Case Study - CAMISEA Natural Gas Project FACTS 1. Overview of the Camisea Project The Project: Natural Gas Project. Location: The Camisea gas reserves are located along the Camise river in the southern Amazon region of Peru. Reserves: They hold proven and probable reserves of 310 billion ms of gas and an estimated 600 million barrels of natural gas liquids (NGL). Phases of the Project: The Camise project consists of three separate but interrelated projects: - The exploitation of these reserves; - The construction and operation of two pipelines (one for natural gas and one for natural gas liquids) for transportation, and - The distribution network for natural gas to the main consumption center in the Peruvian cities Lima and Callao where it will be used for residential and industrial purposes and to generate electricity that will then be distributed nationwide. The NGL will supply domestic market and will also be exported. Total costs for the Camise project are estimated to USD 1.7 billion. Oil & Gas industry in Peru: Peru is a source of oil and gas however, since the eighties, oil production has declined significantly. It is anticipated that demand for gas will grow in the coming years especially for electrical and industrial use. Thus, the discovery of Camisea fields represent an opportunity to satisfy electrical and industrial demand of the Peruvian market. Importance of the Camisea Fields: The Camisea fields are considered as the most important natural gas reserves in Latin America and they are ten times greater than all their existing natural gas reserves in Peru. The area is considered as one of the most pristine areas in the world and it is very close to important natural protected areas. Early years of the project: The Camisea reserves were discovered between 1983 and 1987 by Shell but no agreement could be reached on an exploitation contract at the time. In 1996, an exploitation contract was signed with a joint venture of Shell and Exxon Mobil but in 1998 the consortium abandoned the project because of differences with the Peruvian government. The Government of Peru then organized an international public bidding in 1999, dividing the project into three different phases for which separate licenses and concession are awarded: Finally, a license was awarded in 2000 to a consortium led by Pluspetrol (Argentina). The consortium offered to pay the government of Peru 37.24% of the project's annual income. The consortium consists of: . Pluspetrol (Argentina): 36% - Hunt Oil (US): 36% SK Corporation (South Korea): 18% Techint (Italy/Argentine): 10% Actual production started in 2004 Stakeholders of the Project: The number of stakeholders that have been involved over the course of the nearly two decades of development activities is quite large and has fluctuated. - Government Stakeholders, - Development Stakeholders; -NGO Stakeholders; - Communities Stakeholders, - Financial Stakeholders. Risks and challenges facing the Camise project a Risks and challenges resulting from the nature of the Gas Project - Complex nature of LNG (Liquefied Natural Gas) projects: One of the most striking features of the liquefied natural gas (LNG) industry is the huge, complex and capital-intensive infrastructure projects it entails. Managing these projects demands a wide range of know-how, which only a very few operators possess Major changes in the LNG markets; LNG projects require a special treatment for their financing: unlike oil projects, gas projects are found difficult to finance because of their inflexibility. Gas projects require supply, transportation and utilization phases to be developed concurrently while oil projects are seen much easier to finance due to their international marketability and relatively low costs. - LNG projects are capital intensive, they require significant up-front investments. b. Risks and challenges resulting from the location of the Project - Peru is a developing country, - High Geopolitical risks (the risk that an investment's returns could suffer as a result of political changes or instability in a country). Therefore, national or regional tensions can interrupt the LNG trade. - Environmental sensitive area: environmental problems that could hold up the project. Environmental risk should be constantly monitored until the project is completed. Challenges relating to the pipeline construction in the jungle and over the Andes (longest continental mountain range in the world). Social challenges relating to gas development in lands belonging to native people. American Indians live where the reserves are located: the leaders of the indigenous peoples claimed that the Camisea gas project will put indigenous peoples' lives at "grave risk" and serious danger and that 20 000 people living in the region are against it. 3. The problematic: The financing of the Camisea Project At the early stages of the project, the potential lenders were reluctant to participate in the project. The Lenders did not want to participate in the project financing of the project unless they believe that the environmental, social health and safety aspects have been dealt with appropriately. The Lenders also sent independent environmental consultant firms in order to get further information about the environmental, ecological and social impacts before making any decision. In addition to that, some environmental NGOs were lobbying potential lenders to deny the Camise project financing. It was highly argued that the Camisea is an environmentally and culturally sensitive area. DISCUSSION In light of the above facts and information and based on your understanding of the risks associated with the Camisea Project: 1. What would your position be if you were one of the potential Lenders? Would you enter into a project financing transaction for the Camisea Project? 2. In the affirmative, why and how would you mitigate the risks arising from the project (notably the environmental and social risks)? 3. If no, please justify your decision? ADDITIONAL QUESTIONS (not specific to the Camisea Project) A. In general, why would investors choose project finance as opposed to corporate finance? B. In general, what would be the main security and control mechanisms the Lenders would require be included in the loan documentation? Case Study - CAMISEA Natural Gas Project FACTS 1. Overview of the Camisea Project The Project: Natural Gas Project. Location: The Camisea gas reserves are located along the Camise river in the southern Amazon region of Peru. Reserves: They hold proven and probable reserves of 310 billion ms of gas and an estimated 600 million barrels of natural gas liquids (NGL). Phases of the Project: The Camise project consists of three separate but interrelated projects: - The exploitation of these reserves; - The construction and operation of two pipelines (one for natural gas and one for natural gas liquids) for transportation, and - The distribution network for natural gas to the main consumption center in the Peruvian cities Lima and Callao where it will be used for residential and industrial purposes and to generate electricity that will then be distributed nationwide. The NGL will supply domestic market and will also be exported. Total costs for the Camise project are estimated to USD 1.7 billion. Oil & Gas industry in Peru: Peru is a source of oil and gas however, since the eighties, oil production has declined significantly. It is anticipated that demand for gas will grow in the coming years especially for electrical and industrial use. Thus, the discovery of Camisea fields represent an opportunity to satisfy electrical and industrial demand of the Peruvian market. Importance of the Camisea Fields: The Camisea fields are considered as the most important natural gas reserves in Latin America and they are ten times greater than all their existing natural gas reserves in Peru. The area is considered as one of the most pristine areas in the world and it is very close to important natural protected areas. Early years of the project: The Camisea reserves were discovered between 1983 and 1987 by Shell but no agreement could be reached on an exploitation contract at the time. In 1996, an exploitation contract was signed with a joint venture of Shell and Exxon Mobil but in 1998 the consortium abandoned the project because of differences with the Peruvian government. The Government of Peru then organized an international public bidding in 1999, dividing the project into three different phases for which separate licenses and concession are awarded: Finally, a license was awarded in 2000 to a consortium led by Pluspetrol (Argentina). The consortium offered to pay the government of Peru 37.24% of the project's annual income. The consortium consists of: . Pluspetrol (Argentina): 36% - Hunt Oil (US): 36% SK Corporation (South Korea): 18% Techint (Italy/Argentine): 10% Actual production started in 2004 Stakeholders of the Project: The number of stakeholders that have been involved over the course of the nearly two decades of development activities is quite large and has fluctuated. - Government Stakeholders, - Development Stakeholders; -NGO Stakeholders; - Communities Stakeholders, - Financial Stakeholders. Risks and challenges facing the Camise project a Risks and challenges resulting from the nature of the Gas Project - Complex nature of LNG (Liquefied Natural Gas) projects: One of the most striking features of the liquefied natural gas (LNG) industry is the huge, complex and capital-intensive infrastructure projects it entails. Managing these projects demands a wide range of know-how, which only a very few operators possess Major changes in the LNG markets; LNG projects require a special treatment for their financing: unlike oil projects, gas projects are found difficult to finance because of their inflexibility. Gas projects require supply, transportation and utilization phases to be developed concurrently while oil projects are seen much easier to finance due to their international marketability and relatively low costs. - LNG projects are capital intensive, they require significant up-front investments. b. Risks and challenges resulting from the location of the Project - Peru is a developing country, - High Geopolitical risks (the risk that an investment's returns could suffer as a result of political changes or instability in a country). Therefore, national or regional tensions can interrupt the LNG trade. - Environmental sensitive area: environmental problems that could hold up the project. Environmental risk should be constantly monitored until the project is completed. Challenges relating to the pipeline construction in the jungle and over the Andes (longest continental mountain range in the world). Social challenges relating to gas development in lands belonging to native people. American Indians live where the reserves are located: the leaders of the indigenous peoples claimed that the Camisea gas project will put indigenous peoples' lives at "grave risk" and serious danger and that 20 000 people living in the region are against it. 3. The problematic: The financing of the Camisea Project At the early stages of the project, the potential lenders were reluctant to participate in the project. The Lenders did not want to participate in the project financing of the project unless they believe that the environmental, social health and safety aspects have been dealt with appropriately. The Lenders also sent independent environmental consultant firms in order to get further information about the environmental, ecological and social impacts before making any decision. In addition to that, some environmental NGOs were lobbying potential lenders to deny the Camise project financing. It was highly argued that the Camisea is an environmentally and culturally sensitive area. DISCUSSION In light of the above facts and information and based on your understanding of the risks associated with the Camisea Project: 1. What would your position be if you were one of the potential Lenders? Would you enter into a project financing transaction for the Camisea Project? 2. In the affirmative, why and how would you mitigate the risks arising from the project (notably the environmental and social risks)? 3. If no, please justify your decision? ADDITIONAL QUESTIONS (not specific to the Camisea Project) A. In general, why would investors choose project finance as opposed to corporate finance? B. In general, what would be the main security and control mechanisms the Lenders would require be included in the loan documentation