1. Project Financing and Political Risk Mitigation The Singular Case of the Chad-Cameroon Pipeline Presentation to the TJOGEL Symposium Stephen V. Arbogast, Executive Professor C.T. Bauer College of Business-UH January 23, 2009

2. Discussion Topics 9/08: The World Bank quits the Chad-Cameroon Financing 9/08: The World Bank quits the Chad-Cameroon Financing Project Finance as a Political Risk Mitigation Tool Project Finance as a Political Risk Mitigation Tool First Trials: Exxon and Malaysia First Trials: Exxon and Malaysia Chad-Cameroon: Unique Risks to be Managed by including ECA/MLAs in the Project Financing Chad-Cameroon: Unique Risks to be Managed by including ECA/MLAs in the Project Financing Chad-Cameroon: Chronicle of Events – 2000-08 Chad-Cameroon: Chronicle of Events – 2000-08 Evaluation & Implications: Evaluation & Implications: Results for Chad Consortium, Implications for Private firms Results for Chad Consortium, Implications for Private firms Lessons for World Bank, Implications for Other resource projects in risky places Lessons for World Bank, Implications for Other resource projects in risky places

3. The World Bank quits the Chad-Cameroon Pipeline Project Financing September 9, 2008: World Bank (WB) announces withdrawal September 9, 2008: World Bank (WB) announces withdrawal Bank had lent Chad $65.7 M to finance country’s investment in pipeline Bank had lent Chad $65.7 M to finance country’s investment in pipeline Loans had been conditioned on Chad’s agreement to complex “Revenue Management Plan” (RMP) Loans had been conditioned on Chad’s agreement to complex “Revenue Management Plan” (RMP) Under RMP, WB had oversight over Chad’s spending of most project revenues, which were targeted towards specific development projects Under RMP, WB had oversight over Chad’s spending of most project revenues, which were targeted towards specific development projects WB’s dissatisfaction w/Chad’s conduct prompted demand for loan repayments WB’s dissatisfaction w/Chad’s conduct prompted demand for loan repayments Does WB’s withdrawal signal failure for Oil Companies’ effort to mitigate project risk via WB’s participating in financing? Does WB’s withdrawal signal failure for Oil Companies’ effort to mitigate project risk via WB’s participating in financing? Does WB’s withdrawal indicate RMP model is discredited for use in other energy projects in poor, risky locations? Does WB’s withdrawal indicate RMP model is discredited for use in other energy projects in poor, risky locations?

4. Chad-Cameroon Pipelines: Project Background Oil first discovered in southern Chad by Conoco early in 1970’s Oil first discovered in southern Chad by Conoco early in 1970’s Initial consortium: Conoco, Exxon, Shell, Chevron Initial consortium: Conoco, Exxon, Shell, Chevron Additional discoveries brought reserves to ~1 billion barrels Additional discoveries brought reserves to ~1 billion barrels Chad’s unique risk profile Chad’s unique risk profile Landlocked country: oil must be pipelined to Atlantic coast for export Landlocked country: oil must be pipelined to Atlantic coast for export Best route: through Cameroon – ranked 148/177 on poverty, 99/99 on corruption – potential for pipeline to be held “hostage” Best route: through Cameroon – ranked 148/177 on poverty, 99/99 on corruption – potential for pipeline to be held “hostage” Chad: 30 year civil war after independence; ruled by Gen. Indris Deby since 1990; unstable borders; $300 per capita income; 173/177 poverty Chad: 30 year civil war after independence; ruled by Gen. Indris Deby since 1990; unstable borders; $300 per capita income; 173/177 poverty Oil companies declined to develop Chad’s reserves Oil companies declined to develop Chad’s reserves Conoco withdrew in favor of Exxon; Chevron sold to Elf-Acquitaine Conoco withdrew in favor of Exxon; Chevron sold to Elf-Acquitaine

5. Key to Unlocking Chad’s Reserves – Risk Mitigation Project Finance one of few Available Tools Project Finance can mitigate location/political risk in 3 ways: Project Finance can mitigate location/political risk in 3 ways: 1. Stake Reduction: limiting project sponsor’s capital at risk Requires financing to be “non-recourse” to sponsor Requires financing to be “non-recourse” to sponsor Also strengthens sponsor’s ability to resist host government pressure Also strengthens sponsor’s ability to resist host government pressure 2. Deterrence: disrupting financing involves consequences that deter host government disruptive actions host government disruptive actions Financing to include lenders which host governments don’t want to offend Financing to include lenders which host governments don’t want to offend 3.Terms Clarification: project finance process forces host government to clarify/document commitments to clarify/document commitments Ties commitments to NY/UK law and/or offshore arbitration Ties commitments to NY/UK law and/or offshore arbitration Private firms want deterrence to avoid unilateral contract revision Private firms want deterrence to avoid unilateral contract revision

6. First Test: Esso Production Malaysia (EPMI)1978 Concept: Cash flow allocated for debt service could be impacted by government changes in tax rates Concept: Cash flow allocated for debt service could be impacted by government changes in tax rates Bank loan repayment at risk if government raises rates Bank loan repayment at risk if government raises rates Consortium: Top three international PF banks in lead Consortium: Top three international PF banks in lead Citibank, JP Morgan, Chase Citibank, JP Morgan, Chase Followed by top 3 Malaysian commercial banks Followed by top 3 Malaysian commercial banks Result: Inconclusive Result: Inconclusive Malaysia raised rates, banks responded with mild protests Malaysia raised rates, banks responded with mild protests Exxon repaid loans; Malaysia did not raise rates again Exxon repaid loans; Malaysia did not raise rates again Result left Exxon disinclined to use PF for upstream risk mitigation Result left Exxon disinclined to use PF for upstream risk mitigation

7. Special Risks in Chad-Cameroon led Oil Company Consortium to reconsider using PF Chad’s acute revenue needs for poverty/security; lack of rule of law Chad’s acute revenue needs for poverty/security; lack of rule of law Cameroon’s potential to hold pipeline hostage once built, demanding higher transit fees, equity participations Cameroon’s potential to hold pipeline hostage once built, demanding higher transit fees, equity participations Nothing about EPMI suggested PF by itself would deter such events Nothing about EPMI suggested PF by itself would deter such events Consortium’s new concept: combine PF & World Bank deterrence Consortium’s new concept: combine PF & World Bank deterrence WB’s status: “concessionary” lender, ties to IMF as ‘lender of last resort’ WB’s status: “concessionary” lender, ties to IMF as ‘lender of last resort’ Track record where few if any countries failed to repay WB loans Track record where few if any countries failed to repay WB loans Plan to combine WB participation with strategic ECA/MLA lenders Plan to combine WB participation with strategic ECA/MLA lenders US Ex-Im, CoFACE, European Investment Bank (EIB) US Ex-Im, CoFACE, European Investment Bank (EIB)

8. Chad-Cameroon PF Deal Structure $3.7 G project, divided $1.5 G for oil field development, $2.2 G for pipeline and export infrastructure $3.7 G project, divided $1.5 G for oil field development, $2.2 G for pipeline and export infrastructure Private consortium (now ExxonMobil, Chevron and Petronas) financed oil field development on its own Private consortium (now ExxonMobil, Chevron and Petronas) financed oil field development on its own Pipeline financed with $1.4 G project finance debt, $800 M equity Pipeline financed with $1.4 G project finance debt, $800 M equity WB’s IFC lent $200 M of PF as ‘A’ loan with banks providing similar amount as ‘B’ loan WB’s IFC lent $200 M of PF as ‘A’ loan with banks providing similar amount as ‘B’ loan Other ECA/MLAs and banks lent $600 M Other ECA/MLAs and banks lent $600 M Chad and Cameroon had equity in the pipeline companies Chad and Cameroon had equity in the pipeline companies WB and EIB lent both governments funds for their equity contributions WB and EIB lent both governments funds for their equity contributions

9. WB adds ‘Revenue Management Plan’ to the Deal Concerned about Natural Resource ‘curse’, criticized by NGOs for enabling oil development to help authoritarian regime, WB conditioned its presence (and future loans to Chad) on RMP Concerned about Natural Resource ‘curse’, criticized by NGOs for enabling oil development to help authoritarian regime, WB conditioned its presence (and future loans to Chad) on RMP RMP’s terms: RMP’s terms: Chad’s government anticipated $1.8 G in revenues over project’s life Chad’s government anticipated $1.8 G in revenues over project’s life 84% to be channeled to escrow accounts overseen by WB 84% to be channeled to escrow accounts overseen by WB 10% to stay ‘offshore’ in Fund for Future Generations 10% to stay ‘offshore’ in Fund for Future Generations 76% to go for projects in designated priority development areas 76% to go for projects in designated priority development areas 14% to go for projects in Doba oil producing region 14% to go for projects in Doba oil producing region Oversight committee to review projects, annual budgets Oversight committee to review projects, annual budgets 2/9 members from ‘civil society’ 2/9 members from ‘civil society’ Annual independent audits Annual independent audits Once approved, funds released from offshore accounts to Chad banks Once approved, funds released from offshore accounts to Chad banks

10. Chad agreed to RMP Recognized WB would not proceed without it and private consortium would not develop reserves w/o WB Recognized WB would not proceed without it and private consortium would not develop reserves w/o WB Agreed also to 50% cut in armed forces and privatization of most state companies in 1998 Agreed also to 50% cut in armed forces and privatization of most state companies in 1998 After extensive environmental, social impact studies & consultations, and legal documentation, financing closed in mid-2000 After extensive environmental, social impact studies & consultations, and legal documentation, financing closed in mid-2000 WB: “new model for resource development” WB: “new model for resource development” NGOs: “disappointing WB would participate; unlikely to help Chad’s poor” NGOs: “disappointing WB would participate; unlikely to help Chad’s poor” Project proceeds, completes in 2003; target oil thruput in 2004 Project proceeds, completes in 2003; target oil thruput in 2004

11. Oil prices soar, how do PF & RMP perform? Oil prices - $/B:2004200520062007 Oil prices - $/B:2004200520062007 Project forecast14.2914.6414.7814.94 Project forecast14.2914.6414.7814.94 Actual37.6650.0458.5064.20 Actual37.6650.0458.5064.20 Differential23.3735.4043.7249.26 Strong test of PF’s deterrence – large incentive for host governments to try to extract more ‘rents’ Strong test of PF’s deterrence – large incentive for host governments to try to extract more ‘rents’ Windfall also test of RMP Windfall also test of RMP WB and Chad not ready to absorb revenues w/development projects WB and Chad not ready to absorb revenues w/development projects Cash piling up in escrow Cash piling up in escrow Security threats on Chad’s eastern border Security threats on Chad’s eastern border

12. First Crisis: December 2005 Deby government unilaterally revises RMP Deby government unilaterally revises RMP Law reduces funds escrowed for priority development Law reduces funds escrowed for priority development Incorporates ‘security spending’ into priority areas Incorporates ‘security spending’ into priority areas Chad repatriates Fund for Future Generations Chad repatriates Fund for Future Generations WB response: freeze escrow accounts, suspend loans to Chad WB response: freeze escrow accounts, suspend loans to Chad Energetic WB diplomatic/publicity campaign; Kofi Anan urging Deby to show restraint Energetic WB diplomatic/publicity campaign; Kofi Anan urging Deby to show restraint Deadlock ends in compromise deal, July 2006 – Interim MOU Deadlock ends in compromise deal, July 2006 – Interim MOU 70% all government revenues to go to development 70% all government revenues to go to development More flexibility on security spending More flexibility on security spending Strengthened Oversight Committee to submit new national development strategy to be enacted by new legislation Strengthened Oversight Committee to submit new national development strategy to be enacted by new legislation

13. Conditions stabilized 2H’06-2007 Over $440 M “transferred” to Chad for allocation to priority development sectors by end-2006 Over $440 M “transferred” to Chad for allocation to priority development sectors by end-2006 WB expands staff in-country, focusing on Chad’s petroleum sector and administrative challenges WB expands staff in-country, focusing on Chad’s petroleum sector and administrative challenges NGOs focus on minor oil spill off Cameroon NGOs focus on minor oil spill off Cameroon Chad threatens, but does not implement insertion of Chad’s State oil company into private consortium Chad threatens, but does not implement insertion of Chad’s State oil company into private consortium No general legislation finalized for 2006 MOU deal No general legislation finalized for 2006 MOU deal

14. February 2008 – Rebels Attack and RMP Collapses Early February: Rebels drive across desert from Darfur and attack N’Djamena, Chad’s capital Early February: Rebels drive across desert from Darfur and attack N’Djamena, Chad’s capital 250 die in several days of street fighting 250 die in several days of street fighting End-February: Acting under State of Emergency, Deby empowers himself to approve state budgets by decree End-February: Acting under State of Emergency, Deby empowers himself to approve state budgets by decree Eliminates Oversight Committee, WB approval and audits Eliminates Oversight Committee, WB approval and audits Another suspension of WB lending Another suspension of WB lending But remittances of oil revenues to Chad government accounts continue But remittances of oil revenues to Chad government accounts continue In discussions, WB demands reversion to prior terms, and after Chad fails to agree, requests that loans be repaid In discussions, WB demands reversion to prior terms, and after Chad fails to agree, requests that loans be repaid IFC loans to pipeline remain in place IFC loans to pipeline remain in place Conversations among WB and Chad continue re: basis for resumption of a Bank program Conversations among WB and Chad continue re: basis for resumption of a Bank program

15. Public Assessments of WB’s Withdrawal “ Regrettably, it became evident that the arrangements that had underpinned the Bank’s involvement…were not working. The Bank therefore concluded that it could not continue to support this project …While the payment ends the Bank’s involvement in the pipeline project, the Bank has explained to the Government of Chad that it recognizes the country’s significant development problems…If the Government of Chad wishes to focus its energies on a program to support inclusive development…the World Bank is willing to work with Chad to assist.” World Bank press release, Sept. 9, 2008 “ The World Bank’s request [for loan repayment] amounts to an admission of failure in one of its most controversial and disastrous projects – once touted as a “model” for high-risk projects – after the Chadian government repeatedly used its newfound oil wealth in contravention of its agreements to invest in poverty reduction.” Bank Information Center, Sept. 12, 2008

16. Assessment of Chad-Cameroon Financing as Risk Mitigation for Private Consortium Essential deal terms survived period of peak oil prices Essential deal terms survived period of peak oil prices Fiscal terms essentially unchanged Fiscal terms essentially unchanged State oil company did not gain entry State oil company did not gain entry WB deterrence did not work with Chad WB deterrence did not work with Chad Chad took unilateral actions twice in face of WB’s opposition Chad took unilateral actions twice in face of WB’s opposition Cameroon was not provocative Cameroon was not provocative RMP structurally insulated the private companies RMP structurally insulated the private companies Escrow account funds focused dispute between Chad and WB Escrow account funds focused dispute between Chad and WB WB’s “diplomacy” and resistance were energetic WB’s “diplomacy” and resistance were energetic Contrast to banks in EPMI Contrast to banks in EPMI

17. Assessment of RMP as new WB “Model” for Resource Projects First time results disappointing – will WB care to repeat? First time results disappointing – will WB care to repeat? Little development accomplished, embarrassing withdrawal Little development accomplished, embarrassing withdrawal Severe test: security threats + peak oil prices Severe test: security threats + peak oil prices Enabled oil development to proceed: Enabled oil development to proceed: “We think that the project provides the best and perhaps only opportunity for Chad to reduce the severe poverty of most of its population…Chad’s development prospects can only be improved significantly through the use of this traditional energy source.” James Wolfensohn, WB President Chad-Cameroon project was carefully vetted and executed from environmental and human impact perspective Chad-Cameroon project was carefully vetted and executed from environmental and human impact perspective Fixable RMP design flaws Fixable RMP design flaws

18. RMP: Lessons Learned Tighten control over remittance from Offshore Escrow accounts Tighten control over remittance from Offshore Escrow accounts Chad able to secure enough funds for lengthy confrontations w/WB Chad able to secure enough funds for lengthy confrontations w/WB All oil revenues initially to flow through offshore accounts All oil revenues initially to flow through offshore accounts RMP structure should be less comprehensive, more flexible RMP structure should be less comprehensive, more flexible Target lower % revenues for priority development; anticipate security Target lower % revenues for priority development; anticipate security Anticipate revenue windfalls/shortfalls with specific arrangement Anticipate revenue windfalls/shortfalls with specific arrangement Immediate attention to enhancing development project capabilities Immediate attention to enhancing development project capabilities WB did little between financing’s close (6/00) & project startup (mid’03) WB did little between financing’s close (6/00) & project startup (mid’03) In-country staffing focused as much on execution as supervision In-country staffing focused as much on execution as supervision Don’t overreach on next RMP – escrow lower % of revenue tied to project execution capabilities Don’t overreach on next RMP – escrow lower % of revenue tied to project execution capabilities

19. WB in Project Finance for High Risk Locations – Where from Here? WB continues to be interested in role in Resource projects WB continues to be interested in role in Resource projects Sees energy supply as key to development Sees energy supply as key to development Chad-Cameroon financing successful in getting Chad’s oil developed and mitigating private firms’ high risks Chad-Cameroon financing successful in getting Chad’s oil developed and mitigating private firms’ high risks RMP model discredited within WB and NGO community RMP model discredited within WB and NGO community Recognition of flaws, opportunity for improvement needed to rehabilitate RMP approach Recognition of flaws, opportunity for improvement needed to rehabilitate RMP approach Scaled back RMP coupled with WB participation in financing would be best next step Scaled back RMP coupled with WB participation in financing would be best next step