Message-ID: <6524779.1075843939641.JavaMail.evans@thyme> Date: Fri, 22 Dec 2000 05:28:00 -0800 (PST) From: terence.thorn@enron.com To: rick.bergsieker@enron.com Subject: Oxy meeting Cc: mike.mcconnell@enron.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit Bcc: mike.mcconnell@enron.com X-From: Terence H Thorn X-To: Rick Bergsieker X-cc: Mike McConnell X-bcc: X-Folder: \Mark_McConnell_June2001\Notes Folders\Discussion threads X-Origin: MCCONNELL-M X-FileName: mmcconn.nsf We just finished the meeting with Dale Laurance and Casey Olson. Here's a recap. Oxy wanted to meet with Mike for two reasons: 1) Make sure Enron and Oxy had a project team in place asap and the resources are committed to do a world class job on the January 29 submission and subsequent presentations. As Mike noted- we are in sudden death overtime and the 29th could be the end of the tournament. 2) Revisit the "street talk" about Enron redeploying capital. Mike walked through the EGM organization, talked about our stock multiple and how an announcement that we were putting huge dollars in Saudi would hurt our stock price. Dale talked about their low multiple (between 4 and 5), noted that the market viewed Oxy as a company that could do deals, buy and sell assets, but really wasn't a growth company. They now have a stable cash flow, but need a new beach head in the Middle East to demonstrate they are growing. The point of this conversation was to tell us that debt reduction is also a top priority so they were also not interested in a big announcement about money being dumped into Saudi Arabia They characterized the Saudi perspective as being one where they are looking for strategic partners who will be there for a long time and invest capital. They agree on a division of labor: Oxy can do E&P, processing and petrochemicals and look to us for pipelines and power plants although Oxy can do those too. They realize that only Enron has the marketing, structuring and regulatory expertise. Casey did revisit his conversation with you about in the end Enron ends up as some type of "merchant banker." That's OK in the end- Dale even said they would take over our part of any project-- but we can't project that role initially. We need to be on the same side of the table as Oxy. The point here is that we have to be in step with a consistent approach to the projects. They expect our competitors to say they'll finance things on balance sheet and we need initially to say the same thing although later we will open discussions on other ways to finance. Mike and I agree that this is probably the biggest sticking point in the discussion today. Oxy believes that such an initial statement will never be public and we aren't really locked in an on-balance sheet approach. Maybe we can do this, maybe we can't. They see this as a year long process with PDA's stretching well into next year, and 2002 when the real money would be spent. The short term crisis is January 29 and we need a submission with lots of pages: we were criticized that although our proposal was well thought through and technically superb, it didn't have enough pages- reams of paper to impress the technocrats. We will also need to prepare a smaller 15 page digest to be used for our official February presentation and a three page walk around summary. Casey thinks the production center has to be in the US. We also all agreed that the Jan 29 questions allow us to lay out all of our downstream concerns and establish a placeholder for issues that must be resolved during the PDA discussions before we would do a project. I have had the greatest success around the world when we don't try to force immediately on a country a perfect gas or electric market but adapt to "local conditions" and implement the most important first couple of steps with the rest to follow later. In this respect, our projects can include suggested regulatory concepts that if successful can be used elsewhere in the Kingdom. Over and over we came back to the project team which they want on the ground in Saudi. Casey will be 100% Saudi for the foreseeable future and can make all decisions. Who will be our lead person with the same authority? They don't want to deal with someone who later says Houston changed it's mind ( a little arrogant). When can we identify bodies and assignments and location? They want full time dedicated people. Either Dale or Casey noted that the old Enron would have parachuted a team in by now (Like South America where we landed in a swamp and spent the next five years beating alligators over the head with a stick). This is a very complicated political and technical effort,. The leader has to be good at both. Casey was excited that Rob would be assigned to the project (I guess you discussed this with him). They both were quick to say that the working relationship to date has been excellent and that they appreciate the effort we have put into this. Mike committed that we would go balls to the wall for the 29th deadline, I committed that I would designate a project team by the first week in January (we had our first conference call yesterday), but Mike said he wanted to think about the decision point person and process ( we aren't about to sacrifice a deliberative strategic/consensus thought process because they are in a hurry). We spent a lot of time talking about the process. We agree that the Saudi's will eliminate one or two participants, that each project will have subparts with different combinations and leads of companies with a master JV on top. They minimized the capital investment although they are prepared to spent $200-300 million over the next 3-5 years. They see core project 2 costing $600 million, 60% Oxy/Enron assuming one other partner and Enron half of that. We aren't talking billions (spoken like a true major). They are sure Exxon /Mobil will be our Red Sea partner if only to earn face with possibly Marathon as the other. Exxon is more interested in the chemical focus which Oxy will concede to them. Mike noted was that our worst nightmare was a partner (Exxon) who would throw away money just to have a presence). We were assured that Oxy's only goal was to make money and if he projects didn't, they would walk away. The real danger in the upstream is the risk money for exploration. Oxy hopes to hedge this risk with downstream investments (pipelines and plants) and hopes that if the exploration is successful and reserves are added it will lead to a whole new series of projects. They are very proud of Oxy's role in this, claim that they were instrumental in getting Petry Parkman and Morgan selected as advisors, that Irani is the most respected American Arab business man and has great access in the Kingdom, and that they already know what investments partners are acceptable to the Saudi's. We all left great friends in good Christmas spirit. From our perspective: Saudi is the largest economy in the Middle east and the driver in international oil and liquids markets Enron needs to get inside and establish relationships with the key Saudi people. We need a foot print in the Kingdom with which to earn their respect. Can we do it with minimal capital investment? Saudi is about to embark of a complete electric and gas restructuring, regulatory included. They want the repatriation of petro dollars and dollars held offshore by Saudi nationals. The country can be a tremendous source of capital. It looks like 2001 can be managed with a minimum burn rate with the most intense period of activity being in January. We need to set up the team for the January effort. I'll have this done by Jan 1. There is the question of sorting out conflicts with other ME priorities. Although it may be too soon to answer (we don't know yet what is possible but we can shape that outcome), what is the end game, what do we want out of Saudi Arabia? We seem to have a clear division of labor and strategy with Oxy although we need to sort out what we say about on balance sheet financing. We also need to keep in mind that our other yet to be met partners will have a lot to say. Oxy wants to take the lead on the Core Venture 2 (Red Sea). I agree- this is a perfect laboratory to address all of the market structure issues that will make the Kingdom a great place to do business. Mike- I'm sure you can add more. Rick -it's up to you if you want to send this around to the Saudi team. Merry Christmas.