Chevron has had sustained success operating in Kazakhstan since entering the market in 1993 after the country gained independence. Chevron operates stakes in Kazakhstan's two largest oil fields through joint ventures with the national oil company. Chevron extracts over 291,000 barrels of oil per day in Kazakhstan and plans to increase output. Its experience working with the Kazakh government and overcoming voids like lack of infrastructure provides lessons for operating in other emerging markets like South Sudan.

1.
FDI Risk Strategy: How Past
Experiences Shape Future Investments
FDI Risk in Emerging Markets
Aaron Easlick, Michael Edeke, Patrick Ottenhoff
Presented April 19, 2012

2. Emerging Markets
Appetite for
Risk
Chevron is an integrated energy company that generates most profit from upstream operations.
Oil and gas industry is increasingly dominated by national oil companies in recent years, forcing
independent ones to explore riskier areas.
With strong financial health relative to its private peers, Chevron has more appetite for risk.
Case Study #1:
Kazakhstan
Chevron successfully entered this market in 1993 after independence.
Chevron operates in largest oil fields , owns 50% stake in Tengizchevroil with the Kazakh state.
Major voids: lack of pipeline capacity, shortage of skilled engineers and few domestic suppliers.
Case Study #2:
Chad
Severely underdeveloped state that has been ruled by a military government since 1976.
Chevron operates JV with Exxon and owns a pipeline running through Chad and Cameroon.
Major voids: poor distribution networks, insolvent banks, and unpredictable legal institutions.
Business Case:
South Sudan
Newly-­‐independent nation with significant oil reserves; Asian companies investing quickly.
Major voids: Limited financial intermediaries, nonexistent physical infrastructure, political
and legal institutions are young and unproven.
Based on Kazakh and Chad experiences, and voids in South Sudan, we do not
recommend that Chevron lead exploration in South Sudan at this time.
Business Case
Kazakhstan Analysis
Chad Analysis
South Sudan Analysis
Recommendation
2

3. Chevron Overview
Vertically-­‐integrated energy company with exploration, production and refining
operations worldwide
Production of 2.67bn barrels of
oil each day
180
160
$198.81bn market cap
$, billions
140
120
Revenue
100
Income
2nd largest U.S. oil company
80
3rd largest private oil
60
40
company worldwide
20
19th largest oil company
0
Upstream
Downstream
worldwide
27%
1%
profit margin
profit margin
Upstream production is considerably
more profitable than downstream operations
87% of $20bn capex budget is directed to upstream, 11% in downstream, 2% other
Business Case
Kazakhstan Analysis
Chad Analysis
South Sudan Analysis
Recommendation
3

4. Industry Overview: Rise of NOCs
77% of total worldwide resources are under the control of national oil companies (NOCs)
with no equity participation by foreign, international oil companies (IOCs).
Western IOCs now
JVs
IOCs
NOCs, 77%
13%
10%
control less than 10%
resource base.
14 of the top 20 upstream
companies in the world
are now NOCs.
This trend has forced
the IOCs to explore
increasingly risky areas.
IOCs: better technology,
are more efficient,
more profitable.
Business Case
Kazakhstan Analysis
Chad Analysis
South Sudan Analysis
Recommendation
4

5. Industry Overview: Leading the IOCs
Chevron (CVX, +131%) outperforming rivals IOCs in last decade
Running profitable operation, but slightly lower ROE
Strong financials indicate CVX is in safer position to accept risk
Company
PEG
Chevron (CVX)
BP (BP)
Exxon (XOM)
1.33
1.38
1.47
Business Case
Kazakhstan Analysis
Profit
Margin
11.0%
8.0%
9.5%
ROE
D/E
24%
25%
27%
0.08
0.40
0.11
Chad Analysis
South Sudan Analysis
Credit
Rating
AA
A
AAA
Recommendation
5

6. Upstream overview
32% Asia
25% USA
18% Africa
15% Americas
8% Europe
5% Australia
22% OPEC
Chevron maintains a geographically-­‐balanced upstream portfolio and is hedged
However, Chevron has entered or explored most top targets around the globe and
will increasingly be forced to consider riskier areas.
Business Case
Kazakhstan Analysis
Chad Analysis
South Sudan Analysis
Recommendation
6

7. Foreign Market Strategy
Before Chevron enters a foreign market, it must conduct a profitability study that
encompasses the following three major conditions:
1.
Political concerns
First and foremost, Chevron cannot enter a country if it is not open for business or
if markets are closed due to war or sanctions. Iran (sanctions) and Iraq (war) are
good recent examples.
2.
Geological conditions
Chevron must also conduct a cost analysis of production in certain geological
conditions (see Slide 10).
For example, deepwater and oil sands are considerably more expensive to extract
and refine, and therefore are less profitable.
3.
Presence of Competitors
Presence of IOCs: A market cornered by ExxonMobil or Royal Dutch Shell will be
less attractive for Chevron.
However, Chevron sometimes invites competitors to join projects to spread risk.
Presence of NOCs: Chevron is increasingly confronting NOCs not only in their home
markets, but also abroad. PetroChina, for example, is heavily invested in Africa.
In many cases, Chevron is forced to enter JVs with NOCs
Business Case
Kazakhstan Analysis
Chad Analysis
South Sudan Analysis
Recommendation
7

8. Business case for going on-‐shore
Onshore production is more profitable than offshore, ceteris paribus. In Nigeria, for
example, offshore production ($30/barrel) is twice as expensive as onshore ($15/barrel)
Private operations are almost always more productive than any NOC-­‐affiliated operation.
In Kazakhstan, it costs the private firm $10-­‐$12/barrel and the NOC $15-­‐$18/barrel.
Onshore
Production cost per barrel
Offshore, Sands
More Profitable
$60
Less Profitable
$50
$40
$30
High Estimate
$20
Low or Stated
Estimate
$10
$-­‐
Red denotes costs stated in Chevron 10-­‐k / Blue denotes analyst estimates
Business Case
Kazakhstan Analysis
Chad Analysis
South Sudan Analysis
Recommendation
8

9. Importance of analyzing risk
Examples of Risks
Legend
-­‐ Major enviro. lawsuit
(operational/political):
Chevron fined by courts in
Ecuador for $9.5bn for
enviro. damage
Y-­‐axis = frequency
and likelihood of a
given risk.
X-­‐axis = severity and
impact of a given
risk.
-­‐ Oil spill (operational):
Brazilian prosecutors are
demanding $10.6bn for an
offshore spill
Together, the size of
the bubble indicates
how potentially
consequential a
given risk could be.
-­‐ Windfall taxes (political):
Chad imposed
$280mm unanticipated
taxes on Chevron
-­‐ Expropriation (political):
Argentina unexpectedly
Respol;
company demands $10.5bn
in compensation
Business Case
Kazakhstan Analysis
Chad Analysis
South Sudan Analysis
Recommendation
9

10. Case Studies: Kazakhstan and Chad
Kazakhstan
Proven Success in an Emerging Market: This is an example of Chevron
experiencing sustained success in an emerging market
Entered Immediately After Independence: Chevron entered this
market as soon as it was opened (1993), similar to the experience with
S. Sudan and its independence
Experience Working with State: Chevron was the lead IOC in several
projects and consortiums involving NOC investors
Chad
Geography and Geology: Chad is close to S. Sudan, with a similar
climate and similar geographical and geological obstacles
Similar Institutional Voids: Like S. Sudan, Chad is extremely
underdeveloped and has considerable institutional voids
Business Case
Kazakhstan Analysis
Chad Analysis
South Sudan Analysis
Recommendation
10

11. Analysis of Kazakhstan
11

12. Overview of Chevron in Kazakhstan
Chevron is the largest IOC in Kazakhstan and was the first private oil company to enter the country
after Kazakhstan declared its independence from the Soviet Union; it entered Kazakhstan in 1993.
Key Facts about Chevron in Kazakhstan
Chevron operates in the two largest oil fields in
Kazakhstan. It has a 50% stake in Tengizchevroil
(TCO) a JV with the Kazakh NOC which operates
the Tegiz field the deepest operating super giant
oil field in the world, and a 20% stake in the
nd largest oil
field.
Chevron extracts approximately 291,000 barrels of
oil a day with plans to increase its total output by
up to 150,000 barrels a day.
Chevron is the largest private stake holder in the
CPC pipeline, the largest capacity pipeline that
connects Kazakhstan's oil fields to ports on the
Caspian Sea.
Business Case
Kazakhstan Analysis
Chad Analysis
South Sudan Analysis
Recommendation
12

13. Institutional Void Matrix for Kazakhstan
Capital Markets1
Credibility
Enhancement
Information
Analysis
Aggregation and
Distribution
Product Markets
Financial and legal statements are not
easily accessible.
No universal audit standards
Local/Global agencies/companies .
rarely rate quality of suppliers
Credit Risk Agencies are virtually non-­‐
existent
No Major Voids Exist for Oil & Gas
Industry
Insurance receipts total .7% of GDP
versus 8.6% in OECD countries.
Equity markets are very
undercapitalized
Transaction
Facilitation
accommodate full upstream
production capacity. Low quality
domestic suppliers.
No Major Voids Exist for Oil & Gas
Industry
Similar to OECD institutions, however, Burdensome regulations and taxes on
lack of training and corruption are
importing/exporting of goods make
Regulation and
prevalent
trading across borders very difficult
Public Institutions
Adjudication
Labor Markets
Independent aggregators of career and
employee information are not present
Most universities are inadequately
equipped and produce poorly qualified
Engineers
Services that place workers with
employers are fractured and
underdeveloped
Multiple agencies exist to regulate
workers rights, health, and
discrimination, however, corruption
hinders mission statements
The processes to enforce financial Government has the right to break and Labor law courts exist and operate to
contracts is significantly slower than in alter any energy contract with an IOC
some level of satisfaction, however,
OECD countries.
corruption can skew and delay outcomes
Business Case
Kazakhstan Analysis
Chad Analysis
South Sudan Analysis
Recommendation
13
Source: World Bank ROSC Kazakhstan, TrustLaw, BMI Kazakhstan Oil & Gas Sector Report

14. Political System & Openness in Kazakhstan
Since 1993 when Chevron first entered Kazakhstan, political stability has remained steady and openness has
situation still presents foreign companies with numerous hurdles.
OPENNESS
+ The Government has made ascension into the WTO a
top economic priority, actively pursuing necessary
reforms since 1997.
-­‐ Trading across borders is difficult with import/export
costs and time 3x greater than OECD countries.
Transparency International Corruption Index
FDI in Kazakhstan in $ Billions
Business Case
Kazakhstan Analysis
POLITICAL SYSTEM
+ Since 2010 the government has stepped up
enforcement of business contracts.
-­‐ Corruption remains a major concern and cost to doing
business in the country with transparency levels far
below OECD countries.
(1 very corrupt, 9 very transparent)
Chad Analysis
South Sudan Analysis
Recommendation
14
Sources: World Bank Ease of Doing Business Report, WTO, UNESCAP

15. Major voids in Kazakhstan
While Chevron is forced to deal with numerous institutional and infrastructural voids in Kazakhstan, three of the
VOID
POTENTIAL IMPACT ON OPERATIONS POTENTIAL YEARLY IMPACT
ON GROSS INCOME
Product Market Distribution:
Lack of pipeline capacity
Unless pipeline capacity is increased,
Chevron would not be able to
adequately increase production.
$ 4.90 Billion
Labor Market Distribution:
Shortage of skilled engineers
The lack of qualified engineers
$1.80 Billion
launch new projects while managing
current operations.
Product Market Distribution:
Few quality domestic suppliers
Business Case
Kazakhstan Analysis
Kazakhstan ranks 176/183 for
transporting across borders. Any
equipment failure or supply shortage
could cause significant operation
delays for Chevron.
Chad Analysis
South Sudan Analysis
$0.47 Billion
Recommendation
15

16. How Chevron is Addressing Major Voids in Kazakhstan
Chevron has actively worked to address the voids described on the previous slide by typically trying to mitigate the
potential for future disruptions to its operations, although in some cases Chevron appears to retain the risk.
VOID
Type of Risk
HOW CHEVRON IS ADDRESSING THE VOIDS
Pipeline Capacity
Operational
Mitigation -­‐-­‐ Chevron is working with a consortium of IOCs
and NOCs to expand the capacity of the CPC pipeline by nearly
100%. The total cost of the pipeline expansion will be roughly
$5.4 billion.
Shortage of
Engineers
Operational
Mitigation/Transfer -­‐-­‐ Chevron spent $40 million over the past
few years in Kazakhstan to help universities better trained
managers and engineers for the oil industry. However, the
company increasingly relies on operating contractors in its TCO
operations (largest oil field in Kazakhstan)
Shortage of Quality Operational
Suppliers in the
Country
Mitigation -­‐-­‐ Since 2005 Chevron has actively supported the
development of Kazakhstan suppliers by establishing preferred
local supplier programs that encourage quality production and
then rewarding them over $1.6 billion in business a year.
Business Case
Kazakhstan Analysis
Chad Analysis
South Sudan Analysis
Recommendation
16

17. Analysis of Chad
17

18. Overview of Chevron in Chad
Chad is a central African state comprised
of Saharan desert in the north and Sahel
in the south
Current regime is a military government
that has ruled since 1979
Chevron has two major projects in Chad:
The Doba oil fields
Chad-­‐Cameroon oil pipeline
With ExxonMobil, Petronas, and the
World Bank, Chevron has invested $7
billion since 2000 in the Doba oil-­‐field
Consists of 2 pumping stations, a
pressure reduction station, and a floating
storage and offloading vessel
Crude pumped in Chad is transported
through a 665-­‐mi pipeline to the Atlantic
coast off Cameroon
Business Case
Kazakhstan Analysis
Chad Analysis
South Sudan Analysis
Recommendation
18

19. Institutional Void Matrix for Chad
As a failed state, Chad has a dearth of physical and institutional infrastructure that has exacerbated its
status as one of the most difficult places in the world to do business. Underdeveloped capital markets in
particular prove to be an obstacle to doing business.
Capital Markets
Product Markets
Labor Markets
Credibility
Enhancement
None; there is zero coverage of
private bureaus
Void Virtually no local product
standards
Technical certification from abroad is
available
Information
Analysis
Limited no major credit rating
agencies
Aggregation and
Distribution
Severely Limited the World
Bank financed portion of major
pipeline
Void Product market is
fragmented and is focused on
basic subsistence goods
Vocational Center of
opened in 2011
Union of Trade Unions is a center
Transaction
Facilitation
Void underdeveloped financial
intermediaries
Lack of banking infrastructure.
Little physical infrastructure, less
than 400 mi of paved roads
Void skilled labor must be
imported; unskilled labor market
opaque
Regulation and
Public Institutions
Void Public banks have negative
equity and
Limited College de Control et de
Surveillance des Resources is
nearly powerless
Void Government has limited
capacity to track workforce or
conditions
Adjudication
Direct conflict resolution through
the executive branch with no
independent judiciary
Poor, contract enforcement costs
on-­‐average 45% of the total claim
Little judicial infrastructure
Business Case
Limited product markets are not
developed but there are cell
Void Majority of workforce is in
subsistence agriculture. Semi-­‐skilled
press
Kazakhstan Analysis
Chad Analysis
South Sudan Analysis
Recommendation
19

20. Political System & Openness in Chad
Chad is a failed state under the control of the autocratic Idris Deby since 1979. The development of its oil resources in
a joint-­‐venture with ExxonMobile, Petronas and the World Bank was supposed to grant the government revenues
with which it could pay for human development projects that have not materialized.
OPENNESS
+ A member of the African Union and the government
was amenable to stipulations formulated by the World
Bank on how oil production revenues were to be spent
on development
-­‐ The government has ignored the milestones and has
been stabilized by the influx of weapons and armed
soldiers from the Arab Spring.
POLITICAL SYSTEM
+ Presidential elections for a presidential term of five-­‐
years have been held since 1996
-­‐ Corruption is endemic to the system and Deby has
been the only winner. The entire judiciary is appointed by
the president and in 2006 he had to fend off an
attempted coup by rival military leaders.
Chad by International Rankings
183rd
168th out of 182 on Transparency
163rd out of 169 on the Human Development Index
4 out of 10 on
Foreign Investment Index (China is 7.5)
Source: Roy May and Simon Massey (March, 1999) Chad: Social, Political and Economic Situation WriteNet Country Papers, Refworld, UNHCR.
Business Case
Kazakhstan Analysis
Chad Analysis
South Sudan Analysis
Recommendation
20

21. Major voids in Chad
While Chevron is forced to deal with numerous institutional and infrastructural voids in Chad, three of the voids
VOID
POTENTIAL IMPACT ON
OPERATIONS
IMPACT ON TOTAL VALUE
OF CHAD OPERATIONS
Product Market Aggregation and
Pipeline infrastructure
$1.3 Billion w/ a 25%
Distribution Deterioration of product deterioration reduces the amount increase in operating costs
distribution network
of commercially viable oil shipped
through Cameroon to the Atlantic
Coast.
Capital Markets Adjudication No
formal method of resolving financial
contract disputes
Inability to settle financial disputes $245 Million to settle a
with government has led to
2006 claim for windfall
unverifiable charges in the form of taxes of 40% of operating
income
oil producers.
Capital Markets Aggregation and
Distribution Inefficient local banking
sector
Insolvency of local banks could
increase capital costs by forcing
Chevron to finance through other
intermediaries farther afield.
Business Case
Kazakhstan Analysis
Chad Analysis
South Sudan Analysis
$861 Million w/ a 200
basis point increase in cost
of capital
Recommendation
21

22. How Chevron address Chad voids
Chevron has actively worked to address the voids described on the previous slide by typically trying to mitigate the
potential for future disruptions to its operations, although in some cases Chevron appears to retain the risk.
VOID
TYPE OF RISK
Product Market
Aggregation and
Distribution
Operational
Capitals Market
Adjudication
Company Specific Mitigation In a 2006 tax dispute with the central
government Chevron at first chose withdrawal, then paid a
reduced sum of $280 MM USD for its tax charge. How the
tax accrued in the first place and regular payment
mechanisms are not readily available.
Capital Markets
Aggregation and
Distribution
Financial
Business Case
Kazakhstan Analysis
Transfer Activity in Chad by the China National Petroleum
Corporation is expected to produce 60,000 b/d of crude
and is building a refinery at
.
Mitigation/Transfer Used World Bank and IFC loans for
the initial capital construction and sources capex and
working capital needs from outside the country.
Chad Analysis
South Sudan Analysis
Recommendation
22

23. Analysis of South Sudan
23

24. Business case for South Sudan
In September of 2011 the US Treasury eased restrictions on US oil companies seeking to do business in South Sudan
sanctions placed on Sudan for terrorist activities in 1997 previously kept US firms from operating in the region.
The South Sudanese government has indicated its desire to lure Western oil companies into the country in order to
diversify from its dependence on Chinese NOCs and capital and to help with future exploration.
Sud Province which spans Chad, Central
African Republic, Sudan and South Sudan has 7 billion barrels of unexplored oil reserves. Approximately 40% of the
Financial Opportunity for Chevron
2.8bil reserves x
15% =
420mil barrels x
$100/barrel =
south
420mil barrels
$42bil in Revenue
$42bil in Revenue x $11.4bil in Net
27% profit margin =
Income
The area highlighted in blue represents the Suds Province, a geographical
region that spans Chad, Sudan, South Sudan, and CAR. Approximately
40% of this region lies in the newly formed state of South Sudan
Business Case
Kazakhstan Analysis
Chad Analysis
Assumptions: $100/barrel spot price, similar market share for new oil
production in S. Sudan as current market share in Chad 15%, profit
margin on par with data provided in 2010 10k
South Sudan Analysis
Recommendation
24

25. Institutional void matrix for South Sudan
Since becoming independent in 2011 the newly formed South Sudanese government has been working with
numerous governments and NGOs to try and develop the functioning institutions and infrastructure and attract FDI.
Capital Markets1
Credibility
Enhancement
Information
Analysis
Aggregation and
Distribution
Product Markets
Void must use outside resources
There are no government or 3rd party Virtually no certification schemes currently
entities that certify local suppliers
in place independent of Sudan
Existent a South Sudan Statistical There are no government or 3rd party
Virtually no internal higher or vocational
Body tracks inflation and other
entities that promoted transparency
education programs outside of companies.
metrics
in oil production
Limited-­‐-­‐Banks exist and trade the The two active pipelines in S. Sudan
83% of the population is illiterate and
currency, but there are not many run through Sudan which keeps a
technical training is virtually non-­‐existent
financial intermediaries
tight control over exports.
Very limited the currency (South
Sudan Pound) does not have a set
exchange rate with the Sudanese
pound
Due to control of pipelines , Sudan
controls the sales of oil from the
South.
Independent Commission of Fiscal
Transaction
Facilitation
Regulatory bodies to oversee oil
Regulation and
Allocation, central bank, and Ministry production were only formed in late
Public Institutions of Finance backed by World Bank
2011 and have little experience
Adjudication
Business Case
Labor Markets
Strongly-­‐worded protection for
foreign investors and operators,
enforcement capabilities are
unknown
Kazakhstan Analysis
Ministry of Human Resources established
to develop capability within other
ministries and the public. Includes
Directorate of Development and Training
Ministry of Labor exists with mandates for
capacity building, worker training, and
worker protection among others.
Standards and a petroleum regulator
Ministries of labor and justice exist,
exist, enforcement capabilities are
enforcement capabilities are unknown
unknown
Chad Analysis
South Sudan Analysis
Recommendation
25

26. Political System & Openness in South Sudan
Since becoming independent in 2011 the newly formed South Sudanese government has been working with
numerous governments and NGOs to try and develop the functioning institutions and infrastructure and attract FDI.
OPENNESS
+ Policy of non-­‐discrimination against foreign investors
+ Government allows full repatriation of earnings and
dividends and allows freely convertible currency.
-­‐ Ability and willingness to adjudicate is unknown
POLITICAL SYSTEM
+ The government launched an Anti-­‐Corruption
Commission to weed out corrupt politicians.
-­‐ The government is forced to spend more than 31% of
its budget on security to internal struggles with rebel
groups and border attacks by the Sudanese military.
Recent attacks by Sudan on South Sudan Cities
and Oil Fields
Business Case
Kazakhstan Analysis
Chad Analysis
South Sudan Analysis
Recommendation
26

27. Major Voids in South Sudan
VOID
POTENTIAL IMPACT ON OPERATIONS POTENTIAL REDUCTION IN
GROSS INCOME
Capital Markets Aggregation and Drives up capex and operating costs by
Distribution Lack of institutional requiring Chevron to take a greater
investors
ownership stake of a risky project in S.
Sudan, reducing profitability
Product Markets Aggregation and An unreliable distribution network to
Distribution Existing pipelines run
through Sudan
market share in the field
Product Markets Adjudication
Public institutions are new and
weak
Business Case
$4.2 Billion w/a 10%
reduction in profit margin
$3.8 Billion w/a
5%reduction in market
share
With no formal conflict resolution
$6.8 Billion assuming a
process that has been established with
40% payout after
precedent, Chevron faces risk of
confiscation of oil reserves
Respol in
Argentina
Kazakhstan Analysis
Chad Analysis
South Sudan Analysis
Recommendation
27

28. Dealing with Voids in South Sudan Based on Experiences in Chad and
Kazakhstan
VOID
UNIQUE?
HOW CHEVRON SHOULD ADDRESS THE VOIDS
Product Markets
Aggregation and
Distribution Little
control over pipeline
capacity
No Chevron
transferred pipeline
risk in Chad and
expanded pipes in
Kazakhstan
Capital Markets
Aggregation and
Distribution Lack of
institutional investors
Transfer -­‐ Since 2005 South Sudan has received over $4billion in
No Chevron worked
International AID, much of it coming from the World Bank which has
with Global
pledged to support infrastructure development. Chevron can partner
Organizations to fund
Capex in Chad
needs.
Product Markets
Adjudication No
track record on the
government ability to
enforce contracts
Yes South Sudan
Mitigate/Transfer South Sudan is so new that its ability to adjudicate
younger and less
contracts is virtually unknown. Chevron could buy insurance to
established then other mitigate lengthy disputes with the government or local suppliers. It
markets Chevron has could partner with other IOCs and NOCs to transfer risk of broken or
entered.
disputed contracts.
Business Case
Kazakhstan Analysis
Mitigate/Transfer -­‐ Chevron could use its expertise in upstream
development banks as they did in Chad and Kazakhstan to help build a
suitable pipeline through neighboring Kenya.
Chad Analysis
South Sudan Analysis
Recommendation
28

29. Potential Value of South Sudan after Risk Mitigation
Investment projections when drawing on
best practices from Kazakhstan and Chad
Investment projections in a vacuum
Total Value of 20 Years of
Income in South Sudan
$11.4bn
Total Value of 20 Years of
Income in South Sudan
$11.4bn
Voids
Unique? Less Costs
Voids Addressed
Unique? Less Costs
Limited Pipeline
Capacity
No
$4.2bn
New Pipeline
Capacity
No
Lack of Financial
Intermediaries
No
$3.8bn
World Bank and IFC No
Loans
$0.0bn
Nascent/Unproven
Legal Systems
Yes
$6.8bn
Political Risk
Insurance
$0.3bn
Value of Entering S. Sudan
($3.4bn)
Yes
Value of Entering S. Sudan
$3.0bn
$8.1bn
Note: The above quantifies the potential value to Chevron by entering South Sudan, after removing the reduction in
Business Case
Kazakhstan Analysis
Chad Analysis
South Sudan Analysis
Recommendation
29

30. Without using the risk mitigation tools learned from experience in Kazakhstan
and Chad the value of entering South Sudan is ($3.4bn) < $0
Chevron should not enter under these circumstances.
Using the risk mitigation tools learned from experience in Kazakhstan and
Chad the value of entering South Sudan is $8.1bn > $0.
If Chevron entered South Sudan, there would still be at least $8.1 billion in
value using risk mitigation strategies learned from other emerging markets.
Business Case
Kazakhstan Analysis
Chad Analysis
South Sudan Analysis
Recommendation
30

31. Go/ No Go and Next Steps for Chevron in South Sudan
NO GO
WHY?
South Sudan presents Chevron with some excellent future opportunities for oil
production. As showed on the previous slide utilizing previous risk mitigation and transfer
techniques, over $8 billion in potential income exists for Chevron in South Sudan.
However, many of the risk mitigation techniques are predicated on the assistance of
multiple NOC and IOCs. Further the political instability and conflict with Sudan will likely
hinder the ability of Chevron to mitigate the most severe voids at this time.
NEXT STEPS
the political situation becomes more stable with Chevron should enter South Sudan.
Business Case
Kazakhstan Analysis
Chad Analysis
South Sudan Analysis
Recommendation
31

32. APPENDIX
Business Case
Kazakhstan Analysis
Chad Analysis
South Sudan Analysis
Recommendation
32

33. Assumptions for Chad Valuation
Estimated reserves of 5 billion barrels
25% Chevron stake
Ordinary cost of $20/barrel
Ordinary cost of capital of 10%
At a cost of $20/barrel and r=10%
At a cost of $25/barrel and r=10%
$ 13,042,954,773
$ 11,750,641,101
At a cost of $30/barrel and r=15%
At a cost of $20/barrel and r=12%
$ 8,846,408,036
$ 12,181,966,641
VaR with
Capital Cost increase of 2%
$
860,988,132
VaR with
Operating Cost increase of 25%
$ 1,292,313,671
33

34. Kazakhstan Net Income Impact Calculations
Pipeline Capacity
Chevron is working with a consortium to expand pipeline capacity, which is expected to finish in 2015, the expansion of the pipeline is
expected to take place around the same time as expansion of the Tengiz Oil Field which should provide 250k-­‐300k barrels of oil per day
ional
production output.
150k / day x $100 per barrel -­‐ $12 per operating cost per barrel x 365 days in a year = ~ $4.9 billion /year
Shortage of Engineers
According to a report by BAH http://www.boozallen.com/media/file/Capital_Project_Execution.pdf executives in the oil and gas industry
estimate that due to current shortages in engineers and other qualified workers traditional contractors can managed 70% of planned
future production. Another report by Time magazine says the shortage of engineers global and in the US is approximately 10%,
however, Kazakhstan is likely much worse due to the tertiary % of gross population being 2.23x less than the United States (World Bank
Data) . Using the above data we can estimate the potential cost to Chevron due to a lack of qualified engineers.
A 30% reduction in planned future activities x 1.223 ( assumes the 30% reduction is based on a 10% shortage in the US which when
3) x 150k
(future production expansion in the Tengiz Oil field) x $ 100 per barrel -­‐ $12 in operating costs = ~$1.8 billion/year.
Lack of quality suppliers
When S. Sudan broke away from Sudan supplies and equipment for upstream production were stranded at the border and oil
production in S. Sudan decline by 5% immediately. We assume a similar decline is possible in Kazakhstan due to the fact that most
equipment and suppliers are imported by Chevron.
291k barrels/day (currently extracted) x .05 x $88 (see above calculation) x 365 = $.47 Billion
Business Case
Kazakhstan Analysis
Chad Analysis
South Sudan Analysis
Recommendation
34

35. Sources
Chad Financial Stability Report: http://www.imf.org/external/pubs/ft/scr/2011/cr11299.pdf
Chevron in Chad Fact Sheet: http://www.chevron.com/documents/pdf/chadfactsheet.pdf
Chevron 2011 10k
Chevron 2011 Annual Report Supplements
Petronas
http://www.25degrees.net/index.php/component/option,com_zine/Itemid,123/id,593/lang,en
/view,article/
World Bank Doing Business in Chad 2012 Report:
http://www.doingbusiness.org/data/exploreeconomies/chad/
Local Employees in Chad and Cameroon EssonChad: www.essochad.com/Chad-‐
English/PA/Files/31_ch9.pdf
Economist Intelligence Unit 2011 Chad Country Report
Economist Intelligence Unit 2012 Chad Country Report
Government of South Sudan webside: www.goss.org
http://bakerinstitute.org/events/the-‐changing-‐role-‐of-‐national-‐oil-‐companies-‐in-‐international-‐
energy-‐markets
Google Finance
Reuters International Energy Study
Business Case
Kazakhstan Analysis
Chad Analysis
South Sudan Analysis
Recommendation
35