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Bidding for a Venezuelan Oil Field: The Third Round of “La Apertura”. Eddi Danusaputro Hilde Larssen Jose Molleja Jeremy Usher. Outline. Venezuela: An Emerging Market The Oil Industry BP Venezuela The Bidding Process Oil Field Analysis and Valuation Discussion and Bidding Results.

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bidding for a venezuelan oil field the third round of la apertura

Bidding for a Venezuelan Oil Field: The Third Round of “La Apertura”

Eddi Danusaputro

Hilde Larssen

Jose Molleja

Jeremy Usher

outline
Outline
  • Venezuela: An Emerging Market
  • The Oil Industry
  • BP Venezuela
  • The Bidding Process
  • Oil Field Analysis and Valuation
  • Discussion and Bidding Results
venezuela an emerging market
Venezuela: An Emerging Market
  • Time Frame - 1997
  • Democratic Political Leadership (39 years)
  • Economic Crises:
    • Inflation Rate
    • Exchange Rate
    • Interest Rate
  • Social Reform Program: “Agenda Venezuela”
  • Upcoming 1998 Presidential Elections
venezuela s oil industry
Venezuela’s Oil Industry
  • One of the top four oil producing countries in the world
  • International Investments since 1920
  • Government Expropriation in 1976
  • PDVSA - World’s 2nd largest oil company
  • 1995: OPEC & Venezuela decided to double Venezuela’s daily production
  • Need ~ $60 billion in investment
la apertura the opening
“La Apertura”: The Opening
  • Attempt to raise the needed capital
  • 1st & 2nd round Bidding
    • Complete: Marginal Field re-activation
  • 3rd round Bids
    • 20 Fields for reactivation
    • PDVSA owned all assets, and the operating company paid CAPEX & OPEX, and received a service fee from PDVSA
    • Fierce competition to “get a foot in the door”
bp venezuela s strategy
BP Venezuela’s Strategy
  • Duplicate existing production by 2010
  • Consolidate around existing ops in Eastern Venezuela
  • Lead industry in health, safety & environmental standards
  • Focus on core petroleum and chemical activities
  • Focus growth in regions of the world with new oil and gas resources that have been unexploited due to political history and lack of technical sophistication
bp financial statistics
BP Financial Statistics
  • Company Ratios in 1997:
    • Debt to Equity: 30.1% (Expected to rise)
    • Return on Average

Capital Employed: 12.9% (Expected to drop)

    • Return on Average BP

Shareholder’s Interest:14.6% (Expected to drop)

boqueron
Boqueron
  • One of the top three fields in the 3rd round
  • Eleven wells already drilled
  • Poor drilling practices have not fully exploited the full potential of the field
  • Varying oil quality depending on depth
third round bidders
Prior Winners

ARCO

Pennzoil

Total

Third Round Bidders
  • Aggressive Bidders
      • CNPC
      • Union Texas Petroleum
risk factors
Venezuela

Economic

Inflation

Exchange Rate

Interest Rate

Political

Taxes

Expropriation

New regime

Management Relationship

Risk Factors

Oil / Technical

  • Oil Price
  • Quality of Oil
  • Volume of Oil
  • Difficulty of installation and exploration

BP

  • Internal Cost of Capital
  • Resources availability
  • Reputation
field valuation
Field Valuation
  • Valuation Options
    • Cash Flows - NPV
    • Real Options
      • Future Reserves
      • Be in this market
      • Potential undercover oil reserves
bp s npv analysis
BP’s NPV Analysis
  • Data and assumptions:
    • 105bbls in total reserves.
    • Extraction plan based on experience
    • CAPEX and OPEX accordingly with size and type of field (based on historical data)
    • Service Fee from PDVSA ~ 31% of production income
    • Tax= 34%, Municipal Tax= 4% , Royalty Fee= 16.7%
    • $14/barrels (estimated forecast)
    • Cost of capital = 10% ???
bp s npv analysis1
BP’s NPV Analysis

See spreadsheet handouts

discussion
Discussion
  • Will Venezuela continue to remain stable?
  • How much cash flow variation can the project handle and still be positive?
  • Is a 10% Cost of Capital reasonable?
our position
Our Position
  • Estimate 18% Cost of Capital
    • Currency, Inflation, Exchange risk nominal
    • Political, expropriation, fee risk impact
  • Creates negative $2 Million NPV
  • Do not bid on Boqueron
winning bid
Winning Bid

$175

  • Winning Bid = $175 UNION TEXAS
  • BP Valuation = $63
    • BP did not bid
    • They understood that the competition would push prices up to unreasonable levels

Extra

Synergies

& Future

Options

$63

Field

Specific

NPV

what happened
What happened?
  • Winning bids exceeded all expectations and were driven by the accessibility of strategic impact from the 3rd Round.
  • Total bids received amounted to $2170m for the 18 Areas on which bids were received against a pre-bid PDVSA view of circa $350m.
  • The industry was valuing opportunities at $18/bbl.