1

HBR CASE STUDY

ON CHAD CAMEROON PIPELINE PROJECT

GROUP MEMBERS:
1) AKASH GUPTA M1703
2) BISWA MOHAN PATI M1711
3) KULDEEP SRIVASTAVA M1715
4) RAHUL KUMAR M1720
5) RAVINANDAN K. RAUSHAN M1705
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POINTS OF DISCUSSION:

Project Site Details

Case Highlights
Project Details
Benefits
Project Development
Finance
Corporate & Project Finance
Revenue Management Model
Role Of IFC/World Bank
Returns
Conclusion
Source:HBR Case(Chad- Cameroon Pipeline Development Project)
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PROJECT SITE:

OIL FIELD

COASTAL CITY

Source:HBR Case(Chad- Cameroon Pipeline

Development Project)
 Case Highlights: 4
ExxonMobil, Chevron, and PETRONAS undertake a $4 Billion
petroleum development and pipeline project
Chad-Cameroon Pipeline

Presented a unique opportunity to stimulate Chads economic

development, and yet entailed environmental and social risks.
Project

Corporate finance for the development of the field system and project
finance for the pipelines

Debate on unstable political structure and how Chad would use its
share of project revenues.

WBs introduction of Revenue Management Plan to target Chad

Governments returns from the project for developmental purposes,
and debate on the likelihood of effectiveness of such a plan.
Source:HBR Case(Chad- Cameroon Pipeline
Development Project)
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PROJECT DETAILS:

The project extracts and carries oil from three oil fields (Miandoum, Kome and Bolobo) in
the Doba basin in southern Chad to off-loading facilities off the coast of Cameroon. The
construction phase comprised:

Drilling
some 300 oil Length
wells 1070km(650
mile)

Installing an off-shore terminal facility - a "floating storage and off-loading" vessel

with associated marine pipelines.
Source:HBR Case(Chad- Cameroon Pipeline
Development Project)
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Benefits:

Chad: Cameroon:
Poverty Alleviation Poverty Alleviation
Employment Opportunities Employment Opportunities
Infrastructure Development Improvement in Public
Infrastructure

Consortium of Oil Companies:

The environmental & social relations of the companies will be improved
by providing the additional technical expertise
Source:HBR Case(Chad- Cameroon Pipeline
Development Project)
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$3.7 Billion PROJECT DEVELOPMENT:

Field System: Export System:

Corporate Finance Project Finance
$ 1.5 Billion to extract oil from $ 2.2 Billion for 1070 Kms Export
Doba Basins Pipeline.
Treatment facility to upgrade Oil Buried 1 Mtr Underground
Operation Centre to Support Through Cameroon at Kribi Coast
Production
Probable Reserves 917 Billion

Chad
Exxon Cameroo
Petronas Chevron
n
(40%) (35%) (25%)
Pipeline
Source:HBR Case(Chad- Cameroon Pipeline
Development Project) Project
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Finance:

Equity Debt
$2.3 Bn $1.4 Bn

1) Exxon - $883 Mn
1)Capital Markets $400
2) PETRONAS - $772 Mn Mn
3) Chevron - $551Mn 2) Exim Loans - $600 Mn

1) Chad Govt - $47Mn

1)IFC A - $100 Mn
2) Cameroon Govt - $70
Mn 2) IFC B - $300 Mn
Source:HBR Case(Chad- Cameroon Pipeline
Development Project)
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Corporate Finance of Field System:

The lead sponsor, ExxonMobil had AAA debt rating, very strong balance sheet ($145M
assets) and $16M cash flow ,Could afford the field investment in a less costly way relative
to project financing.
Field development was the less risky part of the entire project for the sponsors, because
upstream operations including field development and production was one of the core
business areas where the companies very strong at. This reduced the cost of bearing
these risks themselves.
Project financing for a field development project would also not be a viable financing
option, as the lenders generally would be reluctant to finance until after all reserves are
proven and capable of production.

Source:HBR Case(Chad- Cameroon Pipeline

Development Project)
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Project Finance For Export System:

Export system was the riskiest part of the project. Project financing for the export
system mainly enabled the sponsors to spread the political risks as much as possible via
the presence of outside lenders such as WB, IFC, ECAs.
Project financing also created the opportunity for the pipeline companies (JV between
Govts and the sponsors) to issue limited-recourse debt, guaranteed by the sponsors
through completion

Source:HBR Case(Chad- Cameroon Pipeline

Development Project)
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Revenue Management Plan

Formation of Special Petroleum Revenue Account

1

10% - For Future Generation

76.5% - For Five Sectors (Health, Education, Social etc)
2 13.5% - Govt. Budget and Doba Region

9 Member Committee (7 Govt, 2 NGO)

3
Planned Annual Expenditure under the monitoring and approval of
World
4 Bank Contractual Obligation in form of Loan
Source:HBR Case(Chad- Cameroon Pipeline
Development Project)
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PROJECT RISKS:

CHAD CAMEROON PRIVATE PLAYER

War Country Highly Corrupt Political Risk
Political Instable Dense Forest High Financial Risk
Poorest Country Environmental Issue Nationalization
Overflow of cash Indigenous People Long Term
may lead to Havoc Sustainability
Closed Land

Source:HBR Case(Chad- Cameroon Pipeline

Development Project)
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OTHER RISKS

Construction risk: very low with super majors in the oil industry.
Operating risk: low. But can be influenced by sovereign risk.
Financial risk: low. (Very high debt service coverage ratio, ex-4a). But high
country credit rank (country default chance), high total debt % of GDP,
volatile exchange rate are somewhat worrisome.
Sovereign risk: High. Civil unrest, threat from rebel groups, high corruption
perception index (Cameroon). (All stakeholders) Mitigated by WB.
Environmental risk: high. Groundwater contamination from oil leak
(Cameroon)
Other social risk: human rights issues from resettlement of local residence.
(Chad
Source:HBR & Cameroon)
Case(Chad- Cameroon Pipeline
Development Project)
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Trade Off Between Risk & Social
Return:

Best strategy for a country to foster its economic

development that will include people.
Investing in education, health & Social protections
which contributes to economic growth of a country.

Source:HBR Case(Chad- Cameroon Pipeline

Development Project)
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ROLE OF IFC/WORLD BANK

Experience and Motive to develop the poorest countries of world.

IFC Provided a $100 million loan and up to $300 million on syndicated loans to
COTCO & TOTCO.
IFC catalysed $900 million of financing from Export Credit agencies.
Develop a Risk Mitigation Plan for all the risks identified such as Environmental
impacts, resettlement of indigenous people etc.
Protection to other lenders and encourage them to invest in the project.
Stabilizing the economy of Chad as it is one of the poorest economy of the world.
WB also initiated a Revenue Management Plan to help prevent probable misuse of
Chads revenues by the Govt, and target them for developmental purposes to
increase welfare .
Source:HBR Case(Chad- Cameroon Pipeline
Development Project)
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Returns:

The project returns were driven by oil prices & volume.

Price assumptions were based on Brent crude prices, which was ranged between $9 -
$42 per barrel over last 18 years.
Average price was $20 per barrel.
Acidic & Corrosive nature of Doba Basin oil Selling at 10% & 20% discount.

Source:HBR Case(Chad- Cameroon Pipeline

Development Project)
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Returns IFC:

Given 0.6 & Risk Premium 6%

Debt to Equity Ratio = 1.4/2.3 = 60%
Equity = 0.6*(1+0.6) =0.96
Return on Equity = 6+(0.96*6) = 11.76%
Return on Assets = 6+(0.6*6) = 9.6%

At 10% discount rate NPV return is appropriate till $15 oil prices are
maintained.

Source:HBR Case(Chad- Cameroon Pipeline

Development Project)
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FAIR DEAL OR NOT

The project could bring higher returns to the otherwise underdeveloped

chad. The money if effectively used will create a win-win situation for
all the stakeholders.
Private sponsors bear most oil reserve risk in terms of its NPV till 2012,
while private sponsors get the largest portion of projected return and
NPV.
The return and risk distribution to Cameroon seems appropriate, but
most environmental risk should be borne by them.

Source:HBR Case(Chad- Cameroon Pipeline

Development Project)