bp amoco case study

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CASE STUDY: BP AMOCO (A): POLICY STATEMENT ON THE USE OF PROJECT FINANCE

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The Caspian region is considered to be one of the next oil and gas frontiers. Along with the re-distribution of political power and the emergence of new balances after the collapse of the Soviet Union, the continuous waves of change also have had significant effects on the prospects for development of energy resources in the region. The objective of this study is to develop a model in order to understand and predict the outcome of the policies of the major actors (governments and companies) in the development and marketing of Caspian Sea energy resources. More specifically, the purpose is to identify the principal factors and their interactions in selecting export routes for the energy resources of the Caspian Basin. My hypothesis in this study is that political factors are dominant in the region. In the final analysis, the political process is more important than economics in determining which pipeline is to be built. The principal inputs to the development of the model will be detailed analyses of; (1) the development of the Baku-Tbilisi-Ceyhan (BTC) pipeline project, and (2) the determination of the export route for Kazakhstan’s giant Kashagan offshore oil field. Such a predictive model can then be applied to other countries in the region, or other similar resource-rich regions of the world. After studying the developments leading to BTC’s success, the promising oil and gas developments in Kazakhstan shall be examined. How will the Kashagan oil field be developed? What alternatives are available to the Kazakh government other than the Russian oil pipeline network? With regard to this question, I put forward the most likely outcome. My methodology will modify Bruce Bueno de Mesquita’s (BDM) model of predicting political events in an attempt to find an answer to the abovementioned central question. Applicability of the BDM model will be tested in the context of energy development, which is different from the original and traditional fields of application for this model.

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Bp Amoco (case study)

BP Amoco was formed through the merger of British Petroleum and Amoco in 1998. Both companies had highly centralized finance functions that preferred corporate financing over project financing. After the merger, BP Amoco's finance executives were tasked with developing a new financing policy for the combined entity. They examined the advantages and disadvantages of both project finance and corporate finance models before recommending scenarios where each could be applied within BP Amoco. Read less

More Related Content

• 1. BP Amoco: Policy Statement on the Use of Project Finance Abhik Tushar Das (20104001) Sitanshu Pathak (20104007) 15 Month Executive MBA Program School of Petroleum Management, PDPU
• 2. Content • Organization Structure • Post merger structure • Assignment • Discussion on PF and CF – Advantage – Disadvantage – Structure – Sources – Institutions • BP Amoco PF and CF Model Comments: 6/14/2011 2 [email protected]
• 3. Organization Structure British Petroleum Amoco Corporation • UK based – world’s 3rd • US based – world’s 6rd largest Oil & Gas giant largest Oil & Gas giant • Operations in 70 countries • Operations in 25 countries • 56,000 employees • 43,000 employees • CEO Sir John Browne • CEO H Lawrence Fuller • Assets $ 54.6 bn. • Assets $ 32.5 bn. • Revenues $ 71.3 bn. • Revenues $ 31.9 bn. • Profits $ 4.1 bn. (1997) • Profits $ 2.7 bn. (1997) In spite corporate rivalry, both merged in 1998 to form BP Amoco to create financial synergies required to fund capital intensive projects. Comments: 6/14/2011 3 [email protected]
• 4. Post Merger Organization Structure • Global HQ in London with Sir John Browne (BP) as CEO • H Lawrence Fuller (Amoco) & Peter Sutherland (BP) as non exe co-chairman • Finance Group: – CFO: John Buchanan (BP) – Treasurer: David Watson (BP) – Head Specialized Finance: Bill Young (Amoco) Both companies had highly centralized finance functions with preference for corporate financing over project financing. Comments: 6/14/2011 4 [email protected]
• 5. The Assignment Goal: • To work out new financing policy for the merged entity. Process: • Watson & Bill sought opinion of finance executives of both the firms regarding their take on project finance vis-a-vis corporate finance. • BP sparingly used project finance • Amoco too, believed in corporate finance more. But they sometimes used project finance. Comments: 6/14/2011 5 [email protected]
• 6. Project Finance Lenders •Non recourse debt Assets •Project assets as collateral Cash Flows •Project future cash flows Life •Finite life Comments: 6/14/2011 6 [email protected]
• 7. Prerequisites of Project Finance Discrete – non core assets Known risk-return profile Lenders familiarity with business model Comments: 6/14/2011 7 [email protected]
• 8. Advantages of Project Finance Hedge Financial against Leverage – Tax losses by Risk Shield sacrificing management some profit tool Government concessions Increases borrowing capacity Comments: 6/14/2011 8 [email protected]
• 9. Disadvantages of Project Finance High costs of capital – due to high risk Time consuming process; Many layers of clearances Requires separate work force Low flexibility Leakages of proprietary information to lenders Comments: 6/14/2011 9 [email protected]
• 10. Comparative Summary Project Finance Corporate Finance • Business diversification • Business Expansion • Capital intensive projects • Small scale projects • Project in politically volatile • Politically stable areas environment • Ventures with weak credit • Stand alone venture or rating partners strong partners Comments: 6/14/2011 10 [email protected]
• 11. Structure of Project Finance Lenders Sponsors Project Contractor Equity Finance Debt Finance SPV Support Agreement Concessions Supplier Off Comments: takers Government 6/14/2011 11 [email protected]
• 12. Sources of Long Term Fund Lease Financing Secured Debt Unsecured debt Convertible debt Preferred Equity Common Equity Comments: 6/14/2011 12 [email protected]
• 13. Sources of Short Term Fund Construction Financing Bridge Financing Line of Credit Comments: 6/14/2011 13 [email protected]
• 14. Institutions Promoters Sponsors Equity Funds Banks / Non Bank Financial Institutions Government Suppliers / Off takers Comments: 6/14/2011 14 [email protected]
• 15. Corporate Finance Funds •Internal funds Assets •Company assets as collateral Cash Flows •Company balance sheet Comments: 6/14/2011 15 [email protected]
• 16. Process of Corporate Finance Use internal funds Pledge assets and cash flows No liability on sponsors Comments: 6/14/2011 16 [email protected]
• 17. Benefits of Corporate Finance Easy mobilization of funds Low cost of capital Flexibility in decision making Comments: 6/14/2011 17 [email protected]
• 18. Corporate Finance Model Company Finance Structure: Funds BP Amoco Debt 30% 1. Operating Cash – Bus Treasury Equity 70% 2. Long term finance 3. Short term finance 4. Money Market Inst. Subsidiary 40% share Partner 1 Project Partner 2 25% Share 35% Share Cash from source Liabilities Comments: 6/14/2011 18 [email protected] Cash Back to source
• 19. Project Finance Model (BP Subsidiary uses PF) BP Amoco BP Amoco Company Finance Structure: Debt 30% Business Treasury Equity 70% Units Debt Service Subsidiary Lenders Collateral 40% share Partner 1 Project Partner 2 25% Share 35% Share Cash from source 6/14/2011 Comments: Liabilities 19 [email protected] Cash Back to source
• 20. Project Finance Model (Project uses PF) BP Amoco BP Amoco Company Finance Structure: Debt 30% Business Treasury Equity 70% Units Subsidiary Lenders Debt Service Collateral 40% share Partner 1 Project Partner 2 25% Share 35% Share Cash from source Liabilities Comments: 6/14/2011 20 [email protected] Cash Back to source
• 21. Project Finance vs. Corporate Finance: Pay Off’s Corporate Finance $ Pay-off’s Sponsor’s Equity Project Finance Pay-off’s Project Value 0 Put Premium Debt Walk away Put Option Debt Level Comments: 6/14/2011 21 [email protected]
• 22. Financial Comparison (1998) Texaco Chevron Mobil Debt/Capital Revenues BP Amoco Net Income Exxon Market Cap Capex Shell 0% 20% 40% 60% 80% 100% Comments: 6/14/2011 22 [email protected]
• 23. BP Amoco (1997-1998) 30 25 20 15 1998 10 1997 5 0 Assets Revenues Net Debt to Capex Market Income Capital Cap ratio Comments: 6/14/2011 23 [email protected]
• 24. Income Statement (1997-1998) Avg revenue/barrels Capex Dividend 1997 Profit 1998 Income Tax Interest Expense 0 5 10 15 20 25 30 35 Comments: 6/14/2011 24 [email protected]
• 25. Thank You… Comments: 6/14/2011 25 [email protected]

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Please note you do not have access to teaching notes, british petroleum, ltd..

Publication date: 20 January 2017

Teaching notes

This case is one of a pair of cases used in a merger negotiation. It is designed to be used with “Amoco Corporation” (UVA-F-1262). One-half of the class prepares only the Amoco case, and one-half uses this case. BP and Amoco are considering a merger, and are in the process of negotiating a merger agreement. Macroeconomic assumptions, particularly forecasting future oil prices in an uncertain environment, and assumptions about Amoco's ability to reduce exploration and production costs make Amoco's future cash flows difficult to predict.

• Mergers and acquisitions bargaining and negotiating valuation

Chaplinsky, S. , Lynch, L.J. and Doherty, P. (2017), "British Petroleum, Ltd.", . https://doi.org/10.1108/case.darden.2016.000051

University of Virginia Darden School Foundation

Copyright © 2000 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved.

You do not currently have access to these teaching notes. Teaching notes are available for teaching faculty at subscribing institutions. Teaching notes accompany case studies with suggested learning objectives, classroom methods and potential assignment questions. They support dynamic classroom discussion to help develop student's analytical skills.

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