PETROLERA ZUATA, PETROZUATA C.A
PETROLERA ZUATA (PETROZUATA) CASE ANALYSIS:
HOW SHOULD PDVSA FINANCE THE DEVELOPMENT OF THE ORINOCO BASIN? WHAT ARE THE COSTS AND BENEFITS OF USING PROJECT FINANCE INSTEAD OF TRADITIONAL DEBT FINANCE?
PDVSA should go for project financing for the development of the Orinoco basin. PDVSA is not looking for financing of one deal, but at a chain of many deals which would be a public- private partnership between PDVSA and a foreign organization for development and up-scaling of the Orinoco Basin. Therefore, it is important that PDVSA maintains its cash and debt capabilities to address to future uncertainties. This would provide higher flexibility for PDVSA and at the same time better distribute the risk, providing a lower risk to the home company PDVSA. The costs attached with using project finance instead of traditional debt finance are: 1. High cost of political risk insurance would increase the interest rate associated with debt. As a result higher leverage through project finance would be costlier. 2. Chances of a negative carry due to inflow of large amount of funds via bond in the start, which would not have its usage then. As a result these bonds would fetch a lower investment gin and cause a higher interest drain leading to loss. The benefits associated with project financing instead of traditional debt finance are: 1. The probability of getting a higher investment grade for the project even when the country Venezuela had a rating of B.
2. Using project financing PDVSA can get into a joint venture which can be private and not public. Through this it can enjoy benefits currently being enjoyed by private equity firms. 3. PDVSA will preserve its debt capacity and hence have higher flexibility. 4. Through project financing it can approach larger private markets inviting more foreign investments.
Hence project financing for the venture is a better option.
WHAT ARE PETROZUATA͛A THREE OR FOUR MOST IMPORTANT RISKS? HOW DOES THE DEAL STRUCTURE ADDRESS THESE RISKS? WHO WOULD BEAR THESE RISKS IF THE PROJECT WERE FINANCED INTERNALLY BY PDVSA INSTEAD?
Petrozuata͛s most important operating risks were:
1. POLITICAL RISK: the political risk associated with the downfall of the Venezuelan government and the unpredictability of the Venezuelan government to abruptly change the tax rate or the royalty posed a big risk for the investors.
2. EXCHANGE RATE: the other major risk associated with the Petrozuata project is exchange rate fluctuation. As the Venezuelan economy is developing there is a high risk that that the currency Bolivar would appreciate against dollar. This would increase the expenses and tax
liability of the project relative to the sale income which would be in dollar, reducing the profitability of the project.
3. OIL PRICE VOLATILITY: the third major risk associated with the Petrozuata project...