Solutions

Bidding for a Venezuelan Oil Field:

The Third Round of “La Apertura”

Teaching Notes

The third round of La Apertura was the latest step in Venezuela’s process of opening its oil industry to foreign corporations. One hundred thirty international and seventy Venezuelan companies qualified on financial and technical grounds to bid during the week of June 2, 1997. BP was one of the international companies that was considering a bid for a couple of the fields that could contribute to its expansion in this market.

This case is set in April 1997, when BP was analyzing the potential of the fields available for bidding. The two key questions facing the team of BP analysts was whether or not to bid for the Boqueron field and if so, what amount to bid. In order to better understand the economic potential of the field and focus the case on its primary pedagogical objectives, the case focuses primarily on the calculation of the appropriate discount rate and assumes a simple discounted cash flow valuation model.

Pedagogical Objectives

This case serves to understand the factors that might potentially influence a company’s decision making process when assessing an NPV project in an Emerging Market. Although the topic of the case is the valuation of an oil field, the analysis should be centered on calculating different costs of capital to evaluate the project. This cost of capital should, at a minimum, incorporate country risk, corporate risk, and industry risk. Furthermore, an option based valuation method is possible in this case even though we did not explicitly perform one.

The Boqueron Valuation

Approach

Determining the size of BP’s bid includes two main steps:

a. Value the field itself using a traditional NPV approach and an appropriate cost of capital

b. Value the “synergies” owning this field might create for BP – a more qualitative discussion

Valuation Alternatives

What is the...