Bidding for a Venezuelan Oil Field: The Third Round of

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

• Eddi Danusaputro
• Hilde Larssen
• Jose Molleja
• Jeremy Usher

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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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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

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Inflation Rate ()
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Interest Rate ()
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Bolivar/ Exchange Rate
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Venezuelas Oil Industry

• One of the top four oil producing countries in
  the world
• International Investments since 1920
• Government Expropriation in 1976
• PDVSA - Worlds 2nd largest oil company
• 1995 OPEC Venezuela decided to double
  Venezuelas daily production
• Need 60 billion in investment

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Venezuelan Oil Reserves
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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

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BP Venezuelas 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

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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
• Shareholders Interest14.6 (Expected to
  drop)

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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

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Third Round Bidders

• Prior Winners
• ARCO
• Pennzoil
• Total

• Aggressive Bidders
• CNPC
• Union Texas Petroleum

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Risk Factors

• Venezuela
• Economic
• Inflation
• Exchange Rate
• Interest Rate
• Political
• Taxes
• Expropriation
• New regime
• Management Relationship

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

• BP
• Internal Cost of Capital
• Resources availability
• Reputation

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Field Valuation

• Valuation Options
• Cash Flows - NPV
• Real Options
• Future Reserves
• Be in this market
• Potential undercover oil reserves

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BPs 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 ???

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BPs NPV Analysis

• See spreadsheet handouts

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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?

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Sensitivity Analysis
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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

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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
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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.