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The Chad-Cameroon Petroleum Development and Pipeline Project(A)Early 1970s1979February 1996November 1999Initial Consortium: Conoco, Chevron, Exxon, Royal Dutch/ShellFinal Consortium: ExxonMobil (40% stake), Petronas (35% stake), Chevron (25% stake)Project TimelineProject StructureEvaluation of Project Financing PlanScenario 1: Corporate finance with Exxon as the sole ownerScenario 2: Corporate finance with Exxon, Petronas and Chevron as the private sponsorsScenario 4: Project finance with Exxon, Petronas and Chevron as private owners, for both field operations and exportScenario 3: Corporate finance with Exxon, Petronas and Chevron as private owners, for field operations, and project finance with special purpose companies and govt of Chad and Cameroon having minority stakeExxonChevronPetronasAdditional Equity issued 1,147 878 469 Additional debt issued 343 426 462 ExxonChevronPetronasTotal Equity Investment (CF+PF)883772551Total Debt Investment in Project560490350ExxonChevronPetronasEquity Investment (PF)883772551Debt Investment (PF)560490350ExxonAdditional equity issued for Exxon 2,867 Additional debt taken on Exxon's balance sheet 857 Evaluation of Project Financing PlanFunding with only corporate finance with one or more than one private owner/sponsorAs can be seen from the various investment scenarios, using only corporate finance will add to both debt and equity on the balance sheet of private sponsors. Looking at socio-political risks involved, this is not a feasible approach and will entail greater investment as compared to the other two optionsFunding with project finance used to cover a part of fundingProject finance can be used as a feasible method for mitigating socio-political risks and securing participating from commercial banks

It helped Exxon in stake reduction thus minimizing its value at risk in case of catastrophic events

It was also a way to involve multiple stakeholders in the project this aided in deterrence. While the upstream consortium funded 85% of the cost of export system rest was provided by Chad and Cameroon governments, with a loan from IBRD. This ensured participation from these governments by making them liable to a strategically significant lender Hence, it can be seen that cases of only corporate funding seems unfeasible due to significant risks involved. The other scenarios involving project finance emerge as the only feasible options however, only project funding has issues related to greater structuring time involved, along with higher costs as a separate entity is created. This could decrease the confidence of commercial lenders hence, a hybrid structure with both corporate and project finance should be the most preferred scenarioWorld Banks RoleWorld bank has a unique status in the developing world, particularly in its role as a development lender. Potential source of funds in places like Chad and Cameroon

World bank was critical in moving financing arrangements forward and attracting other participants to the project

Its participating also brought legitimacy and expertise which encouraged the ECA to fund a major portion of the project debtProject Risk and Returns among various stakeholdersRisk & Return: Chad RisksHigh risk of adverse environmental impactRe-allocation of indigenous populationExtraction of oil can not guarantee development. In fact, It may slow down developmentReturns$1.8 Billion dollars of cash flows in the form of income taxes, royalties and dividends$25 million payment from Chevron & PETRONAS, a payment for tax benefits receivedRisk & Return: CameroonRisksSerious risks: Deforestation & oil spillsChances of ground water contaminationEnvironmental risk to national reservesNo provision or step to solve future social issuesReturnsReturns would be function of pipeline volumeRisk & Return: Private SponsorsPolitical RiskChad is a war ridden country with high political instabilityCameroon ranked 99 out of 99 countries in terms of corruption according to Transparency InternationalProbability of failure to completeHigh financial riskLosses in case of under production and low prices of Brent oilHigh NPV if the project is executed

PERT Distribution of NPV for Chad , Cameroon & Private Sponsors

The deal is fair for all the three parties as Chad is gaining a large revenue (50% the size of its GDP) with a low share of investment.Although it involves grave environmental concerns for both the countries but involvement of companies like ExxonMobil will ensure minimal damage as these companies are highly concerned about their image Revenue Management Plan (RMP)Aim: To direct the oil revenues towards economic development rather than economic distortion and corruption -> Facilitated through World Bank interventionRMP MonitoringWorld Bank and Chad approve a detailed annual expenditure programExpenditure program reviewed by oversight committeeCommittee term 3 to 5 yearsAnnual review of operations subject to external auditFull monitoring of program by World BankImplementation of RMP made contractual obligation under the sanctioned loans Governments performance under RMP linked to future lending1998 Initial efforts by Chad Government Provisions for Oversight Committee, privatized 45 of 50 state-owned enterprises, cut army size by half reallocated public expenditure to increase developmentRMP CriticismsRMP Proposed ChangesConcern AreaProposedOversight Committee CompositionIncrease representation of external parties 4 members including one from World BankAuthority, Voting and veto powers to be clearly defined in contractPriority Sector ListList definition to be made more exhaustive with specifics on mandatory allocation based on sector and regionPercentage allocations to be elucidated for specific sectorsRevenue AllocationReduce periodicity of revenue allocationCan change allocation only every 10 years (current: 5 years)Stricter PenaltiesWorld Bank to become stronger in its stand if compliance to RMP is not followed by ChadComplete withdrawal of support/funds and total exit from project to be brought in as contractual clausesTackling Direct and Indirect RevenuesSpecial clause for cases when oil prices increased as a result of which indirect revenues grow faster than direct revenues50% of excess oil revenue (direct and indirect) to mandatorily go into a stabilization account