bidding for a venezuelan oil field: the third round of “la apertura” eddi danusaputro hilde...

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

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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• 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

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

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Oil Price ($/bbl)

Service fee

Cost of Capital

Taxes

Royalty Fee

NPV

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

• Winning Bid = $175 UNION TEXAS

• BP Valuation = $63– BP did not bid

– They understood that the competition would push prices up to unreasonable levels

$63Field

SpecificNPV

ExtraSynergies& FutureOptions

$175

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.