Key risks associated with the project:
The main risk which is involved in the project is the political risk, the political environment of Venezuela is very unstable. There were many instances in which the political instability resulted in drastic loss for the investors. It is also expected that there will be some serious pressure on the government from the military and other political parties regarding the change in taxes and royalty rates which can affect the profitability of the project.
The poor economic environment can also lead to the foreign exchange risks, in the past the government have altered the monetary and fiscal policies and there was a drastic change in the interest rates which have affected the value of Venezuelan’s currency. The value of Venezuelan currency has deteriorated in the past against the USD which can also affect the returns of the project.
Oil prices risk:
There was a drastic fluctuation in the price of oil in the past, the prices of oil have gone down from almost 200% which have affected the level of profitability of many companies operating in the oil and gas sector. On the other hand, the prices can also go up which can affect the profitability of the project in a favorable manner.
Strategies to mitigate these risks:
Although there are many risks pertaining in the business model of the joint venture but there are strategies available which can reduce the likelihood and impacts of the risks. In order to reduce the political risk, the management of Petrozuata may negotiate with the government and other political parties to fix the tax and royalty rates which can protect the company from adverse changes in the tax rates.
For the exchange rate risk and oil prices risk, the management of Petrozuata can enter into hedging arrangements.There are several derivative instruments available which are also used by many companies operating in the same sector as Petrozuata. It can be said that the earnings can be greatly protected from these hedging arrangements but the company will be unable to take the benefits from the positive changes in the exchange rates and oil prices.
Various parties to the project:
The various parties involved in the project are the DuPont and PDVSA. One party is a sponsor and the other party is the lender, the party which provides equity finance is the sponsor and the party which provides the loan is the lender. Both the parties in the project are recognized globally and have very good reputation in their respective industries. Furthermore, both the parties are financially stableenough to bear the losses in the initial years. In addition to this, the management of both the parties are very experienced and expert in the field and the managements are also highly recognized among the industry.
It can be said that the project financing can allocate the risk to both the parties and no single party have to bear the project financing risk. Firstly, the information cost will be reduced because of the project finance……………….
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