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
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 • 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 • 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 • 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 • 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 • 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
Prior Winners ARCO Pennzoil Total Third Round Bidders • Aggressive Bidders • CNPC • Union Texas Petroleum
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 • Valuation Options • Cash Flows - NPV • Real Options • Future Reserves • Be in this market • Potential undercover oil reserves
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 Analysis See spreadsheet handouts
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 • 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 $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? • 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.