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BP Amoco (A)

BP Amoco created a policy on project finance after merging in 1998. The policy states that the company will use internal funds to finance capital expenditures except in three scenarios: for mega projects too large to fund internally without harming financials; for projects in politically volatile areas to mitigate political risk; and for joint ventures with partners having weaker credit to negotiate jointly with lenders rather than letting weaker partners negotiate alone. The case analyzes the costs and benefits of project finance versus corporate finance and when project finance could create value for BP Amoco given risks, controls, and transaction costs differ between the models.

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507 views8 pages

BP Amoco (A)

BP Amoco created a policy on project finance after merging in 1998. The policy states that the company will use internal funds to finance capital expenditures except in three scenarios: for mega projects too large to fund internally without harming financials; for projects in politically volatile areas to mitigate political risk; and for joint ventures with partners having weaker credit to negotiate jointly with lenders rather than letting weaker partners negotiate alone. The case analyzes the costs and benefits of project finance versus corporate finance and when project finance could create value for BP Amoco given risks, controls, and transaction costs differ between the models.

Uploaded by

BhartiMahawar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
  • Policy Statement Introduction: Introduces the policy statement regarding BP Amoco's approach to project finance.
  • Overview: Provides an overview of BP's merger with Amoco and the reasoning behind using project finance.
  • Issues: Discusses key issues around corporate finance decision-making and project finance value creation.
  • Financing Models: Illustrates the differences between corporate financing and project financing models.
  • Project Financing - Costs and Benefits: Compares the costs and benefits of project financing versus corporate financing, including risk allocation and transaction costs.
  • Policy Statement of BP Amoco: Outlines the policy for using internal funds for capital expenditures in specific scenarios, including mega projects and volatile areas.
  • Case Analysis: Refers to the case study example related to project finance within the company.
  • Conclusion: Concludes the presentation with an acknowledgment note.

BP Amoco(A):

Policy Statement
on the use of
Project Finance

Overview
The British Petroleum Company and Amoco Corporation are publicly traded oil and gas companies working in oil and gas exploration and
production(E&P), refining and marketing(R&M) and petrochemical production

1999

When and in what circumstances should BP Amoco opt for


Project Finance ?
BP and Amoco merge into $48bn BP Amoco
Reasons to merge :

1998

199
7

BP
Earned $4.1bn on
revenues of $71.3bn and
assets of $54.6bn
% earnings : 68% from
E&P, 21% from R&M and
11% from petroleum

Need for scale


Potential cost saving of $2bn
annually
Synergies between the companies
Capital intensive Oil and Gas
Industry
Amoco

Earned $2.7bn on revenues


of $31.9bn and assets of
$32.5bn
% earnings : 60% from
E&P, 20% from R&M and
18% from petroleum

Issues

Decision on Corporate Finance/Project Finance


Cost and benefits of Project Finance
How and why does project finance create value?
Work out new financing policy for the merged
entity
BP sparingly used project finance except in the
scenarios of
Size of the projects
Political Risk
Involvement of multilateral organizations

Financing Models
COMPAN
Y
Cash flow

Debt service

lends
equity

LENDER

COMPANY
equity

equity
Cash flow

Partner

Cash flow Debt service

lends

PROJECT

equity

LENDER

Partner
B

Corporate
Financing

PROJEC
T

equity

equity
Cash flow

Partner
A

Partner
B

Project Financing

Project Financing Costs and benefits


Costs

More Costs
Longer time to arrange
Restricted managerial flexibility
Requires greater disclosure

Benefits

Risk Management
Expanded firms debt capacity
Additional interests tax shield
Government Concessions

Project Financing vs. Corporate Financing


Criteria

Corporate

Project Financing

Risk Allocation

Full Recourse diversified


across assets

Limited non recourse


contractual arrangements

Control and
Monitoring

Control vested in
management

Lenders have control

Organization

Cash flows from different


assets

Cash flows from project


assets

Transaction
Costs

Lower

High

Free Cash Flow

Freely used

Only for the project

Policy Statement of BP
Amoco
Use internal funds to finance capital expenditures except in particular scenarios
mentioned below:
Mega projects
Large enough to cause material harm to the companys earnings, debt rating,
etc.
Relative Size and Risk
Ability to hold a diversified portfolio (much smaller investment in PF)
Prior to the merger Amoco viewed $2B and BP $3B and up as potential project
finance candidates
Projects in Politically volatile areas
Political risk, currency inconvertibility, lack of property rights
Host govt. would be less likely to tolerate hostile action against the project
Could jeopardize access to future credit from financing community(WB,
ADB, etc. )
PF used in Kaltim Prima Coal Mine project in Indonesia to manage Indonesian
exposure
JV with heterogeneous partners
Manage financial needs of partners with weaker credit capabilities
Negotiate with lenders rather than letting weaker partners negotiate for the

Case analysis
Case Analysis

Thank you

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