Project Finance & Project Evaluation At Indian Oil Project Report

Project Finance & Project Evaluation

Visit mbafin.blogspot.com for more

INTRODUCTION

1

Project Finance & Project Evaluation

INTRODUCTION The use of non-recourse project financing has grown steadily in emerging markets, especially in basic infrastructure, natural resources and the energy sector. Because of its cost and complexity, project finance is aimed at large-scale investments. The key is in the precise estimation of cash flows and risk analysis and allocation, which enables high leverage, and in ensuring that the project can be easily separated from the sponsors involved. Indian Oil Corporation Ltd is India’s largest commercial enterprise with leading market shares in downstream segment of Oil business. A number of projects are undertaken by IOCL to improve its infrastructure and increase its profitability. These projects are to be properly evaluated and their feasibility needs to be checked. And thus the need for Project financing arises.

This project has been undertaken in the Finance department (Pipelines Division) of IOCL, which is responsible for the financing and evaluation of the project in pipeline division. In this project, a modest attempt has been made to study and understand Project finance and project evaluation with respect to Dadri-Panipat R-LNG pipeline.

2

Project Finance & Project Evaluation

OBJECTIVES OF STUDY

3

Project Finance & Project Evaluation

OBJECTIVES OF STUDY 

To get an exposure of actual working environment in an organization



To understand project financing



To understand project financing for a pipeline project of IOCL



To do financial analysis of R-LNG pipeline from Dadri to Panipat

4

Project Finance & Project Evaluation

COMPANY OVERVIEW • Indian oil corporation Ltd- Introduction • IOCL Group • Vision of IOCL • Mission of IOCL • Values followed at IOCL • Objectives of IOCL • Major divisions at IOCL • Business chart of IOCL • Products offered by IOCL • Financial highlights • Pipeline Division in IOCL • Finance Department in Pipeline division.

5

Project Finance & Project Evaluation

INDIAN OIL CORPORATION LTD IOC (Indian Oil Corporation) was formed in 1964 as the result of merger of Indian Oil Company Ltd. (Estd. 1959) and Indian Refineries Ltd. (Estd. 1958). COMPANY OVERVIEW Indian Oil Corporation Ltd. is currently India's largest company by sales with a turnover of Rs. 247,479 crore (US $59.22 billion), and profit of Rs. 6963 crore (US $ 1.67 billion) for fiscal 2007. Indian Oil Corporation Ltd. is the highest ranked Indian company in the prestigious Fortune ‘Global 500’. It was ranked at 135th position in 2007. It is also the 20th largest petroleum company in the world. Indian Oil and its subsidiaries today accounts for 49% petroleum products market share in India. Indian Oil group has sold 59.29mn tonnes of Petroleum including 1.74mn tonnes of Natural gas in the domestic market and exported 3.33mn tonnes in the yr 2007-08.

6

Project Finance & Project Evaluation

IOCL GROUP IOCL Group consists of Indian Oil Corporation Ltd. and the following subsidiaries: • Lanka IOC Ltd • Indian Oil (Mauritius) Ltd. • IOCL Middle East FZE • Indian Oil Technologies Ltd. • Chennai Petroleum Corporation Ltd. (CPCL) • Bongaigaon Refinery & Petrochemicals Ltd (BRPL)

7

Project Finance & Project Evaluation

VISION OF IOCL A major diversified, transnational, integrated energy company, with national leadership and a strong environment conscience, playing a national role in oil security & public distribution. MISSION OF IOCL IOCL has the following mission: •

To achieve international standards of excellence in all aspects of energy and diversified business with focus on customer delight through value of products and services and cost reduction.

•

To maximize creation of wealth, value and satisfaction for the stakeholders.

•

To attain leadership in developing, adopting and assimilating state-of- the-art technology for competitive advantage.

•

To provide technology and services through sustained Research and Development.

•

To foster a culture of participation and innovation for employee growth and contribution.

•

To cultivate high standards of business ethics and Total Quality Management for a strong corporate identity and brand equity.

•

To help enrich the quality of life of the community and preserve ecological balance and heritage through a strong environment conscience.

VALUES OF IOCL Values exist in all organizations and are an integral part of any it. Indian Oil nurtures a set of core values: •

CARE 8

Project Finance & Project Evaluation • INNOVATION •

PASSION

•

TRUST

OBJECTIVES OF INDIAN OIL IOCL has defined its objectives for succeeding in its mission. These objectives are: •

To serve the national interests in oil and related sectors in accordance and consistent with Government policies.

•

To ensure maintenance of continuous and smooth supplies of petroleum products by way of crude oil refining, transportation and marketing activities and to provide appropriate assistance to consumers to conserve and use petroleum products efficiently.

•

To enhance the country's self-sufficiency in crude oil refining and build expertise in laying of crude oil and petroleum product pipelines.

•

To further enhance marketing infrastructure and reseller network for providing assured service to customers throughout the country.

•

To create a strong research & development base in refinery processes, product formulations, pipeline transportation and alternative fuels with a view to minimizing/eliminating imports and to have next generation products.

•

To optimise utilisation of refining capacity and maximize distillate yield and gross refining margin.

•

To maximise utilisation of the existing facilities for improving efficiency and increasing productivity.

•

To minimise fuel consumption and hydrocarbon loss in refineries and stock loss in marketing operations to effect energy conservation.

•

To earn a reasonable rate of return on investment.

•

To avail of all viable opportunities, both national and global, arising out of the Government of India’s policy of liberalisation and reforms.

9

Project Finance & Project Evaluation • To achieve higher growth through mergers, acquisitions, integration and diversification by harnessing new business opportunities in oil exploration & production, petrochemicals, natural gas and downstream opportunities overseas. •

To inculcate strong ‘core values’ among the employees and continuously update skill sets for full exploitation of the new business opportunities.

•

To develop operational synergies with subsidiaries and joint ventures and continuously engage across the hydrocarbon value chain for the benefit of society at large.

10

Project Finance & Project Evaluation

MAJOR DIVISIONS OF IOCL

IOCL

Refinerie s

Marketin g

Pipelines

R&D

11

Assam Oil Division

IBP

Project Finance & Project Evaluation

BUSINESS CHART OF IOCL IOCL has its presence in all spheres of downstream operations.

12

Project Finance & Project Evaluation

PRODUCTS OFFERED BY IOCL Indian Oil is not only the largest commercial enterprise in the country it is the flagship corporate of the Indian Nation. Besides having a dominant market share, Indian Oil is widely recognized as India’s dominant energy brand and customers perceive Indian Oil as a reliable symbol for high quality products and services. Major Products of IOCL are •

Auto LPG

•

Aviation Turbine Fuel

•

Bitumen

•

High Speed Diesel

•

Industrial Fuels

•

Liquefied Petroleum Gas

•

Lubricants & Greases

•

Marine Fuels

•

MS/Gasoline

•

Petrochemicals

•

Crude oil

•

Superior Kerosene Oil

13

Project Finance & Project Evaluation

FINANCIAL HIGHLIGHTS Annual Turnover of IOCL for the last 3 years

Annual Turnover 300000 247479

in Crores

250000 200000

220779 183172

150000 100000 50000 0 2005-06

2006-07

14

2007-08

Project Finance & Project Evaluation

PIPELINES DIVISION IN IOCL Indian Oil, the pioneer in cross-country petroleum product pipeline in the Indian subcontinent constructed and commissioned its first petroleum product pipeline, GuwahatiSiliguri Pipeline in the year 1964. Since then Indian Oil has mastered the art and technology of pipeline engineering. Over the last four decades the pipeline network of Indian Oil has grown to 9273 km with a capacity of about 62 million metric tonnes per year. IOCL owns approximately 67% of India’s total throughput capacity. Pipelines offer a cost effective, energy efficient, safe and environment friendly method to transport petroleum products from refineries to demand areas and crude oil from import terminals as well as domestic sources to the inland refineries. India being a vast country, a wide network of pipelines is required for transporting petroleum products to interiors from refineries and crude oil to the refineries. Indian Oil’s sustained pursuit and implementation of proven safety and environmental management systems have brought rich results. All operating pipeline units have been accredited with ISO 9000 and ISO 14001 certificates. WHY PIPELINES ARE PREFFERED? •

Effective cost.

•

Efficient energy.

•

Safe.

•

Environment friendly method of transportation.

15

Project Finance & Project Evaluation Major Crude Oil Pipelines • Salaya-Mathura Pipeline (SMPL) • Haldia-Barauni Crude Oil Pipeline (HBCPL) • Mundra - Panipat Pipeline (MPPL) Major Product pipelines • Guwahati-Siliguri Pipeline (GSPL) • Koyali - Ahamedabad Pipeline (KAPL) • Haldia - Barauni Pipeline (HBPL) • Barauni - Kanpur Pipeline (BKPL) • Haldia-Mourigram-Rajbandh Pipeline (HMRPL) • Mathura-Jalandhar Pipeline (MJPL) • Koyali - Dahej Product Pipeline EXISTING & ONGOING CRUDE & PRODUCT PIPELINES

16

Project Finance & Project Evaluation

FUNCTIONING OF PIPELINE

Pipelines Sea Shore (Exploration)

Pipelines Refinery Division

Marketing Division

Finished products to clients

17

Project Finance & Project Evaluation

Pipelines transfer crude oil from the sea shore exploration points to refinery division, where the crude oil is refined and transferred to marketing division through Product pipelines. The marketing division then provides the finished products to different clients.

FINANCE DEPARTMENT IN PIPELINE DIVISIONS Finance department is one of the most important departments in the Pipeline division of IOCL. The various sections under the finance department are:

Finance Dept

Main Accounts

Project Finance & Concurrence

Foreign

Payroll

18 Exchange & Insurance

MIS & Budgeting

Cash & Bank

Project Finance & Project Evaluation

PROJECT FINANCE • Introduction to Project Finance • Stages of Project Financing

19

Project Finance & Project Evaluation

• Project Evaluation  Risk analysis  Demand analysis  Project cost estimation  Revenue analysis  Financial analysis  Project selection criteria

PROJECT FINANCE Schemes in which investment is made in anticipation of deriving future benefits there from are known as projects. Project is a package of measures selected to reach an objective that has been precisely designated beforehand and is objectively verifiable. Project financing is a loan structure that relies primarily on the project's cash flow for repayment, with the project's assets, rights, and interests held as secondary security or collateral. Project finance is especially attractive to the private sector because they can fund major projects off balance sheet. Project financing involves identifying the project,

20

Project Finance & Project Evaluation determining the feasibility of the project, identifying sources of finance for the project, mitigating the risk and monitoring implementation of the project. It is most commonly used in the mining, transportation, telecommunication and public utility industries. NEED OF PROJECT FINANCE 

Project finance is a finance structure which ensures that the projects are environmentally, socially, economically and politically viable.



Traditional methods are not suitable for projects which have a long life and require huge capital investment.



Risk sharing is another unique feature of project finance which traditional methods do not provide.



Project Finance improves the return on capital in a project by leveraging the investment



Project finance facilitates careful project evaluation & risk assessment

STAGES IN PROJECT FINANCE

21

Project Finance & Project Evaluation Generation of Ideas

Initial Screening

Is the idea Prima Facie Promising

Plan Feasibility Analysis

Conduct Market Analysis

Terminate

Conduct Technical Analysis

Conduct Financial Analysis

Conduct Economic & Ecological Analysis

Is the Project Worthwhile ?

Prepare Funding Proposal

PROJECT EVALUATION

22

Terminate

Project Finance & Project Evaluation Project evaluation is a high level assessment of the project to see whether the project is worthwhile to proceed and whether the project will fit in the strategic planning of the whole organization. Project evaluation helps to decide which of the several alternative projects has a better success rate, a higher turnover. STEPS IN PROJECT EVALUATION

Inception of Idea Economic Analysis Need & Justification Strategic Analysis Project Design Selection

Cost Analysis

Revenue Analysis

Financial Analysis

Sensitivity Analysis

23

Project Finance & Project Evaluation KEY PARAMETERS TO BE EVALUATED IN A PROJECT The key parameters to be evaluated in a project are: 

Risk Analysis



Demand Analysis



Project Cost Estimation



Revenue Analysis



Financial Analysis



Project Selection Criteria

1. RISK ANALYSIS Risk analysis is a technique to identify and assess factors that may jeopardize the success of the project. Risks associated with capital investment proposals can be broadly classified as:



Financial Risk



Other Risk

Financial Risk Financial risk is defined as the possibility that the actual return on an investment will be different from the expected return. Many techniques are available for determining financial risk involved with the projects like Risk adjusted Discount Rate, Certainty Equivalent, Sensitivity Analysis, DCF, Break Even Analysis, Probability Assignment, Standard Deviation etc.

24

Project Finance & Project Evaluation Other Risks Other risks constitute risks which may be an obstacle in the success/ Completion of the project. Risks which can be included in other risk are

2.



Availability Risk



Completion (technical and timing) Risk



Counterparty credit risk



Country (political) Risk



Inflation Risk



Input and throughput Risk



Market (demand) Risk



Technological Risks

DEMAND ANALYSIS Success of a project depends on the projects usage potential and user willingness to pay. Demand analysis involves forecasting the demand on the basis of market surveys and manufacturing capacity of the unit and this is decided through the study of demand and supply. The potential users, their habits, and possibility of changing these habits, the pricing of the products, the designing are studied under demand forecasting. In the demand analysis we check if there is a scope for laying a pipeline, if the demand at destination is less, then a pipeline is not required. The major Steps in demand analysis are 

Determining different uses of a project output



Determining current consumption level and future demand



Finding financial and economical benefits from the project

25

Project Finance & Project Evaluation

3.

PROJECT COST ESTIMATION Accurate estimation of costs is vital for the effective evaluation of the project since it is important for knowing the financial feasibility of the project. The capital costs and operating costs of the project is considered in this step. The following factors needs to be kept in mind while estimating costs. 

Base Cost Estimate



Contingency Costs



Cost Factor for difference between domestic & foreign inflation rates



Financing cost incurred during the construction period on loans specifically borrowed for project is capitalized at the actual borrowing rates.

4. REVENUE ANALYSIS Revenue analysis is estimation of the revenues which would be earned in the future. Revenue projections are formed on the basis of Output sales. It helps in finding out the profits/ losses in the future. Revenue analysis is all the more important in project finance because the debts have to be repaid through the revenues generated by the project. 5. FINANCIAL ANALYSIS Financial analysis refers to an assessment of the viability, stability & profitability of a project. It seeks to ascertain whether the proposed project will be financially viable in the sense of being able to meet the burden of servicing debt and whether the project will satisfy the return expectations of those who provide the capital. 6. PROJECT SELECTION CRITERIA Once information about expected return and costs has been gathered, the next question arises: whether the project should be selected or not. There are many methods of evaluating the profitability of the project. The various commonly used methods are as follows: 26

Project Finance & Project Evaluation

1) PAY-BACK PERIOD METHOD: It represents the period in which the total investment in permanent assets pays back itself. Under this method various investments are ranked according to the length of their pay-back period and the investment with a shortest pay back period is preferred. The pay-back period can be ascertained in the following manner: Payback period = Investment Cash Flows/year 2) AVERAGE RATE OF RETURN METHOD: This method takes into account the earnings expected from the investment over their whole life. According to this method the project with the highest rate of return is selected. The return on investment is calculated with the help of following formula. ARR = Average Annual Profits after depreciation & Taxes x 100 Average Investment Where, Average Investment = Original Investment + Salvage Value 2 3) NET PRESENT VALUE METHODS: The Net present value method is the modern method of evaluating investment proposals. This method takes into consideration the time value of money and attempts to calculate the return on investments by introducing the factor of time-element. NPV= Present value of cash inflows – Present value of cash outflows.

27

Project Finance & Project Evaluation

4) INTERNAL RATE OF RETURN METHOD: It is also known as trial & error yield method. The following steps are required to practice the internal rate of return method: a) Determine the future net cash flows during the entire economic life of the project. The cash inflows are estimated for future profits before depreciation but after taxes. b) Determine the rate of discount at which the value of cash inflows is equal to the present value of cash outflows. If annual cash flows are equal then it can be easily found out otherwise it has to be found out by hit and trial method. c) Accept the proposal if the IRR is higher than or equal to the minimum required rate of return i.e. cost of capital or otherwise reject the proposal. d) In case of alternative proposals select the proposal with highest IRR. 5) PROFITABILITY INDEX This method is also known as benefit cost ratio and is similar to NPV approach. It measures the Present Value of returns per rupee invested based on the following formula: PI = Present value of Cash Inflows Present value of cash Outflows

28

Project Finance & Project Evaluation

CAPITAL INVESTMENT PROPOSALS AT IOCL • Introduction •

Guidelines for Capital investment proposal

• Scope of guidelines at IOCL • Need & importance of Capital investment proposal • Limitations of Capital investment regarding IOCL

29

Project Finance & Project Evaluation GUIDELINES FOR FORMULATION OF CAPITAL INVESTMENT PROPOSALS AT IOCL Capital Investment plays a vital role for overall growth and financial health of any Company. Such investments are necessary for continued growth of the organization, updation of Technology, overall improvement in productivity and efficiency, enhancement of capacities, fulfillment of social objectives etc. A Comprehensive analysis of alternatives is one of the key aspects of capital Investment proposals. There is a need for extensive scan of the projects because the investment is huge and once invested it cannot be reversed.

The capital investment decisions require special attention to fulfill the following Issues: 1.

Growth: The effect of investment decisions extend into the future and

have to be endured for a longer period and play a vital role in the growth of an organization. 2.

Risk: Adoption of an investment increases average gain, but leads to the

frequent fluctuations in its earnings, the risk of the company increases. 3.

Funding: It is necessary for the company to plan its investment

programmes carefully for making the advance arrangement for the procurement of funds internally or externally. 4.

Irreversibility: Investment decisions are generally irreversible, so while

planning investment decisions, maximum features should be of reversible nature. 5.

Complexity: The investment decisions are amongst the most difficult

decisions, therefore these are known as complex decisions.

30

Project Finance & Project Evaluation

POLICY GUIDELINES OF CAPITAL INVESTMENT PROPOSAL

Formulation of capital investment proposal Criteria for approval of capital investment proposal Evaluation of capital investment proposal Purchase of land/office/residential building as part of project Performance Appraisal of Project

31

Project Finance & Project Evaluation

SCOPE OF GUIDELINES AT IOCL

Capital Projects in IOC are broadly divided into: •

Core-sectors projects: The core divisions of IOCL are Refining,

Marketing, Pipelines and R&D, and the projects undertaken by these divisions come under the Core-sector projects. •

Diversification projects: Projects undertaken by IOCL in fields other than

its core divisions (e.g. Exploration &Production (E&P), Liquefied natural gas (LNG), Petrochemicals and power etc.) come under diversification Projects. •

Globalization projects: Core/ non- core sector projects which are

undertaken oversees come under globalization projects •

Merger / Acquisitions: The merger and acquisition of other organizations

by IOCL come under this head.

32

Project Finance & Project Evaluation

NEED AND IMPORTANCE OF CAPITAL INVESTMENT PROPOSALS

•

Capital investment projects usually calls for a comprehensive review

of corporate strategies particularly relating to capital investment. •

Capital investment projects leads to optimum utilization of resources.

•

Capital investment proposals plays a vital role in enhancing the

viability of projects based on corporate basis. •

In order to sustain national security and growth of an organization

Capital investment proposals are essential. •

Capital

investment proposals are also needed

operational

33

for removal of

Project Finance & Project Evaluation bottlenecks and updation of technology. •

It helps in shaping the basic character of the company by

minimizing the complexity of risks. •

Capital investment proposals helps in enhancing the capability of an

organisation and fulfillment of social objectives. •

Investment proposals are very helpful in internal as well as external

fundings of resources in an organisation. •

One of the big necessity of capital investment is that it helps in

increasing the market share of the company.

34

Project Finance & Project Evaluation

STUDY METHEDOLOGY AT IOCL •

Step by step procedure used to evaluate projects

• Cost analysis • Common basis of estimation • Capex (Capital costs) • Opex (Operating costs) • Statement of optimization • Revenue analysis • Financial analysis o Phasing o Depreciation o Tax calculation o Interest & repayment o IRR • Sensitivity analysis

STUDY METHEDOLOGY AT IOCL

35

Project Finance & Project Evaluation In c e p tio n o f Id e a s D r a ft D e s ig n C o s t E s tim: Taetec h n ic a l D e p a r tm e n t C o s t A n a:lyF sinisa n c e D e p a r tm e n t D F R P r o: Sjeycst te m s D e p a r tm e n t

B o a rd o f D ir e c to r s

A p p ro ve d

N o t A p proved R e je c tio n

F u n d in g a t C o r p o r a te le v e l P u r c h a s e R e q: uT ise itio c h n ic a l D e p a r tm e n t

c o n c u rr en c e

T e n d e r: in C og n tr a c t D e p a r tm e n t T e c h -C n oo m m e r c ia l e v a lu a tio n o f B id s P r ic e B id O p e n in g A w a rd o f W o rk M o n ito r in g o f P r o :jeOcnt sWiteo rtek a m P a y m e n t to V e n d o r a n d a c c o u n tin g M o n th ly R e p(M o r IS tin ) g

F in a n c ia l R e p o r tin g

Im p r o v e m e n t

T e c h n ic a l R e p o r tin g

C o m m is s io&nCinagp ita liz a tio n o f P r o je c t

Inception of Idea

36

Project Finance & Project Evaluation IOCL pipeline division perceives the need for undertaking a pipeline project which could be for laying a new pipeline, expanding an existing one or scouting for new areas where pipelines can be introduces. Draft Design Prepared A draft design or step by step procedure is developed for the project according to which the project needs to be carried on. Cost Estimate Costs are estimated by the technical departments (Civil, Mechanical, Electrical and Telecommunication & Instrumentation) according to the individual expenditure that would be incurred in the project. The estimated costs are passed on to the financial department for cost analysis. Cost Analysis Finance department calculates the capital expenses and operating expenses based on the cost estimates provided by the technical departments. DFR Preparation A detailed feasibility report (DFR) is prepared by the systems department which deals with the systems configuration, cost, viability, implementation methodology, and other details in respect of laying the pipeline. The DFR is analyzed by the finance department to determine the financial feasibility of the project. The DFR is then forwarded to the board of directors for their approval. The board analyses the project not only from the financial point of view but also considers the strategic and other implications. If the project is not approved by the board, it may be rejected or improvements may be made in the project. Funding at Corporate Level

37

Project Finance & Project Evaluation Once the project is approved funds are allocated to different departments for the expenses. Purchase Requisition Technical departments prepare their individual purchase requisitions which detail out their requirements of various materials and parts for the purpose of the project. These requisitions are sent to the finance department which checks them for the quoted prices and their sources. Tendering Tenders are invited by the Contract department to fulfill the purchase requisitions of the technical department. Tenders would have all the specifications for the materials needed. Quotations are received in two bids – techno commercial bid and price bid. Techno Commercial evaluation of bids After opening the techno commercial bid, technical specifications and commercial terms etc. offered by various parties shall be evaluated. The technical evaluation is undertaken by the technical department whereas the commercial evaluation regarding turnover, past experiences, tax payment record and working capital analysis of the bidder is done by the finance department. The commercial aspects are taken into consideration for previous 3 years. The bids that do not qualify the techno commercial evaluation are not considered for further evaluation. Price Bid Opening Once the bidding parties qualify the techno commercial evaluation, their price bids are opened. The prices quoted by the bidders are compared. Award of Work The tender with lowest quoted price is awarded the contract for fulfilling the concerned purchase requisition.

38

Project Finance & Project Evaluation Techno Commercial Evaluation, Price Bid Opening and Award of Work and Payment are together named concurrence. Monitoring of Project Work As the work on the project progresses it is supervised by the on-site technical teams as well as the PJ- Monitoring department. Both the physical and financial progress of the project are monitored Payment to Vendor and Accounting When the materials are received Payment is provided to the vendor and in case of services rendered, payment is made as and when services are rendered. Monthly Reporting Monthly financial and technical reports regarding the progress of the project are prepared through Management Information System (MIS). Project Insurance Insurance needs to be taken for the implementation stage of the project. Insurance is also awarded to companies through tenders. Storage cum Errection Insurance (SCE) is taken at the implementation stage and it is taken till the date project gets commissioned. Once the project gets commissioned the SCE Insurance needs to be converted into Fire and Burglary Insurance Commissioning & Capitalization of project The final stage of a pipeline project at IOCL is commissioning and capitalization of project. From this stage onwards project starts generating revenue.

39

Project Finance & Project Evaluation COST ANALYSIS After selecting the project design the engineering department of IOCL estimates the costs of the project for Cost analysis. IOCL has four engineering departments which estimate the costs and these are:



Civil



Mechanical



Electrical



Telecommunication & Instrumentation

Civil Department This department handles the construction of all the civil structures required for the project. The civil structures are erected at stations to provide shelter to men and machinery. Construction of buildings/ facilities to house control panels, MCC panels, batteries, generator sets, compressors etc also comes under the purview of civil department. They also take care of survey of land and material requirements for the pipelines Major Civil Department Costs



Survey & Field Engineering



Land, ROW & Compensation



Mainline Pipes & Materials



Mainline Construction



Station Construction

Survey and field engineering

40

Project Finance & Project Evaluation The cost includes the cost of detailed mainline route survey, cadastral survey, sub-soil investigations & field engineering etc.

Land Acquisition, ROW & Crop Compensation Land is required for constructing metering station, T-point, terminal station and SV station etc and is acquired on a permanent basis. However for laying the pipelines only the right to use the land is needed and the compensation provided for such right is Right of Way compensation (ROW). Crop compensation is provided to cultivated lands. Mainline pipes & Materials Coated pipes are used for the transfer of Crude/Product so as to prevent corrosion of pipeline and also to take care that the crude/product being transferred does not get adulterated. The cost of materials required, such as casing pipe, coating and wrapping materials, valves etc. is considered under this head. Mainline Construction Mainline construction consists of the costs incurred in laying the pipeline. The Land enroute the proposed pipeline is not similar at all places and therefore laying costs also differ. Station Construction The costs incurred in constructing stations at the originating place, destination and terminal stations are placed under this head.

41

Project Finance & Project Evaluation

42

Project Finance & Project Evaluation

43

Project Finance & Project Evaluation Mechanical Department This division is concerned with the fixtures and materials to be used in the pipeline construction and also the designing of terminal stations. Major Mechanical department costs 

Station Pipes



Pipe Fitting



Flanges



Valves



Equipment

Station Pipes and Pipe fitting Station Pipes & Pipe fittings such as tees, weld-o-lets, concentric reducers also form part of the costs under the mechanical head.

Flanges Flange is a rim like object used to connect the pipes in the pipeline. Valves Valves are used to maintain the pressure in the pipeline so that the flow of crude/product is continuous in the pipeline.

Equipment Various equipments such as Scrapper launching barrel, Insulating coupling, Flame arrastor etc. are used by the mechanical department to ensure proper flow of crude/product in the pipeline

44

Project Finance & Project Evaluation Format of mechanical dept

45

Project Finance & Project Evaluation Electrical Department Electrical department’s scope includes day-to-day operation and routine / shutdown/ breakdown maintenance of electrical equipments at the pipeline stations and also catering to all the electricity needs of pipeline stations. Major Electrical Department Costs 

Power Charges



Genset with Control Panel - for providing power backup



Pressure Reduction Skids - for tapping fuel for the genset from the mainline



Power Distribution Board



LT APFC Panel - for saving energy



Earthing Grid - for proper earthing of all electrical facilities



LT/HT Cables - These cables are used in the control of the electrical distribution system



Flood Lighting



Flameproof Light Fittings



Building & Lighting



Installation & Commissioning

46

Project Finance & Project Evaluation Format of Electrical dept

47

Project Finance & Project Evaluation

Telecommunication & Instrumentation This department can be further classified into Telecom, instrumentation and telesupervisory systems. 1. Instrumentation System Instrumentation is provided for the operation and control so as to optimize the use of equipment and manpower and to protect the equipment. Stations will be self-protected and be made nearly fail safe by means of Instrumentation system.

2. Telecommunication System Telecommunication system helps in the smooth operation of the pipeline project by ensuring hassle free communication at all times.

3. Telesupervisory System (SCADA system) Telesupervisory system is necessary to have a better control over the pipeline system and thus ensure the safety and security of the pipeline network.

48

Project Finance & Project Evaluation Format of T&I dept

49

Project Finance & Project Evaluation

COMMON BASIS OF ESTIMATION The costs estimated by the engineering department are developed on the basis of some common assumptions, criteria & techniques. These assumptions are common to all the projects in IOCL, Pipelines Division. Basic Price The basic price of each product/ service is estimated on the basis of work orders, Purchase requisitions, Letter of Intent and Budgetary quotations/price lists of previous projects. Escalation The price for different materials and services are estimated on the basis of historical data (not more than 3 years) available from work orders and purchase requisition and therefore the time gap needs to be taken into consideration. The prices need to be escalated to arrive at an appropriate estimate. Usually the basic rates are escalated at 5% rate annually. Contingencies Sometimes some discrepancies occur in the prices due to occurrence of unforeseen events after the estimation of costs and before the implementation of the project.

These

discrepancies are taken into consideration by allowing a provision for contingencies on all cost estimates. Interest & Repayments Project financing through debt is done only if the project cost is more than Rs.100 Crores and they are considered at the rate at which national banks provide loans.

50

Project Finance & Project Evaluation

Design Change Allowance Sometimes the design of the project needs to be changed due to occurrence of some unforeseen events and it may cause differences in the costs at a later stage. To tackle this issue a design change allowance is provided in the cost estimates.

Service Tax There are mainly three kinds of works or jobs under each project: 1.

Supplies – are concerned with procuring tangible items i.e. receiving

materials like pipes, valves, engines etc .No service tax is charged on supplies. 2.

Services – are intangible in nature like installation, consultancy for

commissioning etc. Service tax is charged at the rate of 12.36% on services offered. 3.

Composites – are combination of supply job and service job (in which

supplies and service cannot be separated). A service tax of 12.36% on 33% of Composite costs is charged as per the Income tax provision.

51

Project Finance & Project Evaluation

CAPITAL COST (CAPEX) CAPITAL COSTS Capital costs (Capex) are expenditures creating future benefits. Capital cost is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life that extends beyond the taxable year. For tax purposes, capital costs are costs that cannot be deducted in the year in which they are paid or incurred, and must be capitalized. The general rule is that if the property acquired has a useful life longer than the taxable year, the cost must be capitalized. The capital costs are then amortized or depreciated over the life of the asset in question. Included in capex are amounts spent on: 1. acquiring fixed assets 2. fixing problems with an asset that existed prior to acquisition 3. preparing an asset to be used in business 4. legal costs of establishing or maintaining one's right of ownership in a piece of property 5. restoring property or adapting it to a new or different use 6. starting a new business

The capital cost of the R-LNG pipeline system from Dadri to Panipat is estimated to be Rs.297.26 crore, including a foreign exchange component of Rs.90.7 crore, at August 2007 price level. There are 10 heads under which the capital costs are considered in IOCL.

52

Project Finance & Project Evaluation

Cost estimation has been prepared using the following basis of estimation: •

Budgetary quotations/price lists.

•

Cost actually incurred in the past with appropriate escalation as applicable.

•

Outline design and incomplete specifications to establish physical requirements, and in- house cost data.

•

Experience of virtually identical projects elsewhere to establish physical requirements and the cost.

•

Experience of slightly different projects, adjusted approximately to establish physical requirements.

•

Use of an empirically tested rule of thumb to establish the physical requirements and in-house cost/data escalated to present value.

•

Experience of similar projects in value/terms, adjusted for price difference by past experience and escalation data.

•

No provision has been made for price escalation during the period of execution of the project as far as possible; the estimates have been prepared on the basis of the costs prevalent in august 2007

•

Provision for contingencies to the tune of 5% has been made in the cost estimates

•

Impact of the prevailing taxes and duties has been taken into account while preparing the estimates.

53

Project Finance & Project Evaluation

Major Capital Cost Heads 1. Survey and field engineering The cost includes the cost of detailed mainline route survey, cadastral survey, sub-soil investigations & field engineering etc. 2. Land acquisition, ROW and crop compensation Land requirement for meeting station, T-point, terminal station and SV station has been considered to be procured on the basis of permanent land acquisition. Right-Of-Way (ROW) compensation has been considered for the entire route except for the length in ROW of the existing MJPL( Mathura- Jalandhar pipeline).Crop compensation has also been considered for complete ROW of the pipeline. 3. Colony Sometimes stations are constructed at places where housing facilities are not available and IOCL employees need to be there for regular checking & maintenance of the pipeline and also at places where administration offices are to be built. In such cases IOCL construct colonies to provide employees with housing facilities. 4. Mainline pipes The cost of pipe and coating has been considered as per the latest available data. Coal Tar Enamel (CTE) / Three Layer Poly- ethylene (3LPE) coating has been considered. 5. Mainline Materials The cost of materials required, such as casing pipe, coating and wrapping materials, valves etc. has been estimated on the basis of budgetary offers and cost actually incurred in the recent past on these items.

54

Project Finance & Project Evaluation

6. Mainline construction The cost of mainline construction has been estimated on the basis of cost incurred in latest similar project executed elsewhere, suitably escalated to bring it to august 2007 price level. 7. Stations and terminal The cost under this head includes mainly the cost of valves, electrical and instrumentation items, civil and mechanical works including the erection and installation of requisite facilities. 8. Cathodic protection This item includes the material required for temporary and permanent cathodic protection, installation &commissioning of equipment/ materials, CP rectifier units, ground beds, cables etc. Estimates are based on budgetary offers and rates from similar projects executed in the recent past. 9. Telecommunication Dedicated telecommunication and telesupervisory system has been envisaged for the pipeline. Cost estimates are based or budgetary offers/earlier purchase orders, escalated suitably. 10. Telesupervisory (SCADA) The Dadri-Panipat R-LNG pipeline will be provided with Supervisory Control and Data Acquisition System (SCADA) for remote monitoring of the entire pipeline operations.

55

Project Finance & Project Evaluation

Other Heads Project management & engineering and insurance (PMC) The project is envisaged to be completed in 18 months from the date of approval of the project. The project management is done inhouse in IOCL and a fee of 5.711 % of Capex is included. The cost towards project management, engineering and insurance is phased out on the basis of envisaged time schedule. Indirect Cost Indirect costs represent the expenses of doing business that are not readily identified with a particular grant, contract, project function or activity, but are necessary for the general operation of the organization and the conduct of activities it performs. Indirect costs include taxes, administration, personnel and security costs.

56

Project Finance & Project Evaluation

Format of Capex

57

Project Finance & Project Evaluation

OPERATING COST (OPEX) OPERATING COST Operating costs are the recurring expenses which are related to the operations of a business, or the operation of a device, component, piece of equipment or facility. The operating cost includes the cost of consumables like utilities (power & water), salaries & wages, administrative overheads, repair & maintenance etc. Features of Operating Costs •

Operating Costs are calculated on per annum basis.

•

Operating costs are bifurcated into Fixed Operating Costs and Variable Operating Costs

•

Another feature of operating costs is that it can be negative. Projects which are taken up for improvement of an existing project does not incur any fixed operating costs and their variable operating costs are negative due to the improvement in the project.

The total operating cost for the pipeline system in Dadri-Panipat R-LNG project, for a capacity of 6.72 MMSCMD, is estimated to cost Rs.5.06 crore per year, based on August 2007 price level. Major Heads under Operating Cost 1. Utilities  Power  Water Power: Power is required for auxiliaries & control etc. and for illuminations at all the stations. Requirement of power is planned to be drawn from GAIL’s Dadri station

58

Project Finance & Project Evaluation Panipat refinery. However, for continuous availability of power for controls and accessories stand-by generating unit of adequate capacity has been considered. Water: While there is no major requirement of water for operation of the pipeline system, the proposed stations will be equipped with fire –fighting tank of adequate capacity. Water for the fie-fighting tanks will be drawn from the nearest public utility system in addition to boring of tube wells to meet the requirement. 2. Salaries and Wages  Manpower Manpower: The manpower requirement assessed to be around 20 has been worked out on the basis of prevailing norms and practices and on a preliminary assessment of work allocation. It is considered that LPMs would be outsourced for this proposal. However, these issues may have to be re-examined at the commissioning stage. 3. Repair and Maintenance Repair and maintenance of the mainline has been considered @1% of the investment in the mainline. Similarly, repair and maintenance of the stations has been considered @2% of the investment on stations, telecommunications and telesupervisory system. 4. Chemicals Chemicals are used to avoid corrosion of pipelines and also to avoid chemical reactions in the product/crude. 5. General Administration Expenses The cost under this head includes management expenses including allocation of head office services, security services and insurance of facilities being proposed in the pipeline system etc. 6.

Incidental charges of Rs.50 lakh (provisional) have been assumed to be paid to GAIL.

59

Project Finance & Project Evaluation

Format of Opex

60

Project Finance & Project Evaluation

STATEMENT OF OPTIMIZATION There are alternative ways of transforming an idea into a concrete project. These ideas may differ in one or more aspects. Statement of optimization is prepared to find out the best way. In a pipeline project while constructing a pipeline IOCL has more than one options based on the width of the pipe, technology used and route of the pipeline. The Statement of Optimization is prepared to analyze the financial optimality of these options and select the best available option. In the Spurline R-LNG Dadri to Panipat only one option (30”OD x 0.344”/0.375” WT, API 5L –X65) has been considered. Steps in Preparing Optimization Statement Cost Estimates by the four Departments (Civil, Mechanical, Electrical, T & I) for all options.

Capex & Opex are calculated for all options for 15 years

PV of the Total cost (Capex + Opex) is calculated

Option with the least PV (Cost) is selected

Factors Considered while preparing Statement of Optimization 

Capex is calculated for 18 months as per Dadri – Panipat RLNG pipeline 61

Project Finance & Project Evaluation  Opex is considered for 15 years. 

Throughput is considered for 15 years



Hurdle rate is used to discount the costs of different years to PV.

62

Project Finance & Project Evaluation

63

Project Finance & Project Evaluation REVENUE ANALYSIS For a company, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. Some companies also receive revenue from interest, dividends or royalties paid to them by other companies. It also includes all net sales, exchange of assets etc. Savings made by a company is also revenue for it. Revenue analysis as discussed earlier is estimating the revenues that would be earned from the project, once it is implemented. In IOCL, depending upon the pipeline project features, any one of the following method is used for estimating revenue.



Based on Corporate Savings: When a new pipeline is to be layed between stations where there is no existing way of transporting Crude/Product, revenues are calculated by the Project Appraisal Group on the basis of corporate savings. Corporate savings is the overall savings made by IOCL by implementing a project. Corporate savings is then divided between the various divisions of IOCL (Refinery, Pipeline, Marketing and R&D) as their revenue.



Based on NRF (Notional Railway Freight): If the Crude/Product was not transported through pipeline, it should have been transported through roadways or railways. Revenue in this method is the amount saved by transporting the product/crude

through

pipeline,

rather

than

transporting

it

through

railways/roadways. Normally the revenue is considered to be 75 % of NRF. 

Based on IRR: In some cases, the IRR of the project is estimated first and based on that the expected revenue for arriving at that IRR is calculated.

In Dadri-Panipat R-LNG pipeline, the primary objective of making the IRR was to determine the tariff to be charged for transportation of gas, as this is the first gas pipeline being setup by IOCL.

64

Project Finance & Project Evaluation Thus, usually where we consider revenue either as notional earnings (i.e.75 % of railway freight) or corporate savings, here IRR was calculated in a backward trend for determining the tariff for transporting per unit of gas. Gail’s tariff was also studied. And in order to arrive at the maximum tariff that can be charged IRR was considered at a predecided rate (minimum hurdle rate ceiling of 12%). For example if we fix the IRR at 12%, the tariff/Revenue per unit works out to Rs. 0.002053. The per unit tariff is then multiplied with throughput and the length of the pipeline to arrive at the total revenue.

65

Project Finance & Project Evaluation FINANCIAL ANALYSIS The primary objective of any project is to earn reasonable returns for the investment made and therefore financial feasibility of a project must be examined while selecting the project for implementation. Once the total cost of the project has been estimated, the means of financing the project has to be looked upon. Financial analysis helps in assessment of the effectiveness with which funds are employed in a project. The working capital needs of the project are also taken into consideration. The capital cost of this project has been considered to be financed through internal resources. The requirement of working capital is also met through internal resources. For the purpose of financial analysis, Debt: Equity ratio of 1:1 has been considered with interest@ 8.55% per annum and repayment in eight equal installments with one year’s moratorium. Financial analysis for the project has been considered taking into following consideration. 

Project life has been considered for 15 years of operation as per corporate guidelines.



The analysis has been carried out at constant prices i.e. no escalation has been provided either in costs or in the return.



After 15 years the salvage value of the system has been considered as 30 % of the initial cost (Without financing cost) except land cost. This has been taken as cash flow.

66

Project Finance & Project Evaluation PHASING A project is rarely done in one go, it is divided into different stages/phases. These phases do not start at the same time and their payment timings also differ. Phasing helps to determine the pattern and quantum of cash outflows each year (in case the project takes more than one year). According to the DFR (Detailed Feasibility Report) of Dadri-Panipat R-LNG pipeline, the proposed pipeline project is expected to be completed in a period of about 18 months after its investment approval. Year-wise phasing of expenditure is as follows. (Figs. In Rs. Crore) YEAR

I

II

Total

Phasing of Capital cost without Interest

235.29

22.04

257.33

Phasing of capital cost with interest

240.43

27.48

267.91

The 18 month project implementation schedule has been divided into the following:  Survey and Investigation: completed in 6 months.  Clearance: Completed in 7 months.  Detailed Engineering: Takes 2 months.  Land/ROW Acquisition & Crop compensation: Starting from 3rd month till the end of the project.  Procurement of pipe and materials: Based on tendering & awarding and then delivery (takes in total 10 months).  Procurement of station materials: Based on tendering & awarding and delivery (takes in total 12 months.)  Mainline construction, station construction, telesupervisory/telecom: Each activity took 15 months to be completed.

67

Project Finance & Project Evaluation  Commissioning: Commissioning is being done in the last month. Phasing graph

68

Project Finance & Project Evaluation

DEPRECIATION Depreciation an expense recorded to allocate a tangible asset's cost over its useful life. It provides for the wear and tear that occurs to an asset during its lifetime. As depreciation is a non-cash expense, it increases free cash flow while decreasing reported earnings. Depreciation is used to try to match the expense of an asset to the income that the asset helps the company earn. Provision for depreciation on an asset is used for replacing the asset once its lifetime is over. The two basic methods of calculating depreciation are: •

Written down value method

•

Straight line depreciation method

Depreciation is considered while doing project analysis to arrive at the correct estimate of profits and to get the actual value of the asset. It helps in reducing the profits and saving taxes. Written down value method of depreciation is usually used because the assets do not depreciate at the same rate every year. In the Dadri-Panipat R-LNG pipeline, land & ROW (Right of Way) and the PMC on it has not been included for depreciation. Depreciation has to be computed in Written down value method for arriving at the regular profits, whereas Straight line method is used for Income tax purposes.

69

Project Finance & Project Evaluation

70

Project Finance & Project Evaluation TAX CALCULATION In project finance basically three types of taxes are calculated while doing financial analysis and these are: 

Minimum Alternate Tax



Income Tax



Capital Gains Tax

Minimum Alternate Tax (MAT) Normally, a comapny is liable to pay tax on the income computed in accordance with the provisions of the income tax Act, but the profit and loss account of the company is prepared as per provisions of the Companies Act. There were large number of companies who had profits as per their profit and loss account but were not paying any tax because income computed as per provisions of the income tax act was either nil or negative. To avoid this practice, MAT was introduced in section 115JB of the Income Tax Act. Profit computed under the regular method is called regular profit and profit computed under sec 115JB is called Book profit and the tax computed is called MAT. If a company is having regular profits then income tax @ 33.99% (30% tax + 10% surcharge + 3% education cess) is charged on it. However if the books show losses, then MAT is calculated and if MAT shows profits, tax is calculated @ 11.33% (10% tax + 10% surcharge + 3% education cess). And if MAT shows losses, then tax is not to be charged. MAT Credit When a company pays tax under MAT, tax credit is allowed in respect thereof during the years when the company pays normal corporate tax. The tax credit earned is the difference between the amount payable under MAT and the regular tax. The amount of MAT credit can be set-off only in the year in which the company is liable to pay tax as per the regular tax. MAT credit will be allowed carry forward facility for a period of five assessment years immediately succeeding the assessment year in which MAT is paid.

71

Project Finance & Project Evaluation MAT CALCULATION First of all, the book profits are calculated using the formula Book profit= Taxable profit + depreciation previously deducted - actual depreciation as per Income tax Act MAT loss is added to the book profit to obtain the adjusted book profit on which the MAT is calculated @ 11.33% (MAT rate).

Capital Gains Tax If any Capital Asset is sold or transferred, the profits arising out of such sale are taxable as capital gains in the year in which the transfer takes place. Capital asset gains are of two types 

Long term capital gains: Gains on assets held for more than 36 months before they are sold or transferred. In case of shares, debentures and mutual fund units the period of holding required is only 12 months. Rate of tax applied on long term capital gains is 22.66% (20% tax + 10% surcharge + 3% education cess).



Short term capital gains: Gains on assets held for less than 36 months are included in this category. Rate of tax applied on short term capital gains is 15%.

CALCULATION OF CAPITAL GAIN Net capital gain is calculated with help of formula: Net Capital Gain = Gross Gain (Cost of Acquisition + Indexation Cost) – Expenses on Sale Indexation Cost = Original value X Present year Index Base year/year of Acquisition Index Capital gain is calculated at 22.66% of Net Capital Gain.

72

Project Finance & Project Evaluation As per the IOCL guidelines, Capital gains tax is calculated on the terminal value of the project at the end of 15 years, which is estimated to be 30% of Capex + Cost of land.

Interest & Repayment In project finance, financing of projects is done through both debt and equity. The interest on the amount financed through debt and the repayment thereof is considered under this heading. Interest & repayment increases the cash outflows as we are paying the amount. It helps in reducing the taxes and increasing the profits from the project. The following points are considered while estimating interest and repayments in IOCL



Interest & repayments are not applicable on projects where Capex less than 100 Crores.



If the project’s Capex is more than 100 Crores, then debt and equity is considered in 1:1 ratio.



Interest rate is considered as per the latest bank lending rates, which is annually revised by Project Appraisal Group.



Repayments are made on reducing interest rate method.

73

Project Finance & Project Evaluation

INTERNAL RATE OF RETURN (IRR) IRR is usually the rate of return that a project earns. Therefore, it is called internal rate of return. IRR is also known as time adjusted rate of return, marginal efficiency of capital, marginal productivity of capital and yield on investment. IRR is the discount rate at which present value of cash inflow is equal to the present value of cash outflows. In other words, it is the rate at which NPV of the project is zero. IRR is preferred by IOCL over other selection methods because of the following reasons: 

IRR consider time value of money (Cash flows are converted into present value).



It takes into account all cash inflows and outflows occurring over the entire lifetime of the project.



IRR is consistent with the overall objective of maximizing the net worth.

EVALUATING A PROJECT ON THE BASIS OF IRR METHOD: To evaluate a project through IRR method, IRR of the project is compared with the predetermined hurdle rate. Hurdle rate is the minimum rate of return that must be met for a company to undertake a project. It is calculated with the help of Capital Asset Pricing Model (CAPM). If IRR exceeds the required rate hurdle rate, the project would be accepted and if IRR is lower than required hurdle rate, the project would be rejected. In Dadri-Panipat R-LNG, the IRR was kept fixed at 12%, which was also the hurdle rate of the project. The revenues for the project were estimated on the basis of the required IRR i.e. 12%.

74

Project Finance & Project Evaluation

75

Project Finance & Project Evaluation

76

Project Finance & Project Evaluation SENSITIVITY ANALYSIS Sensitivity analysis is a procedure to determine the sensitivity of the outcomes of an alternative, to changes in its parameters. If a small change in a parameter results in relatively large changes in the outcomes, the outcomes are said to be sensitive to that parameter. This may mean that the parameter has to be determined very accurately or that the alternative has to be redesigned for low sensitivity. The major parameters on which changes are made to study the revenue/IRR sensitivity are as follows: 

Capex (Capital costs)



Opex (Operating Costs)



Throughput



Freight charges

In Dadri-Panipat R-LNG project, IRR is fixed at 12% and sensitivity analysis is used for calculating transmission charges with respect to changes in IRR. In this project sensitivity analysis has been carried out for the following cases. 

Base Case (12% IRR)



Sensitivity case with throughput same as base case & 10% IRR



Sensitivity case considering non-Availability of NFL throughput for Ist 3 years & 12% IRR



Sensitivity case considering non-Availability of NFL throughput for Ist 3 years & 10% IRR



Sensitivity case considering without NFL throughput & 12% IRR



Sensitivity case considering without NFL throughput & 10% IRR

77

Project Finance & Project Evaluation

DADRI TO PANIPAT R-LNG PIPELINE

78

Project Finance & Project Evaluation R- LNG SPURLINE FROM DADRI TO PANIPAT Indian Oil Corporation Ltd (IOCL) is one of the promoters of Petronet LNG Ltd (PLL). PLL has set up a 5 MMTPA LNG regasification terminal along with associated facilities at Dahej in the state of Gujrat. The pipeline infrastructure has been put up by GAIL for gas transportation ex Dahej. A feasibility Report was prepared on the proposal of laying R-LNG spurline from Dadri to Panipat refinery by IOCL, Including a branch line to feed NFL plant, which is on the way to panipat. The spurline will originate at Dadri (Uttarpradesh) and will terminate at Panipat (Haryana). It will be hooked up to GAIL’s gas pipeline network at Dadri and will transport R-LNG to feed Panipat refinery’s requirement to economically replace naphtha currently being used and for hydrogen generation/gas turbine operation as well as for diesel component currently in use in IFO to meet the sulphur emission norms. The gas requirement for the Panipat refinery would be 4.3 MMSCMD in the year 2009 onwards, however for design purpose it was advised to consider 4.8 MMSCMD for Panipat refinery. Further a 1.92 MMSCMD requirement of NFL plant has also been considered to be met through this pipeline. The total volume of gas required to be transported through the pipeline would thus be 6.72 MMSCMD. The total length of the pipeline from Dadri to Panipat, based on survey report, is 138 KM and the length of branch pipeline to NFL is 3KM. The proposed pipeline project is expected to be completed in a period of about 18 months after investment approval.

79

Project Finance & Project Evaluation NEED & JUSTIFICATION FOR DADRI-PANIPAT PIPELINE An internal study by IOCL has indicated that Panipat refinery would be able to absorb about 4.3 MMSCMD of natural gas, which would economically replace naphtha currently being used and is also proposed to be used for hydrogen generation/gas turbine operation. The study has also indicated that the R-LNG transmission charges to be paid to GAIL would be much higher as compared to that in case pipeline laying and operation were undertaken by IOCL. Considering IOCL’s dedicated requirement at Panipat refinery, economies of low tariff, low project implementation cost and inhouse capability of laying and operating the pipeline, it is proposed that this project be expeditiously implemented to meet Panipat refinery requirement.

80

Project Finance & Project Evaluation

KEY LEARNINGS FROM PROJECT

81

Project Finance & Project Evaluation

KEY LEARNINGS FROM THE PROJECT Each and every activity in life helps us to learn new things. This project too was a perfect learning experience and has helped me to learn a lot.



Corporate aspect: This project has provided me with good exposure to actual working environment of an organization.



Indian Oil scenario: Indian Oil is one of the Navratna PSU’s of India and also a leading company in downstream operations in Oil business. Working in the finance Division (Pipelines) has helped me to know how the finance department works in actual scenario.



Financing of Projects: Project finance is a new & emerging concept for financing the projects. This project has helped me to understand the nitty- gritties & application of project finance which cannot be understood by reading books.



Procedure of evaluating projects: Through this project, I have learned the various aspects of evaluating the project, financial tools for assessing the viability of project, cost estimation and how depreciation, taxes etc impact the evaluation of the projects.

82

Project Finance & Project Evaluation

LIMITATIONS

83

Project Finance & Project Evaluation LIMITATIONS Each and every project or research carried out has some limitations, be it time constraints or any other such issues that invariably, plague the result.  There was a constraint with regard to time allocation for the research study i.e. for a period of two months.  Data collection was strictly confined to secondary source thus is subject to slight variation than what the study includes in reality.  There were various technical terms used in the project, which were difficult to understand.

84

Project Finance & Project Evaluation

CONCLUSIONS AND RECOMMENDATIONS Visit mbafin.blogspot.com for more

85

Project Finance & Project Evaluation

CONCLUSIONS & RECOMMENDATIONS At the end it may be concluded that project financing is a good method for financing and evaluating the projects. It covers all the aspects of the project and help in mitigating the risks. This project includes step wise analysis of Dadri-Panipat R-LNG starting from need & justification to sensitivity analysis. Recommendations: 

In IOCL, Projects with Capex less than 100 Crores are financed through internal resources, however it is recommended to use more of debt in financing projects.



Normally, in project financing a Special Purpose Vehicle (SPV) is created, which is a legally independent company. However in IOCL SPV is not created.



All the projects in IOCL are evaluated using set guidelines and in the same way, however the projects vary from each other (Crude pipelines and LNG pipelines vary in their characteristics) and it is recommended that evaluation should be according to the project characteristics and features.



Many a times Projects are implemented due to strategic considerations rather than their financial feasibility and do not provide expected results. It is recommended not to implement projects which are not financially feasible.

86

Project Finance & Project Evaluation

Visit mbafin.blogspot.com for more

REFERENCES

87

Project Finance & Project Evaluation

Visit mbafin.blogspot.com for more

REFERENCES  BOOKS 

Financial Management By I M Pandey



Financial Management By D K Goel



Projects: Appraisal, Evaluation and Financing By Prasanna Chandra

 WEBSITES 

www.iocl.com



www.incometax.india.in

88

Project Finance & Project Evaluation

Visit mbafin.blogspot.com for more

89