Transcript Bidding for a Venezuelan Oil Field: The Third Round of “La Apertura” Eddi Danusaputro Hilde Larssen Jose Molleja Jeremy Usher.

Bidding for a Venezuelan Oil Field:
The Third Round of “La Apertura”
Eddi Danusaputro
Hilde Larssen
Jose Molleja
Jeremy Usher
Outline
• Venezuela: An Emerging Market
• The Oil Industry
• BP Venezuela
• The Bidding Process
• Oil Field Analysis and Valuation
• Discussion and Bidding Results
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
19
19
19
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94
91
88
85
82
79
76
73
70
Inflation Rate (%)
120
100
80
60
40
20
0
Interest Rate (%)
60
50
40
30
20
10
96
19
94
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90
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88
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19
84
0
Bolivar/$ Exchange Rate
600
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100
0
1
0
7
9
1
3
7
9
1
6
7
9
1
9
7
9
1
2
8
9
1
5
8
9
1
8
8
9
1
1
9
9
1
4
9
9
Venezuela’s Oil Industry
• One of the top four oil producing countries in the
world
• International Investments since 1920
• Government Expropriation in 1976
• PDVSA - World’s 2nd largest oil company
• 1995: OPEC & Venezuela decided to double
Venezuela’s daily production
• Need ~ $60 billion in investment
Venezuelan Oil Reserves
“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”
BP Venezuela’s 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
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
Shareholder’s Interest:14.6% (Expected to drop)
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
Third Round Bidders
Prior Winners
• ARCO
• Pennzoil
• Total
Aggressive Bidders
•CNPC
•Union Texas
Petroleum
Risk Factors
•
Venezuela
Oil / Technical
Economic
•
•
•
•
– Inflation
– Exchange
Rate
– Interest Rate
•
Political
–
–
–
–
Taxes
Expropriation
New regime
Management
Relationship
Oil Price
Quality of Oil
Volume of Oil
Difficulty of
installation and
exploration
BP
•
•
•
Internal Cost of
Capital
Resources
availability
Reputation
Field Valuation
• Valuation Options
– Cash Flows - NPV
– Real Options
• Future Reserves
• Be in this market
• Potential undercover oil reserves
BP’s 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%
– $14/barrels (estimated forecast)
– Cost of capital = 10% ???
BP’s NPV Analysis
See spreadsheet handouts
Discussion
• Will Venezuela continue to remain stable?
• How much cash flow variation can the project
handle and still be positive?
• Is a 10% Cost of Capital reasonable?
Sensitivity Analysis
Sensit - Sensitivity Analysis - Tornado
Oil Price ($/bbl)
Service fee
Cost of Capital
10.00
20.00
20.00%
40.00%
20.00%
5.00%
60.00%
Taxes
Royalty Fee
-100.00
20.00%
25.00%
-50.00
0.00
5.00%
50.00
100.00
NPV
150.00
200.00
250.00
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
Winning Bid
$175
Extra
Synergies
& Future
Options
• BP Valuation = $63
$63
Field
Specific
NPV
• Winning Bid = $175
UNION TEXAS
– BP did not bid
– They understood that the
competition would push
prices up to unreasonable
levels
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.