Corp Fin ( Exxon

single owner)
high risk projects has
high positive NPVs
Although In
unfavourable
condition the distress
costs can be
significant and could
jeopardize the firm as
a whole
Corp Fin( 3 owners)
(Exxon 40%)
corporate finance, the
risk of the project and
the risk of the firm are
intertwined
the risk of
expropriation by the
host government
Corp Fin for Field
system and Proj ect
Finance for Export
system
With project finance
since the funds are
raised from
independent third
parties ( IBRD, EIB,
IFC, ECAs), most of
the risk is transferred
the costs of
bankruptcy are lower
with project finance
Project Finance for
both
generally easier to
monitor the cash
flows associated with
a project relative to
the sponsoring firms
cash flows
Project preparation
costs were only $15
million project
finance is associated
with high transactions
costs and makes sense
only if the deal is a
large
Financing
Field System
Investment (million $)
Export System
Investment (million $)
Total Investment(
million $)

Corp Fin ( Exxon single
owner)
1521 2203 3723
Corp Fin( 3 openers)
(Exxon 40%)
0.4*1521= 608 0.4*2203=881 1489
Corp Fin for Field
system and Project
Finance for Export
system
0.4*1521=608
0.4*123+04*608=
321
929
Project Finance for both 0.16*1521=243 0.16*2203=352 596
Instances of political instability hampered chads
economic development in the past
Political Risk
Ground water contamination from oil leak ( greatest
damage to Atlantic Forest zone Cameroon)
Environmental
Risk
Resettlement of local residents going to be affected
from the project(Chad & Cameroon)
Human rights
Issues
High civil unrest, Cameroon corruption index of 99 (All
stakeholders)
Sovereign Risk
High country credit, therefore chances of default
Financial Risk
Assessment of Returns
Returns were driven by price and volume
Actual reserves could vary from 595 millions to 1038 millions
barrel
Brent crude prices ranged from $9 to $42 with an average of
$20.43 per barrel
With discount of 10% to 20% due to corrosive nature of the oil,
projects development and finding cost was only $5.20 per
barrel
Overall, significant return for all stakeholders
Project provides an important opportunity for Chad to reduce poverty, though
contingent on Govt commitment
Receive up to $125M per year from the project, increasing Govt revenues by more
than 50%
Chad has few other alternatives if any for development
Potential employment opportunities created for local people in operations
Another positive externality may be WBs capacity building efforts to establish the
sufficient infrastructure for a well-functioning petroleum industry and investment
climate
Benefits
The realization of the opportunity for economic development strictly dependent on
Governments commitment in implementation of RMP
Environmental and social risks remain
Some adverse impacts are either irreversible or extremely hard to fix
Despite contingency plans, there may be leakages in the pipeline that would go
unnoticed for long time, due to limitations of even the most advanced technologies
Forest regions, home to 11,000 Bakola people (pygmies) will be affected
Risks
Fair distribution of risk & return although most of the environmental risk is borne
by both countries
Benefits

The presence of World Bank and Internal Finance Corporation along with participation
on governments in equity financing significantly reduced political risk exposure
Low construction risks (sponsors expertise and reputation in the industry)
Low operating risks (positive NPV under most scenarios in Exhibit 5 with different price and
reserve levels)
Low financial risks, considering high debt service coverage ratio(as high as 2:1) and low
and development costs compared to price

Risks

Any social or political instability in either Chad or Cameroon would adversely effect the
export of oil through the pipelines across the two countries
Chad and Cameroon both are high on country credit rank, therefore increasing
chances of default
Private sponsors bear most of the oil reserve risk although they get the largest
portion of the projected return among all the parties involved
The world Banks involvement was essential for the beginning of the project
Commercial lenders were unwilling to lend to the project without the
involvement of the World Bank
The humanitarian nature of the funding: The funding of World bank would ensure
that the projects revenues were used for human development through the
revenue management program
Other countries were ready to fund the project; However the revenues in this
case would have been used to promote arms dealing with the dictator of Chad
IFC provided with a loan of $100 million; $300 million syndicated loan to COTCO
and TOTCO
IFC influenced the raising of finances up to $900m from the export credit
agencies
Helped raise $400m from international capital markets
Objective:
If not utilized properly oil revenue will go into wrong hands, Chad will be
devoid of economic development.
RMP ensured benefits accrue to all the citizens of Chad
Positives:
RMP was designed with inputs from Chads government thus by establishing
trust factor
Chad will receive around $1.78 billion over the next years
Discretion in the hand of government on how to spend revenue They wont
feel that their hands are tied
Oversight committee consisting of 9 members to monitor and approve
annual expenditure program
Governments RMP performance linked to the future world bank lending
added incentive
External audit to review annual operations

Risks :
7 members from government in 9 member committee Overrepresentation
could lead to higher bargaining power.
Prone to colluding or bribery.
Assumptions
Average Price per barrel is assumed to be constant across the years
Extracted oil volume is 96% of reserve quantity ( based on base case
scenario)
Distribution of cash flows is calculated for all 9 scenarios according to base
case scenario
Operating costs and other costs are assumed to be same as of base case
scenario
Reinvestment rate is assumed to be 8% for MIRR calculation


MIRR
Price Chad Cameron Private Sponsors
Reserve = 595 mm
bbl
12 12.31% 10.80% 4.20%
15.25 16.63% 14.56% 6.78%
18.5 19.37% 16.91% 8.54%
Reserve = 917 mm
bbl
12 19.37% 16.91% 8.54%
15.25 21.45% 19.31% 10.49%
18.5 22.86% 20.69% 11.90%
Reserve = 1038 mm
bbl
12 20.53% 18.31% 8.54%
15.25 22.37% 20.21% 11.40%
18.5 23.69% 21.51% 12.76%
World Banks
investments
(in $ million)
Investment Rate of return Assumptions
IFC-A Loan 100 15% IFC Lending rates ( Lending rates for Chad and
cameroon is not given on the website; hence the
lending rates for countries like Afghanistan, Nigeria
and Haiti is taken as reference)
IFC-B Loan 300 15%
IBRD 33 8.216%
IBRD lending rates = LIBOR + 1.35%; now for the
calculations we have taken a 12-month LIBOR.
IBRD 44 8.216%
Using the above conditions, the revenues for the World Bank is
projected for the 32-year period and the Net present value is
calculated.
The investments are assumed to be equally spread over the first
4 years from 2000-03. The revenues are materialized from 2004-
32.
Taking this into account the NPV is found to be $73.69 million.
As a result of this, the board members would be expected to
go ahead with the project.
Whether board members of the World Bank
should approve of the project?- YES