PowerPoint Presentation

BP Amoco(A): Policy Statement on the use of Project Finance

OverviewThe British Petroleum Company and Amoco Corporation are publicly traded oil and gas companies working in oil and gas exploration and production(E&P), refining and marketing(R&M) and petrochemical production

1997

1998

1999

Amoco

Earned $2.7bn on revenues of $31.9bn and assets of $32.5bn

% earnings : 60% from E&P, 20% from R&M and 18% from petroleum

When and in what circumstances should BP Amoco opt for Project Finance ?

BP and Amoco merge into $48bn BP Amoco

Reasons to merge :

Need for scale

Potential cost saving of $2bn annually

Synergies between the companies

Capital intensive Oil and Gas Industry

BP

Earned $4.1bn on revenues of $71.3bn and assets of $54.6bn

% earnings : 68% from E&P, 21% from R&M and 11% from petroleum

Issues

Decision on Corporate Finance/Project Finance

Cost and benefits of Project Finance

How and why does project finance create value?

Work out new financing policy for the merged entity

BP sparingly used project finance except in the scenarios of

Size of the projects

Political Risk

Involvement of multilateral organizations

COMPANY

LENDER

PROJECT

lends

Partner B

Partner A

Debt service

Cash flow

equity

equity

Cash flow

equity

COMPANY

LENDER

PROJECT

Partner A

Partner B

lends

Debt service

equity

equity

equity

Cash flow

Cash flow

Financing Models

Corporate Financing

Project Financing

Project Financing Costs and benefits

Criteria CorporateProject FinancingRisk AllocationFull Recourse diversified across assetsLimited non recourse contractual arrangementsControl and MonitoringControl vested in managementLenders have controlOrganizationCash flows from different assetsCash flows from project assetsTransaction CostsLowerHighFree Cash FlowFreely usedOnly for the project

Project Financing vs. Corporate Financing

Costs

More Costs

Benefits

Risk Management

Longer time to arrange

Restricted managerial flexibility

Requires greater disclosure

Expanded firms debt capacity

Additional interests tax shield

Government Concessions

Policy Statement of BP Amoco

Use internal funds to finance capital expenditures except in particular scenarios mentioned below:

Mega projects

Large enough to cause material harm to the companys earnings, debt rating, etc.

Relative Size and Risk

Ability to hold a diversified portfolio (much smaller investment in PF)

Prior to the merger Amoco viewed $2B and BP $3B and up as potential project finance candidates

Projects in Politically volatile areas

Political risk, currency inconvertibility, lack of property rights

Host govt. would be less likely to tolerate hostile action against the project

Could jeopardize access to future credit from financing community(WB, ADB, etc. )

PF used in Kaltim Prima Coal Mine project in Indonesia to manage Indonesian exposure

JV with heterogeneous partners

Manage financial needs of partners with weaker credit capabilities

Negotiate with lenders rather than letting weaker partners negotiate for the group as a whole

$1B financing of Atlantic LNG plant in Trinidad and Tobago on project basis because certain critical partners did not want a large investment on their balance sheets

Case analysis

Case Analysis

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