The Risks That Would Limit Petrozuata from Obtaining Investment Grades
1. Introduction
In 1998, the Venezuelan government awarded Du Pont and PDVSA a 40-year concession to develop the Orinoco Belt oilfields. As part of the project, Du Pont and PDVSA created the Petrozuata joint venture, with each company owning 50% stake.
The objective of this essay is to discuss the risks that would limit Petrozuata from obtaining investment grades. These risks can be classified as pre-completion, post-completion, sovereign and financial risks.
2. Pre-completion risks
The main pre-completion risk is the oil price risk. The development of the Orinoco Belt oilfields is a long term and capital intensive project. The project requires an investment of US$4 billion. The return on investment will be sensitive to changes in oil prices.
If the oil price falls below US$15 per barrel, the project will not be economically viable. This is because the cash operating cost of the project is US$9 per barrel. In addition, the fall in oil prices will also reduce the value of crude reserves in the ground.
The second pre-completion risk is finding and development risk. There is always a risk that the estimated crude reserves in the Orinoco Belt may not be accurate. This would lead to a situation where the actual production from the oilfields is lower than what is expected. This would have a negative impact on the project’s economics.
3. Post-completion risks
The main post-completion risk is the crude quality risk. The quality of crude produced from the Orinoco Belt oilfields is heavy and sour. This type of crude is difficult to refine and has a lower market value than light sweet crude.
As a result, Petrozuata will have to sell its crude at a discount to international benchmark prices. This will have a negative impact on the project’s profitability.
4. Sovereign risks
Another risk that would limit Petrozuata from obtaining investment grades is sovereign risk. This refers to the political risks associated with investing in a country like Venezuela.
The Venezuelan government has a history of nationalising foreign companies and assets. This creates an uncertain business environment for investors like Du Pont and PDVSA. In addition, Venezuela is also going through an economic crisis at present which makes it a risky place to invest in.
5. Financial risks
Petrozuata is also exposed to financial risks arising from its ownership structure. The joint venture between Du Pont and PDVSA means that both companies are equally responsible for any losses incurred by Petrozuata.
This could lead to financial problems for Du Pont if Petrozuata incurs significant losses in the future. In addition, Petrozuata’s finances are also linked to PDVSA’s credit rating. PDVSA is currently rated as junk by international credit rating agencies which makes it a high risk investment for DuPont.
6. Conclusion
In conclusion, there are many risks that would limit Petrozuata from obtaining investment grades. These risks can be classified as pre-completion, post-completion, sovereign and financial risks.