286) Winter 2008What 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?How did the financing differ? Review Corporate Structure in Exhibit 3a Review Sources / Uses of Cash Exhibit 3b Field System Oil wells and drilling equipment Export System Pipeline and off-shore loading systemCorporate Finance for the Field System No debt all equity 3 sponsors (upstream consortium) Exxon/Mobil exposure 608m 40% of $1,521m Market value of equity $280b High discretion over cash flows Monitoring is done internally As opposed to the external monitoring similar to the equator principlesEquator Principles A new voluntary framework to guide “project financing” decisions Endorsed in 2003 by ten leading banks Non government organizations (NGO) wanted financers of large projects to take legal and moral responsibility for the social and environmental impact on local communities and host nations caused by the projects that they financedProject Finance Project finance involves the use of limited or fully non-recourse debt by a corporate partner (the sponsor or sponsors) to finance investment in and ownership of a legally independent, single purpose industrial asset usually with a limited life.Key elements of the project finance agreement Key elements: An investment in an industrial asset An organizational decision to create a new, legally- independent entity Financing decision involving non-recourse debt The project financing arrangement is limited non-recourse debt because it provides a guarantee for debt repayment through completion After completion there is no recourse to sponsors The debt is an obligation of the project companies, Techad (TOTCO) and Cameroon (COTCO) pipeline projects Repayment is a function of project cash flowsKey elements of the project finance agreement By creating a legally-independent entity the borrowing entities (the sponsors) are able to protect their balance sheets Off balance sheet financing Exxon/Mobil has a debt to equity capital ratio on its balance sheet of 23% Export system debt to equity ratio is 62-64% Would Exxon/Mobil do this deal on their balance sheet?Exxon Review Look on Google finance to determine: Total Market capitalization Balance sheet debt and equityRisk 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 BankRisk Mitigation Risk mitigation Inclusion of the World Bank /IFC to help mitigate political and reputation risk The world bank . as the lender of last resort for impoverished countries the World Bank has leverage over these countries that private sponsors do not have. has the experience and technology to deal with environmental, social and political risk that is superior to that of a private sponsor the world bank can sort through the propaganda to determine the actual behavior on environmental and social issuesHow much risk mitigation is needed? How much involvement by the world bank is needed to get the risk mitigation benefits that Exxon/Mobil (sponsors) are looking for? Generally, for highly rated companies like Exxon/Mobil project finance is more expensive than corporate finance The extra costs are in the costs to structure and fund the project finance ($15 million of preparation costs) See quote under financial projections on page 3 of caseThe 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 It appraised the project for sponsors and other outside lenders to uncover important information It assisted with the environmental assessment It structured the project to ensure “fairness” and to minimize social and environmental impact Policy advice to ensure long term sustai