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Aamir Ansari 
Himanshu saigal
Petrozuata is offered $ 2.5 billion oil 
development project in Venezuela. It takes 
place in 1997 as a project sponsor, Conoco and 
PDVSA (Venezuela’s national oil company), 
plan to meet with various development 
agencies and credit rating agencies in respect of 
the proposed financial structure. The authors 
hope to raise part of the $ 1.5 billion of debt in 
the capital markets, which will require an 
investment rating.
.1 
. Economical 
instability 
before 1960s 
2.Nationaliza 
tion of oil 
companies 
3. Formation 
of PDVSA 
4. In 1993 Conoco 
came in joint 
venture 
5. Petrozuata 
planned to 
build 125 mile 
pipeline 
6. DuPont & Conoco 
agreed to purchase 
104,000 BCDP from 
Petrozuata
Conoco 
Incorporated 
Petrolera 
Zuata 
(USA) 
Petróleos de 
Venezuela 
(PDVSA) 
(50.1% 
Interest) 
(49.9% 
Interest)
 Currently 10th 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
 Subsidiary of DuPont (USA) 
 Has operations in over 200 countries 
 15000 employees in over 40 countries. 
 Known for expertise in technology and 
extraction processes
 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
 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
1. Saudi Arabia 
2. Russia 
3. United Arab Emirates 
4. Kuwait 
5. Iraq 
6. Nigeria 
7. Qatar 
8. Iran 
9. Angola 
10. Venezuela
 In liquid markets, greater availability of capital 
 Developing countries. 
 But there are risks - 
 Illiquid markets 
 Foreign Exchange Risk
 A credit rating is an evaluation of the credit 
worthiness of a debtor, especially a business (company) 
or a government. 
 The evaluation is made by a credit rating agency of the 
debtor's ability to pay back the debt 
 It is based on an analysis of the issuer's financial 
condition and profit potential 
 Main providers: S&P, Moody’s, Fitch
Petrolera zuata
 Conoco was rated single A 
 PDVSA was rated single B
Petrolera zuata
 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%
 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)
 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
 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
 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.
 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
 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
 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
 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
 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
 Any questions?

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Petrolera zuata

  • 2. Petrozuata is offered $ 2.5 billion oil development project in Venezuela. It takes place in 1997 as a project sponsor, Conoco and PDVSA (Venezuela’s national oil company), plan to meet with various development agencies and credit rating agencies in respect of the proposed financial structure. The authors hope to raise part of the $ 1.5 billion of debt in the capital markets, which will require an investment rating.
  • 3. .1 . Economical instability before 1960s 2.Nationaliza tion of oil companies 3. Formation of PDVSA 4. In 1993 Conoco came in joint venture 5. Petrozuata planned to build 125 mile pipeline 6. DuPont & Conoco agreed to purchase 104,000 BCDP from Petrozuata
  • 4. Conoco Incorporated Petrolera Zuata (USA) Petróleos de Venezuela (PDVSA) (50.1% Interest) (49.9% Interest)
  • 5.  Currently 10th 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
  • 6.  Subsidiary of DuPont (USA)  Has operations in over 200 countries  15000 employees in over 40 countries.  Known for expertise in technology and extraction processes
  • 7.  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
  • 8.  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
  • 9. 1. Saudi Arabia 2. Russia 3. United Arab Emirates 4. Kuwait 5. Iraq 6. Nigeria 7. Qatar 8. Iran 9. Angola 10. Venezuela
  • 10.  In liquid markets, greater availability of capital  Developing countries.  But there are risks -  Illiquid markets  Foreign Exchange Risk
  • 11.  A credit rating is an evaluation of the credit worthiness of a debtor, especially a business (company) or a government.  The evaluation is made by a credit rating agency of the debtor's ability to pay back the debt  It is based on an analysis of the issuer's financial condition and profit potential  Main providers: S&P, Moody’s, Fitch
  • 13.  Conoco was rated single A  PDVSA was rated single B
  • 15.  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%
  • 16.  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)
  • 17.  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
  • 18.  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
  • 19.  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.
  • 20.  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
  • 21.  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
  • 22.  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
  • 23.  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
  • 24.  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