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Risk Shifting and Long-Term Contracts : Evidence from the Ras Gas Project

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dc.contributor.authorDailami, Mansoor
dc.contributor.authorHauswald, Robert
dc.date.accessioned2014-08-27T18:17:04Z
dc.date.available2014-08-27T18:17:04Z
dc.date.issued2000-11
dc.description.abstractRisk 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.en
dc.identifierhttp://documents.worldbank.org/curated/en/2000/11/717455/risk-shifting-long-term-contracts-evidence-ras-gas-project
dc.identifier.doi10.1596/1813-9450-2469
dc.identifier.urihttps://hdl.handle.net/10986/19764
dc.languageEnglish
dc.language.isoen_US
dc.publisherWorld Bank, Washington, DC
dc.relation.ispartofseriesPolicy Research Working Paper;No. 2469
dc.rightsCC BY 3.0 IGO
dc.rights.urihttp://creativecommons.org/licenses/by/3.0/igo/
dc.subjectACCOUNTING
dc.subjectBANKRUPTCY
dc.subjectBANKRUPTCY PROCEDURES
dc.subjectCAPITAL MARKETS
dc.subjectCAPITALIZATION
dc.subjectCONSTRUCTION
dc.subjectCONTAGION
dc.subjectCREDIT RISK
dc.subjectCRUDE OIL
dc.subjectDEBT
dc.subjectDEFAULT RISK
dc.subjectDEMAND FOR ENERGY
dc.subjectDIVIDENDS
dc.subjectECONOMIC CIRCUMSTANCES
dc.subjectECONOMIC SITUATION
dc.subjectECONOMICS
dc.subjectECONOMIES OF SCALE
dc.subjectELECTRIC POWER
dc.subjectELECTRICITY
dc.subjectELECTRICITY DEMAND
dc.subjectELECTRICITY GENERATION
dc.subjectEMERGING MARKETS
dc.subjectEMPIRICAL ANALYSIS
dc.subjectEMPIRICAL EVIDENCE
dc.subjectEQUILIBRIUM
dc.subjectEXCHANGE RATE
dc.subjectFINANCIAL CRISES
dc.subjectFINANCIAL MARKETS
dc.subjectFINANCIAL TRANSACTIONS
dc.subjectFUEL
dc.subjectFUTURE VALUE
dc.subjectGAS
dc.subjectGAS COMPANY
dc.subjectGAS PLANTS
dc.subjectGAS PRICES
dc.subjectGAS RESERVES
dc.subjectGENERATION CAPACITY
dc.subjectGLOBAL MARKETS
dc.subjectIMPORTS
dc.subjectINVESTMENT CHOICES
dc.subjectMARKET RISK
dc.subjectMIGRATION
dc.subjectMORAL HAZARD
dc.subjectNATURAL GAS
dc.subjectOFFSHORE DRILLING
dc.subjectOIL
dc.subjectOIL PRICES
dc.subjectOPERATING COSTS
dc.subjectOPTION VALUE
dc.subjectPIPELINES
dc.subjectPOWER PLANTS
dc.subjectPOWER STATIONS
dc.subjectPRIVATIZATION
dc.subjectPROPERTY RIGHTS
dc.subjectRISK FACTORS
dc.subjectRISK MANAGEMENT
dc.subjectRISK TAKING
dc.subjectTRANSACTION COSTS
dc.subjectVALUABLE INFORMATION
dc.subjectVESSELS
dc.subjectWORLD CRUDE
dc.titleRisk Shifting and Long-Term Contracts : Evidence from the Ras Gas Projecten
dspace.entity.typePublication
okr.crossref.titleRisk Shifting and Long-Term Contracts: Evidence from the Ras Gas Project
okr.date.disclosure2000-11-30
okr.date.doiregistration2025-04-10T07:19:58.447092Z
okr.doctypePublications & Research::Policy Research Working Paper
okr.doctypePublications & Research
okr.docurlhttp://documents.worldbank.org/curated/en/2000/11/717455/risk-shifting-long-term-contracts-evidence-ras-gas-project
okr.globalpracticeFinance and Markets
okr.globalpracticeWater
okr.globalpracticeEnergy and Extractives
okr.guid498231468757516556
okr.identifier.doi10.1596/1813-9450-2469
okr.identifier.externaldocumentum000094946_00111605302946
okr.identifier.internaldocumentum717455
okr.identifier.reportWPS2469
okr.language.supporteden
okr.pdfurlhttp://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2000/12/15/000094946_00111605302946/Rendered/PDF/multi_page.pdfen
okr.region.administrativeEast Asia and Pacific
okr.region.administrativeMiddle East and North Africa
okr.region.countryKorea, Republic of
okr.sectorEnergy and mining :: Oil and gas
okr.sectorEnergy and mining :: General energy sector
okr.topicEnergy::Energy and Environment
okr.topicBanks and Banking Reform
okr.topicFinance and Financial Sector Development::Financial Intermediation
okr.topicWater Resources::Water and Industry
okr.topicEnvironmental Economics and Policies
okr.unitGovernance, Regulation, and Finance Division, World Bank Institute
okr.volume1
relation.isSeriesOfPublication26e071dc-b0bf-409c-b982-df2970295c87
relation.isSeriesOfPublication.latestForDiscovery26e071dc-b0bf-409c-b982-df2970295c87
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