1. Bidding for a Venezuelan Oil Field: The Third Round of “La Apertura” Eddi Danusaputro Hilde Larssen Jose Molleja Jeremy Usher

2. Outline Venezuela: An Emerging Market The Oil Industry BP Venezuela The Bidding Process Oil Field Analysis and Valuation Discussion and Bidding Results

3. Venezuela: An Emerging Market Time Frame - 1997 Democratic Political Leadership (39 years) Economic Crises: –Inflation Rate –Exchange Rate –Interest Rate Social Reform Program: “Agenda Venezuela” Upcoming 1998 Presidential Elections

4. Inflation Rate (%)

5. Interest Rate (%)

6. Bolivar/$ Exchange Rate

7. Venezuela’s Oil Industry One of the top four oil producing countries in the world International Investments since 1920 Government Expropriation in 1976 PDVSA - World’s 2nd largest oil company 1995: OPEC & Venezuela decided to double Venezuela’s daily production Need ~ $60 billion in investment

8. Venezuelan Oil Reserves

9. “La Apertura”: The Opening Attempt to raise the needed capital 1st & 2nd round Bidding –Complete: Marginal Field re-activation 3rd round Bids –20 Fields for reactivation –PDVSA owned all assets, and the operating company paid CAPEX & OPEX, and received a service fee from PDVSA –Fierce competition to “get a foot in the door”

10. BP Venezuela’s Strategy Duplicate existing production by 2010 Consolidate around existing ops in Eastern Venezuela Lead industry in health, safety & environmental standards Focus on core petroleum and chemical activities Focus growth in regions of the world with new oil and gas resources that have been unexploited due to political history and lack of technical sophistication

11. BP Financial Statistics Company Ratios in 1997: –Debt to Equity: 30.1% (Expected to rise) –Return on Average Capital Employed: 12.9% (Expected to drop) –Return on Average BP Shareholder’s Interest:14.6% (Expected to drop)

12. Boqueron One of the top three fields in the 3rd round Eleven wells already drilled Poor drilling practices have not fully exploited the full potential of the field Varying oil quality depending on depth

13. Third Round Bidders Prior Winners ARCO Pennzoil Total Aggressive Bidders CNPC Union Texas Petroleum

14. Risk Factors Venezuela Economic –Inflation –Exchange Rate –Interest Rate Political –Taxes –Expropriation –New regime –Management Relationship Oil / Technical Oil Price Quality of Oil Volume of Oil Difficulty of installation and exploration BP Internal Cost of Capital Resources availability Reputation

15. Field Valuation Valuation Options –Cash Flows - NPV –Real Options Future Reserves Be in this market Potential undercover oil reserves

16. BP’s NPV Analysis Data and assumptions: –105bbls in total reserves. –Extraction plan based on experience –CAPEX and OPEX accordingly with size and type of field (based on historical data) –Service Fee from PDVSA ~ 31% of production income –Tax= 34%, Municipal Tax= 4%, Royalty Fee= 16.7% –$14/barrels (estimated forecast) –Cost of capital = 10% ???

17. BP’s NPV Analysis See spreadsheet handouts

18. Discussion Will Venezuela continue to remain stable? How much cash flow variation can the project handle and still be positive? Is a 10% Cost of Capital reasonable?

19. Sensitivity Analysis

20. Our Position Estimate 18% Cost of Capital –Currency, Inflation, Exchange risk nominal –Political, expropriation, fee risk impact Creates negative $2 Million NPV Do not bid on Boqueron

21. Winning Bid Winning Bid = $175 UNION TEXAS BP Valuation = $63 –BP did not bid –They understood that the competition would push prices up to unreasonable levels $63 Field Specific NPV Extra Synergies & Future Options $175

22. What happened? Winning bids exceeded all expectations and were driven by the accessibility of strategic impact from the 3 rd Round. Total bids received amounted to $2170m for the 18 Areas on which bids were received against a pre-bid PDVSA view of circa $350m. The industry was valuing opportunities at $18/bbl.