Latin Finance - January/February 2012 - 60

project finance
trading at around 72.125 or at a yield of 13.35%. PDVSA’s 5.5% 2027s, rated B+/ B1 by the same agencies, sell for as low as 48 cents on the dollar or 13.35% on a yield basis. Officials at the Carabobo 3 project declined to comment on the venture’s financing plans, while PDVSA officials failed to respond to several requests for comment. Taylor-DeJongh officials referred inquiries to Chevron’s media relations department. “We still need to determine the commercial viability of the project,” Margarita Arango, a spokeswoman for Chevron tells LatinFinance. “We haven’t made a final investment decision in Carabobo.” The Carabobo 3 project is 60% owned by PDVSA, with the 40% remaining divided among Chevron (34%), Mitsubishi (2.5%), Inpex (2.5%) and Suelopetrol (1%). The venture will develop three oil fields and build a stateof-the-art 200,000-barrel upgrading plant to turn thick, sulphur-laden crude into more marketable, lighter oil. yet, and the ultimate profitability of the venture depends on them. Tax exemptions will be key to the financing. The project’s models so far indicate that Chevron and its partners could see an internal rate of return (IRR) of 16%, says an insider familiar with Carabobo 3’s financial models. But that figure depends in large part on how soon along the project’s life the government decides to impose the windfall tax. The more the government delays imposing the tax, the closer the figure gets to a 20% level, the source said. Chevron declined to comment on the IRR figure and so did officials at PDVSA. Oil experts point out that oil companies typically seek a 20% IRR for similar ventures, with a 16% IRR reserved for projects with a very low rate of Costs, Taxes and Other Questions oil recovery. Yet the project’s advantages may add up With project financing being essentially to little if the overall costs of the venture a high-grade market, the big question remain unclear. A team of experts hired by is whether Carabobo 3 could breach the Carabobo 3 partners is now working the necessary triple-B threshold to lure to update the overall cost of the venture, investor interest and tap affordable according to a person with knowledge of financing. With Chávez weakened by his the review. battle with cancer, hopes are high among The original 1990s Orinoco projects many inside and outside Venezuela that a carried a price tag of approximately regime change is on the horizon after the $2 billion each, but early estimates for presidential elections take place late next Carabobo 3, puts it at anywhere between year. Otherwise, an investment-grade for $15 billion and $20 billion, assuming a Carabobo seems unlikely. cost of the upgrading plant alone at $12 Credit rating analysts point out that billion. Some project insiders believe, technically Venezuela under Chávez has however, that the final charge could well dutifully serviced its debt and paid off exceed $20 billion. what it owed in full when it was required Venezuela’s oil royalties and taxes to do so. However, if his administration which Chávez has generously raised remains, “it would be very difficult or even during his mandate, pose another impossible to get an investment-grade unknown for Chevron. In the 1990s, rating”, even if the project finance deal Orinoco projects paid a 1% royalty for the has a solid contractual framework, says revenue obtained from every barrel, and Aaron Freedman, a Moody’s analyst who companies enjoyed an income tax rate of rated Orinoco project debt for many years. 34%. Today, Carabobo 3 partners face a Although Venezuela has technically paid 33% royalty rate, a 50% income tax take, all its debts so far, its treatment of equity and an additional, escalated, windfall-oil- holders leaves a lot to be desired. “Who revenue tax that can take as much as 95 is to say [the Chávez administration] cents out of every dollar of oil sold, and wouldn’t change its mind in the future activates when world prices, as measured [and nationalize a venture again]?” by Brent crude, exceed $40 per barrel. Freedman adds. So far, the government has promised A new administration, on the other to exempt Carabobo 3 from the windfall hand could offer businesses more tax until partners recover their investment, guarantees, making Carabobo 3 more in a calculation that assumes a recovery attractive to investors and less costly for the period of seven years from the beginning partners. It would appear that the project of construction in 2013, but no detailed partners may bite the bullet and play the rules regarding the tax scheme exist Venezuelan roulette game after all. LF respected the company’s operations, an unusually advantageous position for a US firm in socialist Venezuela. Chevron also gains by being able to book its share of the project’s reserves in its balance sheet, the life blood of all publicly listed oil companies. For their part Carabobo 3’s Japanese partners Mitsubishi and Inpex, are seeking new sources of crude and they are expected to sign an off-take contract to ship the project’s production to energyhungry Asian markets. A solid off-take agreement that spans the life of the 25-year venture would ensure a steady stream of cash flows to Carabobo 3, limiting the venture’s liquidity risk and making it a more secure and attractive investment.

On the Bright Side

Several factors can turn the Carabobo 3 project into a viable investment. Given the crude price outlook for the coming decades and Venezuela’s low cost oil, the profit potential is enormous. Demand for oil continues to rise primarily from Asia, namely China and India, and world oil prices are expected to reach levels of at least $125 per barrel by 2035, according to the US’s Energy Information Agency’s reference estimate. While production costs do climb over time, the price of producing a barrel of heavy Venezuelan crude has historically been and remains low at roughly $7 a barrel, one of the lowest costs per barrel for that quality of crude. The project offers no exploratory risk given that the estimated 66 billion barrels in reserves are known to be under the three assigned fields. As a case in point, the partners plan to pump crude from the Carabobo 3 fields at an initial rate of 50,000 barrels a day beginning in the second quarter of 2012, to reduce the amount of debt the project will need to issue later on. Chevron has built a good working relationship with the Chávez administration, which has so far largely

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January/February 2012

Latin Finance - January/February 2012

Table of Contents for the Digital Edition of Latin Finance - January/February 2012