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Agenda. Timeline Introduction to international debt and debt ratings Description of the PDVSA and Conoco joint venture Petrozuata’s debt rating Debt financing: 144A Bonds Project financing: advantages and disadvantages Three types of project financing risks

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  • Timeline

  • Introduction to international debt and debt ratings

  • Description of the PDVSA and Conoco joint venture

  • Petrozuata’s debt rating

  • Debt financing: 144A Bonds

  • Project financing: advantages and disadvantages

  • Three types of project financing risks

  • The aftermath: Dupont’s sale of Conoco and state of Petrozuata today

  • Q&A

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1976 1997 1998 1999

Venezuelan government nationalizes interests of oil companies and forms PDVSA

Petrozuata was


Dupont sold Conoco and first set of cost overruns

Second cost overruns

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The Case of Petrozuata

Petróleos de Venezuela (PDVSA)

Conoco Incorporated (USA)

(49.9% Interest)

(50.1% Interest)

Petrolera Zuata

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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

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The Partners - Conoco

  • Subsidiary of Dupont (USA)

  • Has operations in over 200 countries

  • Known for expertise in technology and extraction processes

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The Joint Venture

  • Petrozuata was formed in 1997 by PDVSA and Conoco

  • Three key components

    • Production of heavy oil from a new field in Venezuela’s interior

    • Transportation of the oil to coast via pipeline

    • Transportation of oil to refineries along the US Gulf Coast

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The Joint Venture (cont’d)

  • 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

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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

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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, Moody’s, Fitch

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Bond Rating




Standard & Poor's




Lowest Risk




Low Risk




Low Risk




Medium Risk

Ba, B



High Risk




Highest Risk




In Default

Debt Ratings (cont’d)

  • AAA – highest possible rating

  • D – Default

  • <BBB – junk bonds

  • Venezuela

    • Long term: B-

    • Short term: B

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Petrozuata’s 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?

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Crude Oil Price

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Petrozuata’s debt rating (Cont’d)

  • 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

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Debt Financing

  • High leverage ratio (60%)

    • Bank debt, the traditional source of debt and

      Rule 144A project bonds

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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)

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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

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Three types of risk

  • Precompletion risk

    • No operations = no cash flow coming from the investment

  • Postcompletion risk

    • Occur when project is operating and effect the cash flows

  • Political risk

    • Macroeconomic events in Venezuela

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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 isn’t used up.

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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

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Another example

  • British Petroleum: North Sea and Trans-Atlantic Pipeline

    • Constructed to move oil from the North Slope of Alaska to the northern most ice- free 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 billion—too much for any one firm to handle

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Dupont’s 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 Dupont’s debt

  • Spinning off Conoco would help it be an industry leader, which was impossible under Dupont—conflicted with Dupont’s strategic positioning

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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

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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

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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

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