REV : M A Y 4, 2010
B ENJA M IN E ST Y M ICHA EL K A NE
BP Amoco (A): Policy Statement on the Use of Project Finance As two of the largest oil and gas firms in the world, The British Petroleum Company p.l.c. (BP) and Amoco Corporation (Amoco) had a long history of competitive encounters. This rivalry continued into the 1990s in a variety of locations ranging from the United States to the North Sea to, more recently, the Caspian Sea—a region that had opened up to exploration by Western oil companies following the breakup of the Soviet Union in 1991. In describing this rivalry, one analyst wrote: Azerbaijan was an early battleground for BP and Amoco as these two companies competed for the oil riches of this newly independent country. During the period from 1990 until 1994, BP and Amoco were the two major players in the Azerbaijan oil rush. This competition extended to their respective governments, each of which was trying to support its country’s commercial interests via BP and Amoco.1
Despite their historic rivalry, BP and Amoco agreed to a $48 billion merger in August 1998. Following shareholder approvals in December, they began the process of integration, which involved placement decisions for hundreds of executives and creation of a new organizational structure. Within the Finance Group, BP’s John Buchanan and David Watson retained their positions as chief financial officer and treasurer, respectively. Bill Young, a 20-year Amoco veteran, became head of a unit known as Specialized Finance with responsibility for advising the company’s business units on project structuring, project finance, leasing, and other asset-backed transactions. Shortly after the merger, in March 1999, Da vid Watson asked Bill Young to prepare a recommendation on when and in what circumstances the firm should use external project finance instead of its own internal, corporate funds to finance new investments. One challenging aspect of this assignment was the perception that BP and Amoco had somewhat different philosophies regarding project finance. To some observers, particularly those outside the firm, Amoco was viewed as more willing to use project finance than BP. Young disagreed with this characterization, though he acknowledged that he had little information on BP’s financial policies prior to the merger. As background for his presentation, he and two colleagues from the Finance Group, Adam Wilson and Mike Wrenn, met with finance executives from both organizations and debated the merits of project finance with them.
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BP Amoco (A): Policy Statement on the Use of Project Finance
Based on these discussions, Young, Wilson, and Wrenn proposed that BP Amoco should finance all projects with corporate funds, except in a few special circumstances. As they prepared for the upcoming presentation, they wondered if they had fairly evaluated the...