Risk Shifting and Long-Term Contracts : Evidence from the Ras Gas Project
Risk shifting and incomplete contracting lie at the heart of the agency relationship inherent in the procurement and financing of large-scale projects such as power plants, oil and gas pipelines, and liquefied natural gas (LNG) facilities. Resolvin...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
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World Bank, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2000/11/717455/risk-shifting-long-term-contracts-evidence-ras-gas-project http://hdl.handle.net/10986/19764 |
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okr-10986-197642021-04-23T14:03:44Z Risk Shifting and Long-Term Contracts : Evidence from the Ras Gas Project Dailami, Mansoor Hauswald, Robert ACCOUNTING BANKRUPTCY BANKRUPTCY PROCEDURES CAPITAL MARKETS CAPITALIZATION CONSTRUCTION CONTAGION CREDIT RISK CRUDE OIL DEBT DEFAULT RISK DEMAND FOR ENERGY DIVIDENDS ECONOMIC CIRCUMSTANCES ECONOMIC SITUATION ECONOMICS ECONOMIES OF SCALE ELECTRIC POWER ELECTRICITY ELECTRICITY DEMAND ELECTRICITY GENERATION EMERGING MARKETS EMPIRICAL ANALYSIS EMPIRICAL EVIDENCE EQUILIBRIUM EXCHANGE RATE FINANCIAL CRISES FINANCIAL MARKETS FINANCIAL TRANSACTIONS FUEL FUTURE VALUE GAS GAS COMPANY GAS PLANTS GAS PRICES GAS RESERVES GENERATION CAPACITY GLOBAL MARKETS IMPORTS INVESTMENT CHOICES MARKET RISK MIGRATION MORAL HAZARD NATURAL GAS OFFSHORE DRILLING OIL OIL PRICES OPERATING COSTS OPTION VALUE PIPELINES POWER PLANTS POWER STATIONS PRIVATIZATION PROPERTY RIGHTS RISK FACTORS RISK MANAGEMENT RISK TAKING TRANSACTION COSTS VALUABLE INFORMATION VESSELS WORLD CRUDE Risk shifting and incomplete contracting lie at the heart of the agency relationship inherent in the procurement and financing of large-scale projects such as power plants, oil and gas pipelines, and liquefied natural gas (LNG) facilities. Resolving this agency problem is critical in structuring the nexus of long-term contracts--construction, operating, output sale, and financial contracts--commensurate with the project's underlying tehcnological and market organization. By investigating the Ras Gas bonds--the largest and most liquid global project bonds ever issued in an emerging market economy--the authors provide empirical evidence of the risk-shifting consequences of contractual incompleteness. They relate the credit spreads of Ras Gas bonds to the bond spreads of the Korea Electric Power Company (Kepco), the major customer, in the context of a 25-year supply agreement, the oil price index used to price the LNG, emerging debt market returns, and various systematic and unsystematic risk variables. Consistent with theoretical predictions, they find that the risk factors affecting the sales and purchase agreements drive perceptions of market risk for Ras Gas bonds. In particular, Ras Gas yield spreads reflect the market's risk assessment of Kepco. Other priced risks are energy price and foreign currency exposure (which influence Ras Gas credit spreads through their impact on Kepco), Korean economic variables, and spillovers from turbulence in European and Latin American emerging debt markets. The authors' analysis shows that the design of each contractual arrangement is not independent, because risk factors relevant to one contract determine the price and risk premium of the other. Despite heavy capitalization and partial guarantees by the parent companies of Ras Gas, the off-take agreement essentially determines the riskiness of the bonds. The authors interpret this as evidence of the nexus-of-contracts view of the firm in the presence of contractual incompleteness: Investors bear all residual risks and price their financial claims accordingly. 2014-08-27T18:17:04Z 2014-08-27T18:17:04Z 2000-11 http://documents.worldbank.org/curated/en/2000/11/717455/risk-shifting-long-term-contracts-evidence-ras-gas-project http://hdl.handle.net/10986/19764 English en_US Policy Research Working Paper;No. 2469 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research East Asia and Pacific Middle East and North Africa Korea, Republic of |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English en_US |
| topic |
ACCOUNTING BANKRUPTCY BANKRUPTCY PROCEDURES CAPITAL MARKETS CAPITALIZATION CONSTRUCTION CONTAGION CREDIT RISK CRUDE OIL DEBT DEFAULT RISK DEMAND FOR ENERGY DIVIDENDS ECONOMIC CIRCUMSTANCES ECONOMIC SITUATION ECONOMICS ECONOMIES OF SCALE ELECTRIC POWER ELECTRICITY ELECTRICITY DEMAND ELECTRICITY GENERATION EMERGING MARKETS EMPIRICAL ANALYSIS EMPIRICAL EVIDENCE EQUILIBRIUM EXCHANGE RATE FINANCIAL CRISES FINANCIAL MARKETS FINANCIAL TRANSACTIONS FUEL FUTURE VALUE GAS GAS COMPANY GAS PLANTS GAS PRICES GAS RESERVES GENERATION CAPACITY GLOBAL MARKETS IMPORTS INVESTMENT CHOICES MARKET RISK MIGRATION MORAL HAZARD NATURAL GAS OFFSHORE DRILLING OIL OIL PRICES OPERATING COSTS OPTION VALUE PIPELINES POWER PLANTS POWER STATIONS PRIVATIZATION PROPERTY RIGHTS RISK FACTORS RISK MANAGEMENT RISK TAKING TRANSACTION COSTS VALUABLE INFORMATION VESSELS WORLD CRUDE |
| spellingShingle |
ACCOUNTING BANKRUPTCY BANKRUPTCY PROCEDURES CAPITAL MARKETS CAPITALIZATION CONSTRUCTION CONTAGION CREDIT RISK CRUDE OIL DEBT DEFAULT RISK DEMAND FOR ENERGY DIVIDENDS ECONOMIC CIRCUMSTANCES ECONOMIC SITUATION ECONOMICS ECONOMIES OF SCALE ELECTRIC POWER ELECTRICITY ELECTRICITY DEMAND ELECTRICITY GENERATION EMERGING MARKETS EMPIRICAL ANALYSIS EMPIRICAL EVIDENCE EQUILIBRIUM EXCHANGE RATE FINANCIAL CRISES FINANCIAL MARKETS FINANCIAL TRANSACTIONS FUEL FUTURE VALUE GAS GAS COMPANY GAS PLANTS GAS PRICES GAS RESERVES GENERATION CAPACITY GLOBAL MARKETS IMPORTS INVESTMENT CHOICES MARKET RISK MIGRATION MORAL HAZARD NATURAL GAS OFFSHORE DRILLING OIL OIL PRICES OPERATING COSTS OPTION VALUE PIPELINES POWER PLANTS POWER STATIONS PRIVATIZATION PROPERTY RIGHTS RISK FACTORS RISK MANAGEMENT RISK TAKING TRANSACTION COSTS VALUABLE INFORMATION VESSELS WORLD CRUDE Dailami, Mansoor Hauswald, Robert Risk Shifting and Long-Term Contracts : Evidence from the Ras Gas Project |
| geographic_facet |
East Asia and Pacific Middle East and North Africa Korea, Republic of |
| relation |
Policy Research Working Paper;No. 2469 |
| description |
Risk shifting and incomplete contracting
lie at the heart of the agency relationship inherent in the
procurement and financing of large-scale projects such as
power plants, oil and gas pipelines, and liquefied natural
gas (LNG) facilities. Resolving this agency problem is
critical in structuring the nexus of long-term
contracts--construction, operating, output sale, and
financial contracts--commensurate with the project's
underlying tehcnological and market organization. By
investigating the Ras Gas bonds--the largest and most liquid
global project bonds ever issued in an emerging market
economy--the authors provide empirical evidence of the
risk-shifting consequences of contractual incompleteness.
They relate the credit spreads of Ras Gas bonds to the bond
spreads of the Korea Electric Power Company (Kepco), the
major customer, in the context of a 25-year supply
agreement, the oil price index used to price the LNG,
emerging debt market returns, and various systematic and
unsystematic risk variables. Consistent with theoretical
predictions, they find that the risk factors affecting the
sales and purchase agreements drive perceptions of market
risk for Ras Gas bonds. In particular, Ras Gas yield spreads
reflect the market's risk assessment of Kepco. Other
priced risks are energy price and foreign currency exposure
(which influence Ras Gas credit spreads through their impact
on Kepco), Korean economic variables, and spillovers from
turbulence in European and Latin American emerging debt
markets. The authors' analysis shows that the design of
each contractual arrangement is not independent, because
risk factors relevant to one contract determine the price
and risk premium of the other. Despite heavy capitalization
and partial guarantees by the parent companies of Ras Gas,
the off-take agreement essentially determines the riskiness
of the bonds. The authors interpret this as evidence of the
nexus-of-contracts view of the firm in the presence of
contractual incompleteness: Investors bear all residual
risks and price their financial claims accordingly. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Dailami, Mansoor Hauswald, Robert |
| author_facet |
Dailami, Mansoor Hauswald, Robert |
| author_sort |
Dailami, Mansoor |
| title |
Risk Shifting and Long-Term Contracts : Evidence from the Ras Gas Project |
| title_short |
Risk Shifting and Long-Term Contracts : Evidence from the Ras Gas Project |
| title_full |
Risk Shifting and Long-Term Contracts : Evidence from the Ras Gas Project |
| title_fullStr |
Risk Shifting and Long-Term Contracts : Evidence from the Ras Gas Project |
| title_full_unstemmed |
Risk Shifting and Long-Term Contracts : Evidence from the Ras Gas Project |
| title_sort |
risk shifting and long-term contracts : evidence from the ras gas project |
| publisher |
World Bank, Washington, DC |
| publishDate |
2014 |
| url |
http://documents.worldbank.org/curated/en/2000/11/717455/risk-shifting-long-term-contracts-evidence-ras-gas-project http://hdl.handle.net/10986/19764 |
| _version_ |
1764440580849401856 |