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Petrolera Zuata,

Petrozuata C.A.
THULIKA GAMBIR

SMITHA SAHA

VIGNESH SANGAMESWARAN

STUTI RELAN

VAIBHAV VARSHNEY

ARKA JYOTI MITRA

TIMELINE
1998 - Dupont
sold Conoco
and first set of
cost overruns

1999 - Second
cost overruns

1997 Petrozuata was


formed

1976 Venezuelan
government
nationalizes
interests of oil
companies
and forms
PDVSA

The Partners - PDVSA


Currently 4th 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

The Partners - Conoco

Subsidiary of Dupont (USA)

Has operations in over 200 countries

Known for expertise in technology and extraction processes

The Joint Venture

Petrozuata was formed in 1997 by PDVSA and


Conoco

Three key components

Production of heavy oil from a new field in


Venezuelas 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

CONOCO
(50.1%)

PDVSA
(49.9%)

$1.450
billion
DEPT

Petrozuata

Debt Ratings
An evaluation of the possibility of default by a bond issuer
It is based on an analysis of the issuer's financial condition and profit potential
Main providers: S&P, Moodys, Fitch
AAA highest possible rating
D Default
<BBB junk bonds
Venezuela
Long term: B Short term: B

Conoco was rated single A


PDVSA was rated single B
Junk Bond (it is state-owned company)

Its target is to get a BBB rating

Petrozuatas debt rating

Conoco guaranteed to buy all the output that


Petrozuata would produce for the next 35 yrs (priced
in $)

All costs (ie: water, electricity and gas) are also under
long-term contracts, except labor (but it only
represented a small fraction of total cost)
Conoco & PDVSA guaranteed to pay project expenses,
including any unexpected cost overruns

The project passed six completion tests (to make sure


that the project can produce syncrude at predetermined quantities and qualities)

Project Financing Option

Involves syndicates

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

Initial investment (in millions)


Debt

Equity

Commercial
banks $450

Paid in capital $445

Bond investors
$1000

Operating cash flows


$530

Total

$1450

$975

Total investment

$2425

CAPITALIZATION RATIO= 1450/2425=60%

Advantages and disadvantages of


agency debt, bank debt and Rule144A
bonds
o
o
o
o
o
o

Using bank debt, Petrozuata could draw on its credit line as needed, matching
its cash flows
Using public bonds on the other hand would provide longer maturity, fixed
interest rates, more flexible covenants and larger amounts of borrowing
However public bonds would have to be raised in lump sum amounts to the
extent that the excess funds would create negative carry
Rule144A bonds had all the advantages of public bond, plus they are faster to
acquire (6 months) and require less initial and ongoing disclosure
The main disadvantage of Rule144A bonds in addition to the ones same as
public bonds, only qualified institutions were able to get it, which meant less
liquidity for the issuance and Petrozuata would needed investment-grade rating
Given the speed and flexibility of the process, Rule144A bonds were the most
appealing financing

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