Conoco/Maraven's Financing Effort On Petrozuata Sets String Of Benchmarks

Pipelaying is under way for the first of two 125-mile pipelines from Petrozuata's production site to the Jose industrial complex in Venezuela. One of the lines will transport extra-heavy crude mixed with diluent north to Jose; the other will return diluent to the production site. Petrozuata is a Venezuelan joint venture of Conoco Inc. and Maraven SA. Photo courtesy of Conoco.

• Construction is under way at Jose, Venezuela, on the $1 billion Petrozuata upgrader. The upgrader, slated to come on stream in 2000, is based on Conoco's delayed coking technology and will upgrade diluted Petrozuata crude to synthetic crude oil and byproducts. Photo courtesy of Conoco. [15,233 bytes]

Petrozuata is a $2.45 billion Venezuelan joint venture company formed to produce heavy oil in the La Faja region of Venezuela's Orinoco heavy oil belt and upgrade it into a synthetic crude oil, most of which will be processed at Conoco's refinery at Lake Charles, La. Crude production will start up in third quarter 1998 and continue for the 35 years of the contract term.

Conoco, energy subsidiary of E. I. Du Pont de Nemours, played a key role on the finance team and worked closely with its partners at Maraven and Maraven's parent Petroleos de Venezuela SA (Pdvsa) to implement the financing effort.

Initial efforts

At the outset of discussions on the project's financing plan, it became apparent that the source of financing remained an unanswered question. After visits with many possible lenders around the world, the partners decided that a project of this magnitude needed a financial adviser; after asking for proposals from a handful of institutions, Citibank was selected for this role.

The Petrozuata partners and Citibank decided to target a 60:40 debt-to-equity split and thus ultimately established a plan to seek $1.45 billion of financing. At first, there was consideration of a financing plan that had a heavy multilateral, ECA content but the partners reconsidered that approach as global financial markets continued to evolve and economic improvements emerged in Venezuela.

In the end, this financing was designed to be acceptable to lenders without the use of or requirement for political risk insurance, resulting in a substantial savings in financing costs. The net result is the largest project financing yet in Latin America, with the tightest spreads to date.

Financing structure

Roughly 96% of project revenues will be dollar-denominated and paid to an offshore trustee. Lenders get comfort through a 6-month debt service reserve, collateralization of all project cash in dollars and local currency, and some limitations on cash held by the project in operating accounts. Additional restrictions are made on the ability of the company to distribute cash to the sponsors.

In order to reduce the risk of marketing the production, Conoco stepped up with a commitment to purchase 100% of the project's design output at a market-based formula price.

While this left lenders to evaluate crude price risks, they did not have to be concerned with the marketability of the product. Conoco can process the syncrude at Lake Charles, and Maraven will take part of the production and process it at the company's Cardon refinery in Venezuela. In addition, Petrozuata has the right to sell to third parties on the world market, which is expected to benefit project economics. The partners fully expect that such a market will develop.

Completion agreement

This allowed the project to be executed without requiring lump-sum contracts for all components, typically required in many project financings. We believe this strategy will significantly reduce the total constructed cost by about 15%. The joint venture company is acting as general contractor for the project, with components divided up into manageable contract pieces.

Under the completion agreements, Conoco and Maraven, guaranteed by their respective parent companies, agree to complete the project on a certain date and to independently fund any cost overruns required to complete the project. To provide added flexibility, we designed a mechanism to "buy down" the debt to levels that maintain modeled debt-service coverage ratios in the event the project does not meet certain design capacity targets.

The financing's success is supported by experienced sponsors, strong cash flows, and debt service coverage ratios. It was also aided by strategic planning, coupled with some lucky timing. Being the first of these projects in Venezuela means undertaking a considerable amount of risk, but it also means enjoying the benefit of "writing the book" on this kind of effort.

Strong project cash flows provided a minimum debt service coverage ratio of 2.08:1.0 at a 60% debt level. This, along with a host of other positive issues, allowed the project to achieve credit ratings of BAA 1 by Moody's, BBB- by Standard & Poors, and BBB+ by Duff & Phelps.

Financing timing critical

The partners made a commitment to this project and stuck with it, even during a time of domestic economic uncertainty in Venezuela in 1995-96, when exchange and price controls were reintroduced.

For a long time, it was apparent that the project was not financeable, at least not in an acceptable way. But the partners remained committed and continued, with the expectation that things would improve-and, in fact, they did. So, when the time was right, the partners were ready to pull the trigger on financing execution.

As late as March 1997, the financing timeline still had the closing date scheduled during the fourth quarter. But it became apparent that the appetite in the marketplace was significantly improving, so Petrozuata quickly shifted into high gear to be able to go to the financing market earlier, with the intent to close all aspects of the financing by June. The result far exceeded the companies' expectations, both in pricing and tenor.

Credit Suisse First Boston had been engaged to raise the long-term portion of the financing. Petrozuata went to the capital markets with a 144A bond issue, which evolved into a three-tranche offering in response to what we were seeing in the market: a $300 million, 12-year tenor tranche that was priced at 120 basis points over applicable treasuries (7.63 %); a $625 million, 18-year tranche that was priced at 145 basis points over treasuries (8.22 %); and a $75 million, 25-year, bullet tranche that was priced at 160 basis points over treasuries (8.37 %). The bond offering was over-subscribed.

Petrozuata then focused on the bank market in order to gain some added flexibility. The syndication for the $450 million bank facility was led by Credit Suisse First Boston, Union Bank of Switzerland, ING, and NationsBank. This part of the financing consisted of a $200 million, 14-year amortizing tranche and a $250 million, 12-year amortizing tranche. The bank financing was well received and also was oversubscribed.

Accomplishments

Among their accomplishments together, Maraven and Conoco:

• Raised the targeted $1.45 billion in financing.
• Secured an up-to-14-year uncovered bank facility for $450 million.
• Structured three tranches totaling $1 billion issued in the 144a market with 12-year bonds, 20-year bonds, and 25-year bonds.
• Implemented the largest Latin American project financing and the second-largest emerging-market project financing-after Ras Laffan (see article on p. 43)-to date.
• Established the longest tenor for an emerging-market bond issue; the 20-year and 25-year maturities set benchmarks for an emerging-market project finance bond issue and for the Republic of Venezuela.
• Created the tightest spreads to date for an emerging-market bond issue.
• Achieved the highest-rated project financing to date in Latin America.
• Obtained the largest emerging market project financing bond issue from a sub-investment grade country (Venezuela: Moody's BA2; Standard & Poor's B-, recently upgraded to B+).

Conclusion

To date, it has been recognized by a number of financial publications as "deal of the year" in 1997.

It is the cornerstone for what will be a long-lasting win-win relationship between Conoco and the Pdvsa organization.

Through its investment in Petrozuata, Conoco gains a significant presence in a country that it hopes to develop into a major new core business area.

Petrozuata and other opportunities in Venezuela are an important part of Conoco's overall plan to double its value by 2003.

The Author

Miguel Espinosa is assistant treasurer of Conoco Inc. and manages the treasury department at Conoco's worldwide headquarters in Houston. A native of Mexico City, Espinosa graduated from the University of Texas at Austin with a BA in 1963 and MBA in 1965. He joined Conoco's treasury department in Houston in 1965 and worked for Conoco subsidiaries in Spain and the U.K., where was named treasurer of Continental Oil Co. Ltd. in 1972. In 1974, Espinosa worked at Conoco's Stamford, Conn., office before returning to Houston in 1976. In 1981, Espinosa assumed his current position.

Copyright 1998 Oil & Gas Journal. All Rights Reserved.