Project Finance Project Evaluation at Indian Oil Project Report

Project Finance & Project Evaluation
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INTRODUCTION
INTRODUCTION
The use of non-recourse project financing has grown steadily in emerging markets, especially in asic infrastructure, natural resources and the energy sector! "ecause of its cost and comple#ity, project finance is aimed at large-scale investments! The key is in the precise estimation of cash flows and risk analysis and allocation, which ena les high leverage, and in ensuring that the project can e easily separated from the sponsors involved! $ndian %il &orporation 'td is $ndia(s largest commercial enterprise with leading market shares in downstream segment of %il usiness! ) num er of projects are undertaken y $%&' to improve its infrastructure and increase its profita ility! These projects are to e properly evaluated and their feasi ility needs to e checked! )nd thus the need for Project financing arises!
This project has een undertaken in the Finance department (Pipelines Division of IOC!, which is responsi le for the financing and evaluation of the project in pipeline division! $n this project, a modest attempt has een made to study and understand Project finance and project evaluation with respect to *adri-Panipat +-',- pipeline!
O"#$CTIV$% OF %TUD&
O"#$CTIV$% OF %TUD&
To get an e#posure of actual working environment in an organi0ation To understand project financing To understand project financing for a pipeline project of $%&' To do financial analysis of +-',- pipeline from *adri to Panipat
CO'P(N& OV$RVI$)
$ndian oil corporation 'td- $ntroduction $%&' -roup 2ision of $%&' 3ission of $%&' 2alues followed at $%&' % jectives of $%&' 3ajor divisions at $%&' "usiness chart of $%&' Products offered y $%&' Financial highlights Pipeline *ivision in $%&' Finance *epartment in Pipeline division!
INDI(N OI! CORPOR(TION !TD

$%& 5$ndian %il &orporation6 was formed in 1781 as the result of merger of $ndian %il &ompany 'td! 5Estd! 17476 and $ndian +efineries 'td! 5Estd! 17496! CO'P(N& OV$RVI$) $ndian %il &orporation 'td! is currently $ndia:s largest company y sales with a turnover of +s! .1;,1;7 crore 5<= >47!.. illion6, and profit of +s! 878/ crore 5<= > 1!8; illion6 for fiscal .??;! $ndian %il &orporation 'td! is the highest ranked $ndian company in the prestigious Fortune @-lo al 4??(! $t was ranked at 1/4th position in .??;! $t is also the .?th largest petroleum company in the world! $ndian %il and its su sidiaries today accounts for 17A petroleum products market share in $ndia! $ndian %il group has sold 47!.7mn tonnes of Petroleum including 1!;1mn tonnes of ,atural gas in the domestic market and e#ported /!//mn tonnes in the yr .??;-?9!
IOC! *ROUP $%&' -roup consists of $ndian %il &orporation 'td! and the following su sidiariesB 'anka $%& 'td $ndian %il 53auritius6 'td! $%&' 3iddle East FCE $ndian %il Technologies 'td! &hennai Petroleum &orporation 'td! 5&P&'6 "ongaigaon +efinery & Petrochemicals 'td 5"+P'6
VI%ION OF IOC! ) major diversified, transnational, integrated energy company, with national leadership and a strong environment conscience, playing a national role in oil security & pu lic distri ution! 'I%%ION OF IOC! $%&' has the following missionB To achieve international standards of e#cellence in all aspects of energy and diversified usiness with focus on customer delight through value of products and services and cost reduction! To ma#imi0e creation of wealth, value and satisfaction for the stakeholders! To attain leadership in developing, adopting and assimilating state-of- the-art technology for competitive advantage! To provide technology and services through sustained +esearch and *evelopment! To foster a culture of participation and innovation for employee growth and contri ution! To cultivate high standards of usiness ethics and Total Duality 3anagement for a strong corporate identity and rand eEuity! To help enrich the Euality of life of the community and preserve ecological alance and heritage through a strong environment conscience!
V(!U$% OF IOC! 2alues e#ist in all organi0ations and are an integral part of any it! $ndian %il nurtures a set of core valuesB &)+E 9
Project Finance & Project Evaluation $,,%2)T$%, P)==$%, T+<=T
O"#$CTIV$% OF INDI(N OI! $%&' has defined its o jectives for succeeding in its mission! These o jectives areB
To serve the national interests in oil and related sectors in accordance and consistent with -overnment policies! To ensure maintenance of continuous and smooth supplies of petroleum products y 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 uild e#pertise 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 ase in refinery processes, product formulations, pipeline transportation and alternative fuels with a view to minimi0ingFeliminating imports and to have ne#t generation products!
To optimise utilisation of refining capacity and ma#imi0e distillate yield and gross refining margin! To ma#imise utilisation of the e#isting facilities for improving efficiency and increasing productivity! To minimise fuel consumption and hydrocar on loss in refineries and stock loss in marketing operations to effect energy conservation! To earn a reasona le rate of return on investment! To avail of all via le opportunities, oth national and glo al, arising out of the -overnment of $ndia(s policy of li eralisation and reforms!
Project Finance & Project Evaluation To achieve higher growth through mergers, acEuisitions, integration and diversification
y harnessing new usiness opportunities in oil e#ploration &
production, petrochemicals, natural gas and downstream opportunities overseas! To inculcate strong @core values( among the employees and continuously update skill sets for full e#ploitation of the new usiness opportunities!
To develop operational synergies with su sidiaries and joint ventures and continuously engage across the hydrocar on value chain for the enefit of society at large!
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'(#OR DIVI%ION% OF IOC!
IOCL
Refinerie s
Marketin g
Pipelines
R&D
Assam Oil Division
IBP
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"U%IN$%% C+(RT OF IOC! $%&' has its presence in all spheres of downstream operations!
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PRODUCT% OFF$R$D "& IOC! $ndian %il is not only the largest commercial enterprise in the country it is the flagship corporate of the $ndian ,ation! "esides having a dominant market share, $ndian %il is widely recogni0ed as $ndia(s dominant energy rand and customers perceive $ndian %il as a relia le sym ol for high Euality products and services! 3ajor Products of $%&' are )uto 'P)viation Tur ine Fuel "itumen Gigh =peed *iesel $ndustrial Fuels 'iEuefied Petroleum -as 'u ricants & -reases 3arine Fuels 3=F-asoline Petrochemicals &rude oil =uperior Herosene %il
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FIN(NCI(! +I*+!I*+T% (nn,al T,rnover of IOC! for t-e last . /ears
Annual Turnover
300000 250000 in Crores 200000 150000 100000 50000 0 2005-06 2006-07 2007-08 183172 247479 220779
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PIP$!IN$% DIVI%ION IN IOC! $ndian %il, the pioneer in cross-country petroleum product pipeline in the $ndian su continent constructed and commissioned its first petroleum product pipeline, -uwahati=iliguri Pipeline in the year 1781! =ince then $ndian %il has mastered the art and technology of pipeline engineering! %ver the last four decades the pipeline network of $ndian %il has grown to 7.;/ km with a capacity of a out 8. million metric tonnes per year! $%&' owns appro#imately 8;A of $ndia(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! $ndia eing a vast country, a wide network of pipelines is reEuired for transporting petroleum products to interiors from refineries and crude oil to the refineries! $ndian %il(s sustained pursuit and implementation of proven safety and environmental management systems have rought rich results! )ll operating pipeline units have een accredited with $=% 7??? and $=% 11??1 certificates! )+& PIP$!IN$% (R$ PR$FF$R$D0 Effective cost! Efficient energy! =afe! Environment friendly method of transportation!
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Project Finance & Project Evaluation 'a1or Cr,de Oil Pipelines =alaya-3athura Pipeline 5=3P'6 Galdia-"arauni &rude %il Pipeline 5G"&P'6 3undra - Panipat Pipeline 53PP'6 'a1or Prod,ct pipelines -uwahati-=iliguri Pipeline 5-=P'6 Hoyali - )hameda ad Pipeline 5H)P'6 Galdia - "arauni Pipeline 5G"P'6 "arauni - Hanpur Pipeline 5"HP'6 Galdia-3ourigram-+aj andh Pipeline 5G3+P'6 3athura-Ialandhar Pipeline 53IP'6 Hoyali - *ahej Product Pipeline $2I%TIN* 3 ON*OIN* CRUD$ 3 PRODUCT PIP$!IN$%
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FUNCTIONIN* OF PIP$!IN$
Pipelines =ea =hore 5E#ploration6 +efinery *ivision
Pipelines 3arketing *ivision
Finished products to clients
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Pipelines transfer crude oil from the sea shore e#ploration 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!
FIN(NC$ D$P(RT'$NT IN PIP$!IN$ DIVI%ION% Finance department is one of the most important departments in the Pipeline division of $%&'! The various sections under the finance department areB
Finance *ept
3ain )ccounts
Project Finance & &oncurrence
Payroll
19 E#change
& $nsurance
Foreign
3$= & "udgeting
&ash & "ank
PRO#$CT FIN(NC$
$ntroduction to Project Finance =tages of Project Financing
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Project Evaluation +isk analysis *emand analysis Project cost estimation +evenue analysis Financial analysis Project selection criteria
PRO#$CT FIN(NC$ =chemes in which investment is made in anticipation of deriving future enefits there from are known as projects! Project is a package of measures selected to reach an o jective that has een precisely designated eforehand and is o jectively verifia le! 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 ecause they can fund major projects off alance sheet! Project financing involves identifying the project,
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Project Finance & Project Evaluation determining the feasi ility of the project, identifying sources of finance for the project, mitigating the risk and monitoring implementation of the project! $t is most commonly used in the mining, transportation, telecommunication and pu lic utility industries! N$$D OF PRO#$CT FIN(NC$ Project finance is a finance structure which ensures that the projects are environmentally, socially, economically and politically via le! Traditional methods are not suita le for projects which have a long life and reEuire huge capital investment! +isk sharing is another uniEue feature of project finance which traditional methods do not provide! Project Finance improves the return on capital in a project y leveraging the investment Project finance facilitates careful project evaluation & risk assessment
%T(*$% IN PRO#$CT FIN(NC$
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Generation of Ideas
Initial Screening
Is the idea Prima acie Promising
Plan easi!ilit" #nal"sis
$erminate
%ond&ct 'ar(et #nal"sis
%ond&ct $echnical #nal"sis
%ond&ct inancial #nal"sis
%ond&ct )conomic * )cological #nal"sis
Is the Pro+ect ,orth-hile .
Pre/are &nding Pro/osal
$erminate
PRO#$CT $V(!U(TION
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Project Finance & Project Evaluation Project evaluation is a high level assessment of the project to see whether the project is worthwhile to proceed and whether the project will fit in the strategic planning of the whole organi0ation! Project evaluation helps to decide which of the several alternative projects has a etter success rate, a higher turnover! %T$P% IN PRO#$CT $V(!U(TION
$nception of $dea Econom ic )nalysis ,eed & Iustification =trategic )nalysis Project *esign =election
&ost )nalysis
+evenue )nalysis
Financial )nalysis
=ensitivity )nalysis
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Project Finance & Project Evaluation 4$& P(R('$T$R% TO "$ $V(!U(T$D IN ( PRO#$CT The key parameters to e evaluated in a project areB +isk )nalysis *emand )nalysis Project &ost Estimation +evenue )nalysis Financial )nalysis Project =election &riteria
1! +$=H ),)'J=$= +isk analysis is a techniEue to identify and assess factors that may jeopardi0e the success of the project! +isks associated with capital investment proposals can classified asB Financial +isk %ther +isk e roadly
Financial Ris5 Financial risk is defined as the possi ility that the actual return on an investment will e different from the e#pected return! 3any techniEues are availa le for determining financial risk involved with the projects like +isk adjusted *iscount +ate, &ertainty EEuivalent, =ensitivity )nalysis, *&F, "reak Even )nalysis, Pro a ility )ssignment, =tandard *eviation etc!
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Project Finance & Project Evaluation Ot-er Ris5s %ther risks constitute risks which may e an o stacle in the successF &ompletion of the project! +isks which can e included in other risk are )vaila ility +isk &ompletion 5technical and timing6 +isk &ounterparty credit risk &ountry 5political6 +isk $nflation +isk $nput and throughput +isk 3arket 5demand6 +isk Technological +isks
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*E3),* ),)'J=$= =uccess of a project depends on the projects usage potential and user willingness to pay! *emand analysis involves forecasting the demand on the asis of market surveys and manufacturing capacity of the unit and this is decided through the study of demand and supply! The potential users, their ha its, and possi ility of changing these ha its, the pricing of the products, the designing are studied under demand forecasting! $n 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 reEuired! The major =teps in demand analysis are *etermining different uses of a project output *etermining current consumption level and future demand Finding financial and economical enefits from the project
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P+%IE&T &%=T E=T$3)T$%, )ccurate estimation of costs is vital for the effective evaluation of the project since it is important for knowing the financial feasi ility of the project! The capital costs and operating costs of the project is considered in this step! The following factors needs to e kept in mind while estimating costs! "ase &ost Estimate &ontingency &osts &ost Factor for difference etween domestic & foreign inflation rates Financing cost incurred during the construction period on loans specifically orrowed for project is capitali0ed at the actual orrowing rates! 1! +E2E,<E ),)'J=$= +evenue analysis is estimation of the revenues which would e earned in the future! +evenue projections are formed on the asis of %utput sales! $t helps in finding out the profitsF losses in the future! +evenue analysis is all the more important in project finance ecause the de ts have to e repaid through the revenues generated y the project! 4! F$,),&$)' ),)'J=$= Financial analysis refers to an assessment of the via ility, sta ility & profita ility of a project! $t seeks to ascertain whether the proposed project will e financially via le in the sense of eing a le to meet the urden of servicing de t and whether the project will satisfy the return e#pectations of those who provide the capital! 8! P+%IE&T =E'E&T$%, &+$TE+$) %nce information a out e#pected return and costs has een gathered, the ne#t Euestion arisesB whether the project should followsB .8 e selected or not! There are many methods of evaluating the profita ility of the project! The various commonly used methods are as
16 P(&6"(C4 P$RIOD '$T+OD7 $t represents the period in which the total investment in permanent assets pays ack itself! <nder this method various investments are ranked according to the length of their pay- ack period and the investment with a shortest pay ack period is preferred! The pay- ack period can e ascertained in the following mannerB Pa/bac5 period 8 Investment Cas- Flo9s:/ear .6 (V$R(*$ R(T$ OF R$TURN '$T+OD7 This method takes into account the earnings e#pected from the investment over their whole life! )ccording 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! (RR 8 (verage (nn,al Profits after depreciation 3 Ta;es ; <== (verage Investment Khere, )verage $nvestment L %riginal $nvestment M =alvage 2alue . /6 N$T PR$%$NT V(!U$ '$T+OD%7 The ,et present value method is the modern method of evaluating investment proposals! This method takes into consideration the time value of money and attempts to calculate the return on investments introducing the factor of time-element! NPV8 Present val,e of cas- inflo9s > Present val,e of cas- o,tflo9s. y
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? INT$RN(! R(T$ OF R$TURN '$T+OD7 $t is also known as trial & error yield method! The following steps are reEuired to practice the internal rate of return methodB a6 *etermine the future net cash flows during the entire economic life of the project! The cash inflows are estimated for future profits efore depreciation ut after ta#es! 6 *etermine the rate of discount at which the value of cash inflows is eEual to the present value of cash outflows! $f annual cash flows are eEual then it can e easily found out otherwise it has to e found out y hit and trial method! c6 )ccept the proposal if the $++ is higher than or eEual to the minimum reEuired rate of return i!e! cost of capital or otherwise reject the proposal! d6 $n case of alternative proposals select the proposal with highest $++! @ PROFIT("I!IT& IND$2 This method is also known as enefit cost ratio and is similar to ,P2 approach! $t measures the Present 2alue of returns per rupee invested ased on the following formulaB PI 8 Present val,e of Cas- Inflo9s Present val,e of cas- O,tflo9s
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C(PIT(! INV$%T'$NT PROPO%(!% (T IOC!

$ntroduction
-uidelines for &apital investment proposal
=cope of guidelines at $%&' ,eed & importance of &apital investment proposal 'imitations of &apital investment regarding $%&'
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Project Finance & Project Evaluation *UID$!IN$% FOR FOR'U!(TION OF C(PIT(! INV$%T'$NT PROPO%(!% (T IOC! &apital $nvestment plays a vital role for overall growth and financial health of any &ompany! =uch investments are necessary for continued growth of the organi0ation, updation of Technology, overall improvement in productivity and efficiency, enhancement of capacities, fulfillment of social o jectives etc! ) &omprehensive analysis of alternatives is one of the key aspects of capital $nvestment proposals! There is a need for e#tensive scan of the projects ecause the investment is huge and once invested it cannot e reversed!
The capital investment decisions reEuire special attention to fulfill the following $ssuesB
1.
*ro9t-7 The effect of investment decisions e#tend into the future and
have to e endured for a longer period and play a vital role in the growth of an organi0ation!
2.
Ris57 )doption of an investment increases average gain, ut leads to the
freEuent fluctuations in its earnings, the risk of the company increases!

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F,nding7 $t is necessary for the company to plan its investment
programmes carefully for making the advance arrangement for the procurement of funds internally or e#ternally!
!.
Irreversibilit/7 $nvestment decisions are generally irreversi le, so while
planning investment decisions, ma#imum features should e of reversi le nature!

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Comple;it/7 The investment decisions are amongst the most difficult
decisions, therefore these are known as comple# decisions!
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PO!IC& *UID$!IN$% OF C(PIT(! INV$%T'$NT PROPO%(!
Form,lation of capital investment proposal Criteria for approval of capital investment proposal $val,ation of capital investment proposal P,rc-ase of land:office:residential b,ilding as part of pro1ect Performance (ppraisal of Pro1ect
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%COP$ OF *UID$!IN$% (T IOC!
&apital Projects in $%& are roadly divided intoB
Core6sectors pro1ects7 The core divisions of $%&' are +efining,
3arketing, Pipelines and +&*, and the projects undertaken y these divisions come under the &ore-sector projects!
*iversification projectsB Projects undertaken y $%&' in fields other than
its core divisions 5e!g! E#ploration &Production 5E&P6, 'iEuefied natural gas 5',-6, Petrochemicals and power etc!6 come under diversification Projects!
-lo ali0ation projectsB &oreF non- core sector projects which are
undertaken oversees come under glo ali0ation projects
3erger F )cEuisitionsB The merger and acEuisition of other organi0ations y $%&' come under this head!
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N$$D (ND I'PORT(NC$ OF C(PIT(! INV$%T'$NT PROPO%(!%
&apital investment projects usually calls for a comprehensive review
of corporate strategies particularly relating to capital investment! &apital investment projects leads to optimum utili0ation of resources! &apital investment proposals plays a vital role in enhancing the
via ility of projects ased on corporate asis!
$n order to sustain national security and growth of an organi0ation
&apital investment proposals are essential! &apital investment proposals are also needed for removal of
operational
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Project Finance & Project Evaluation ottlenecks and updation of technology! $t helps in shaping the asic character of the company y
minimi0ing the comple#ity of risks! &apital investment proposals helps in enhancing the capa ility of an
organisation and fulfillment of social o jectives! $nvestment proposals are very helpful in internal as well as e#ternal
fundings of resources in an organisation! %ne of the ig necessity of capital investment is that it helps in
increasing the market share of the company!
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%TUD& '$T+$DO!O*& (T IOC!
=tep y step procedure used to evaluate projects
&ost analysis &ommon asis of estimation &ape# 5&apital costs6 %pe# 5%perating costs6 =tatement of optimi0ation +evenue analysis Financial analysis o Phasing o *epreciation o Ta# calculation o $nterest & repayment o $++ =ensitivity analysis
%TUD& '$T+$DO!O*& (T IOC!
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In c e / tio n o f Id e a s 0 r a ft 0 e s ig n % o s t ) s tim 2 $aete c h n ic a l 0 e / a r tm e n t % o s t # n a2l" sin isa n c e 0 e / a r tm e n t 0 1 P ro 2S +e"cst te m s 0 e / a r tm e n t
Im / r o 5 e m e n t
# / / ro 5e d
3 o a rd o f 0 ir e c to r s
4 o t # / /ro5ed 1 e +e c tio n
& n d in g a t % o r / o r a te le 5 e l P & r c h a s e 1 e 72 & $ is e itio c h n ic a l 0 e / a r tm e n t $ender 2 in %o g n tr a c t 0 e / a r tm e n t $ e c h -% n oo m m e r c ia l e 5 a l& a tio n o f 3 id s P r ic e 3 id 6 / e n in g # - a rd o f , o r( ' o n ito r in g o f P r o 2+e 6cnt s, ite o rte ( am P a " m e n t to 8 e n d o r a n d a c c o & n tin g ' o n th l" 1 e /9' o r IS tin : g
c o n c u rr en c e
in a n c ia l 1 e / o r tin g
$ e c h n ic a l 1 e / o r tin g
% o m m is s io*n% inag/ ita li; a tio n o f P r o +e c t
Inception of Idea
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Project Finance & Project Evaluation $%&' pipeline division perceives the need for undertaking a pipeline project which could e for laying a new pipeline, e#panding an e#isting one or scouting for new areas where pipelines can e introduces! Draft Design Prepared ) draft design or step y step procedure is developed for the project according to which the project needs to e carried on! Cost $stimate &osts are estimated y the technical departments 5&ivil, 3echanical, Electrical and Telecommunication & $nstrumentation6 according to the individual e#penditure that would e incurred in the project! The estimated costs are passed on to the financial department for cost analysis! Cost (nal/sis Finance department calculates the capital e#penses and operating e#penses ased on the cost estimates provided y the technical departments! DFR Preparation ) detailed feasi ility report 5*F+6 is prepared y the systems department which deals with the systems configuration, cost, via ility, implementation methodology, and other details in respect of laying the pipeline! The *F+ is analy0ed y the finance department to determine the financial feasi ility of the project! The *F+ is then forwarded to the oard of directors for their approval! The oard analyses the project not only from the financial point of view ut also considers the strategic and other implications! $f the project is not approved y the oard, it may e rejected or improvements may e made in the project! F,nding at Corporate !evel
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Project Finance & Project Evaluation %nce the project is approved funds are allocated to different departments for the e#penses! P,rc-ase ReA,isition Technical departments prepare their individual purchase reEuisitions which detail out their reEuirements of various materials and parts for the purpose of the project! These reEuisitions are sent to the finance department which checks them for the Euoted prices and their sources! Tendering Tenders are invited y the &ontract department to fulfill the purchase reEuisitions of the technical department! Tenders would have all the specifications for the materials needed! Duotations are received in two ids N techno commercial id and price id! Tec-no Commercial eval,ation of bids )fter opening the techno commercial id, technical specifications and commercial terms etc! offered y various parties shall e evaluated! The technical evaluation is undertaken y the technical department whereas the commercial evaluation regarding turnover, past e#periences, ta# payment record and working capital analysis of the idder is done y the finance department! The commercial aspects are taken into consideration for previous / years! The ids that do not Eualify the techno commercial evaluation are not considered for further evaluation! Price "id Opening %nce the idding parties Eualify the techno commercial evaluation, their price ids are opened! The prices Euoted y the idders are compared! (9ard of )or5 The tender with lowest Euoted price is awarded the contract for fulfilling the concerned purchase reEuisition!
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Project Finance & Project Evaluation Techno &ommercial Evaluation, Price "id %pening and )ward of Kork and Payment are together named concurrence! 'onitoring of Pro1ect )or5 )s the work on the project progresses it is supervised y the on-site technical teams as well as the PI- 3onitoring department! "oth the physical and financial progress of the project are monitored Pa/ment to Vendor and (cco,nting Khen 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! 'ont-l/ Reporting 3onthly financial and technical reports regarding the progress of the project are prepared through 3anagement $nformation =ystem 53$=6! Pro1ect Ins,rance $nsurance needs to e taken for the implementation stage of the project! $nsurance is also awarded to companies through tenders! =torage cum Errection $nsurance 5=&E6 is taken at the implementation stage and it is taken till the date project gets commissioned! %nce the project gets commissioned the =&E $nsurance needs to e converted into Fire and "urglary $nsurance Commissioning 3 CapitaliBation of pro1ect The final stage of a pipeline project at $%&' is commissioning and capitali0ation of project! From this stage onwards project starts generating revenue!
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Project Finance & Project Evaluation CO%T (N(!&%I% )fter selecting the project design the engineering department of $%&' estimates the costs of the project for &ost analysis! $%&' has four engineering departments which estimate the costs and these areB &ivil 3echanical Electrical Telecommunication & $nstrumentation
Civil Department This department handles the construction of all the civil structures reEuired for the project! The civil structures are erected at stations to provide shelter to men and machinery! &onstruction of uildingsF facilities to house control panels, 3&& panels, atteries, generator sets, compressors etc also comes under the purview of civil department! They also take care of survey of land and material reEuirements for the pipelines Major Civil Department Costs =urvey & Field Engineering 'and, +%K & &ompensation 3ainline Pipes & 3aterials 3ainline &onstruction =tation &onstruction
%,rve/ and field engineering
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Project Finance & Project Evaluation The cost includes the cost of detailed mainline route survey, cadastral survey, su -soil investigations & field engineering etc!
!and (cA,isitionC RO) 3 Crop Compensation 'and is reEuired for constructing metering station, T-point, terminal station and =2 station etc and is acEuired on a permanent asis! Gowever for laying the pipelines only the right to use the land is needed and the compensation provided for such right is +ight of Kay compensation 5+%K6! &rop compensation is provided to cultivated lands! 'ainline pipes 3 'aterials &oated pipes are used for the transfer of &rudeFProduct so as to prevent corrosion of pipeline and also to take care that the crudeFproduct materials, valves etc! is considered under this head! 'ainline Constr,ction 3ainline construction consists of the costs incurred in laying the pipeline! The 'and enroute the proposed pipeline is not similar at all places and therefore laying costs also differ! %tation Constr,ction The costs incurred in constructing stations at the originating place, destination and terminal stations are placed under this head! eing transferred does not get adulterated! The cost of materials reEuired, such as casing pipe, coating and wrapping
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Project Finance & Project Evaluation 'ec-anical Department This division is concerned with the fi#tures and materials to e used in the pipeline construction and also the designing of terminal stations! Major Mechanical department costs =tation Pipes Pipe Fitting Flanges 2alves EEuipment
%tation Pipes and Pipe fitting =tation 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 o ject used to connect the pipes in the pipeline! Valves 2alves are used to maintain the pressure in the pipeline so that the flow of crudeFproduct is continuous in the pipeline!
$A,ipment 2arious eEuipments such as =crapper launching arrastor etc! are used crudeFproduct in the pipeline arrel, $nsulating coupling, Flame y the mechanical department to ensure proper flow of
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Project Finance & Project Evaluation Format of mec-anical dept
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Project Finance & Project Evaluation $lectrical Department Electrical department(s scope includes day-to-day operation and routine F shutdownF reakdown maintenance of electrical eEuipments at the pipeline stations and also catering to all the electricity needs of pipeline stations! Major Electrical Department Costs Power &harges -enset with &ontrol Panel - for providing power ackup Pressure +eduction =kids - for tapping fuel for the genset from the mainline Power *istri ution "oard 'T )PF& Panel - for saving energy Earthing -rid - for proper earthing of all electrical facilities 'TFGT &a les - These ca les are used in the control of the electrical distri ution system Flood 'ighting Flameproof 'ight Fittings "uilding & 'ighting $nstallation & &ommissioning
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Project Finance & Project Evaluation Format of $lectrical dept
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Telecomm,nication 3 Instr,mentation This department can telesupervisory systems! e further classified into Telecom, instrumentation and
<. Instr,mentation %/stem $nstrumentation is provided for the operation and control so as to optimi0e the use of eEuipment and manpower and to protect the eEuipment! =tations will e self-protected and e made nearly fail safe y means of $nstrumentation system!
D. Telecomm,nication %/stem Telecommunication system helps in the smooth operation of the pipeline project y ensuring hassle free communication at all times!
.. Teles,pervisor/ %/stem (%C(D( s/stem Telesupervisory system is necessary to have a etter control over the pipeline system and thus ensure the safety and security of the pipeline network!
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Project Finance & Project Evaluation Format of T3I dept
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CO''ON "(%I% OF $%TI'(TION The costs estimated y the engineering department are developed on the asis of some common assumptions, criteria & techniEues! These assumptions are common to all the projects in $%&', Pipelines *ivision! "asic Price The asic price of each productF service is estimated on the asis of work orders, Purchase reEuisitions, 'etter of $ntent and "udgetary EuotationsFprice lists of previous projects! $scalation The price for different materials and services are estimated on the asis of historical data 5not more than / years6 availa le from work orders and purchase reEuisition and therefore the time gap needs to e taken into consideration! The prices need to e escalated to arrive at an appropriate estimate! <sually the asic rates are escalated at 4A rate annually! Contingencies =ometimes some discrepancies occur in the prices due to occurrence of unforeseen events after the estimation of costs and all cost estimates! Interest 3 Repa/ments Project financing through de t is done only if the project cost is more than +s!1?? &rores and they are considered at the rate at which national anks provide loans! efore the implementation of the project! These discrepancies are taken into consideration y allowing a provision for contingencies on
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Design C-ange (llo9ance =ometimes the design of the project needs to e 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!
%ervice Ta; There are mainly three kinds of works or jo s under each projectB 1! .! =upplies N are concerned with procuring tangi le items i!e! receiving =ervices N are intangi le in nature like installation, consultancy for materials like pipes, valves, engines etc !,o service ta# is charged on supplies! commissioning etc! =ervice ta# is charged at the rate of 1.!/8A on services offered! /! &omposites N are com ination of supply jo and service jo 5in which supplies and service cannot e separated6! ) service ta# of 1.!/8A on //A of &omposite costs is charged as per the $ncome ta# provision!
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C(PIT(! CO%T (C(P$2 C(PIT(! CO%T% &apital costs 5&ape#6 are e#penditures creating future enefits! &apital cost is incurred when a usiness spends money either to uy fi#ed assets or to add to the value of an e#isting fi#ed asset with a useful life that e#tends eyond the ta#a le year! For ta# purposes, capital costs are costs that cannot e deducted in the year in which they are paid or incurred, and must e capitali0ed! The general rule is that if the property acEuired has a useful life longer than the ta#a le year, the cost must e capitali0ed! The capital costs are then amorti0ed or depreciated over the life of the asset in Euestion! $ncluded in cape# are amounts spent onB 1! acEuiring fi#ed assets .! fi#ing pro lems with an asset that e#isted prior to acEuisition /! preparing an asset to e used in usiness 1! legal costs of esta lishing or maintaining one:s right of ownership in a piece of property 4! restoring property or adapting it to a new or different use 8! starting a new usiness
The capital cost of the +-',- pipeline system from *adri to Panipat is estimated to e Rs.DEF.DG croreC including a foreign e#change component of +s!7?!; croreC at )ugust .??; price level! There are 1? heads under which the capital costs are considered in $%&'!
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&ost estimation has een prepared using the following asis of estimationB "udgetary EuotationsFprice lists! &ost actually incurred in the past with appropriate escalation as applica le! %utline design and incomplete specifications to esta lish physical reEuirements, and inhouse cost data! E#perience of virtually identical projects elsewhere to esta lish physical reEuirements and the cost! E#perience of slightly different projects, adjusted appro#imately to esta lish physical reEuirements! <se of an empirically tested rule of thum to esta lish the physical reEuirements and in-house costFdata escalated to present value! E#perience of similar projects in valueFterms, adjusted for price difference y past e#perience and escalation data! ,o provision has een made for price escalation during the period of e#ecution of the project as far as possi leO the estimates have een prepared on the asis of the costs prevalent in august .??; Provision for contingencies to the tune of 4A has een made in the cost estimates $mpact of the prevailing ta#es and duties has preparing the estimates! een taken into account while
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'a1or Capital Cost +eads <. %,rve/ and field engineering The cost includes the cost of detailed mainline route survey, cadastral survey, su -soil investigations & field engineering etc! D. !and acA,isitionC RO) and crop compensation 'and reEuirement for meeting station, T-point, terminal station and =2 station has een considered to e procured on the asis of permanent land acEuisition! +ight-%f-Kay 5+%K6 compensation has een considered for the entire route e#cept for the length in +%K of the e#isting 3IP'5 3athura- Ialandhar pipeline6!&rop compensation has also een considered for complete +%K of the pipeline! .. Colon/ =ometimes stations are constructed at places where housing facilities are not availa le and $%&' employees need to e there for regular checking & maintenance of the pipeline and also at places where administration offices are to e uilt! $n such cases $%&' construct colonies to provide employees with housing facilities! ?. 'ainline pipes The cost of pipe and coating has een considered as per the latest availa le data! &oal Tar Enamel 5&TE6 F Three 'ayer Poly- ethylene 5/'PE6 coating has een considered! @. 'ainline 'aterials The cost of materials reEuired, such as casing pipe, coating and wrapping materials, valves etc! has een estimated on the asis of udgetary offers and cost actually incurred in the recent past on these items!
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G. 'ainline constr,ction The cost of mainline construction has een estimated on the asis of cost incurred in latest similar project e#ecuted elsewhere, suita ly escalated to ring it to august .??; price level! F. %tations 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 reEuisite facilities! H. Cat-odic protection This item includes the material reEuired for temporary and permanent cathodic protection, installation &commissioning of eEuipmentF materials, &P rectifier units, ground eds, ca les etc! Estimates are ased on udgetary offers and rates from similar projects e#ecuted in the recent past! E. Telecomm,nication *edicated telecommunication and telesupervisory system has een envisaged for the pipeline! &ost estimates are ased or udgetary offersFearlier purchase orders, escalated suita ly! <=. Teles,pervisor/ (%C(D( The *adri-Panipat +-',- pipeline will e provided with =upervisory &ontrol and *ata )cEuisition =ystem 5=&)*)6 for remote monitoring of the entire pipeline operations!
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Ot-er +eads Pro1ect management 3 engineering and ins,rance (P'C The project is envisaged to e completed in 19 months from the date of approval of the project! The project management is done inhouse in $%&' and a fee of 4!;11 A of &ape# is included! The cost towards project management, engineering and insurance is phased out on the asis of envisaged time schedule! Indirect Cost $ndirect costs represent the e#penses of doing usiness that are not readily identified with a particular grant, contract, project function or activity, ut are necessary for the general operation of the organi0ation and the conduct of activities it performs! $ndirect costs include ta#es, administration, personnel and security costs!
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Format of Cape;
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OP$R(TIN* CO%T (OP$2 OP$R(TIN* CO%T %perating costs are the recurring e#penses which are related to the operations of a usiness, or the operation of a device, component, piece of eEuipment or facility! The operating cost includes the cost of consuma les like utilities 5power & water6, salaries & wages, administrative overheads, repair & maintenance etc! Feat,res of Operating Costs %perating &osts are calculated on per annum asis! %perating costs are ifurcated into Fi#ed %perating &osts and 2aria le %perating &osts )nother feature of operating costs is that it can e negative! Projects which are taken up for improvement of an e#isting project does not incur any fi#ed operating costs and their varia le operating costs are negative due to the improvement in the project! The total operating cost for the pipeline system in *adri-Panipat +-',- project, for a capacity of 8!;. 33=&3*, is estimated to cost Rs.@.=G crore per year, ased on )ugust .??; price level! 'a1or +eads ,nder Operating Cost <. Utilities Power Kater Po9erB Power is reEuired for au#iliaries & control etc! and for illuminations at all the stations! +eEuirement of power is planned to e drawn from -)$'(s *adri station
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Project Finance & Project Evaluation Panipat refinery! Gowever, for continuous availa ility of power for controls and accessories stand- y generating unit of adeEuate capacity has een considered! )aterB Khile there is no major reEuirement of water for operation of the pipeline system, the proposed stations will e eEuipped with fire Nfighting tank of adeEuate capacity! Kater for the fie-fighting tanks will e drawn from the nearest pu lic utility system in addition to oring of tu e wells to meet the reEuirement! D. %alaries and )ages 3anpower 'anpo9erB The manpower reEuirement assessed to e around .? has een worked out on the asis of prevailing norms and practices and on a preliminary assessment of work allocation! $t is considered that 'P3s would e outsourced for this proposal! Gowever, these issues may have to e re-e#amined at the commissioning stage! .. Repair and 'aintenance +epair and maintenance of the mainline has een considered P1A of the investment in the mainline! =imilarly, repair and maintenance of the stations has een considered P.A of the investment on stations, telecommunications and telesupervisory system! ?. C-emicals &hemicals are used to avoid corrosion of pipelines and also to avoid chemical reactions in the productFcrude! @. *eneral (dministration $;penses The cost under this head includes management e#penses including allocation of head office services, security services and insurance of facilities eing proposed in the pipeline system etc! G. $ncidental charges of +s!4? lakh 5provisional6 have een assumed to e paid to -)$'!
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Format of Ope;
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%T(T$'$NT OF OPTI'II(TION There are alternative ways of transforming an idea into a concrete project! These ideas may differ in one or more aspects! =tatement of optimi0ation is prepared to find out the est way! $n a pipeline project while constructing a pipeline $%&' has more than one options ased on the width of the pipe, technology used and route of the pipeline! The =tatement of %ptimi0ation is prepared to analy0e the financial optimality of these options and select the est availa le option! $n the =purline +-',- *adri to Panipat only one option 5/?Q%* # ?!/11QF?!/;4Q KT, )P$ 4' NR846 has een considered! %teps in Preparing OptimiBation %tatement &ost Estimates y the four *epartments 5&ivil, 3echanical, Electrical, T & $6 for all options!
&ape# & %pe# are calculated for all options for 14 years
P2 of the Total cost 5&ape# M %pe#6 is calculated
%ption with the least P2 5&ost6 is selected
Factors Considered 9-ile preparing %tatement of OptimiBation &ape# is calculated for 19 months as per *adri N Panipat +',- pipeline 81
Project Finance & Project Evaluation %pe# is considered for 14 years! Throughput is considered for 14 years Gurdle rate is used to discount the costs of different years to P2!
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Project Finance & Project Evaluation R$V$NU$ (N(!&%I% For a company, revenue is income that a company receives from its normal usiness activities, usually from the sale of goods and services to customers! =ome companies also receive revenue from interest, dividends or royalties paid to them y other companies! $t also includes all net sales, e#change of assets etc! =avings made y a company is also revenue for it! +evenue analysis as discussed earlier is estimating the revenues that would e earned from the project, once it is implemented! $n $%&', depending upon the pipeline project features, any one of the following method is used for estimating revenue! "ased on Corporate %avings7 Khen a new pipeline is to e layed etween stations where there is no e#isting way of transporting &rudeFProduct, revenues are calculated y the Project )ppraisal -roup on the asis of corporate savings! &orporate savings is the overall savings made y $%&' y implementing a project! &orporate savings is then divided etween the various divisions of $%&' 5+efinery, Pipeline, 3arketing and +&*6 as their revenue! "ased on NRF (Notional Rail9a/ Freig-t 7 $f the &rudeFProduct was not transported through pipeline, it should have een transported through roadways or railways! +evenue in this method is the amount saved productFcrude through pipeline, rather than y transporting the it through transporting
railwaysFroadways! ,ormally the revenue is considered to e ;4 A of ,+F! "ased on IRR7 $n some cases, the $++ of the project is estimated first and ased on that the e#pected revenue for arriving at that $++ is calculated!
$n *adri-Panipat +-',- pipeline, the primary o jective of making the $++ was to determine the tariff to e charged for transportation of gas, as this is the first gas pipeline eing setup y $%&'!
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Project Finance & Project Evaluation Thus, usually where we consider revenue either as notional earnings 5i!e!;4 A of railway freight6 or corporate savings, here $++ was calculated in a ackward trend for determining the tariff for transporting per unit of gas! -ail(s tariff was also studied! )nd in order to arrive at the ma#imum tariff that can e charged $++ was considered at a predecided rate 5minimum hurdle rate ceiling of 1.A6! For e#ample if we fi# the $++ at 1.A, the tariffF+evenue per unit works out to +s! ?!??.?4/! The per unit tariff is then multiplied with throughput and the length of the pipeline to arrive at the total revenue!
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Project Finance & Project Evaluation FIN(NCI(! (N(!&%I% The primary o jective of any project is to earn reasona le returns for the investment made and therefore financial feasi ility of a project must e e#amined while selecting the project for implementation! %nce the total cost of the project has een estimated, the means of financing the project has to e 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 een considered to e financed through internal resources! The reEuirement of working capital is also met through internal resources! For the purpose of financial analysis, *e tB EEuity ratio of 1B1 has een considered with interestP 9!44A per annum and repayment in eight eEual installments with one year(s moratorium! Financial analysis for the project has een considered taking into following consideration! Project life has guidelines! The analysis has een carried out at constant prices i!e! no escalation has een provided either in costs or in the return! )fter 14 years the salvage value of the system has een considered as /? A of the initial cost 5Kithout financing cost6 e#cept land cost! This has een taken as cash flow! een considered for 14 years of operation as per corporate
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Project Finance & Project Evaluation P+(%IN* ) project is rarely done in one go, it is divided into different stagesFphases! These phases do not start at the same time and their payment timings also differ! Phasing helps to determine the pattern and Euantum of cash outflows each year 5in case the project takes more than one year6! )ccording to the *F+ 5*etailed Feasi ility +eport6 of *adri-Panipat +-',- pipeline, the proposed pipeline project is e#pected to e completed in a period of a out 19 months after its investment approval! Jear-wise phasing of e#penditure is as follows! 5Figs! $n +s! &rore6 JE)+ Phasing of &apital cost without $nterest Phasing of capital cost with interest $ ./4!.7 .1?!1/ $$ ..!?1 .;!19 Total .4;!// .8;!71
The 19 month project implementation schedule has een divided into the followingB =urvey and $nvestigationB completed in 8 months! &learanceB &ompleted in ; months! *etailed EngineeringB Takes . months! 'andF+%K )cEuisition & &rop compensationB =tarting from /rd month till the end of the project! Procurement of pipe and materialsB "ased on tendering & awarding and then delivery 5takes in total 1? months6! Procurement of station materialsB "ased on tendering & awarding and delivery 5takes in total 1. months!6 3ainline construction, station construction, telesupervisoryFtelecomB Each activity took 14 months to e completed!
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Project Finance & Project Evaluation &ommissioningB &ommissioning is eing done in the last month! P-asing grap-
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D$PR$CI(TION *epreciation an e#pense recorded to allocate a tangi le asset:s cost over its useful life! $t provides for the wear and tear that occurs to an asset during its lifetime! )s depreciation is a non-cash e#pense, it increases free cash flow while decreasing reported earnings! *epreciation is used to try to match the e#pense 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 asic methods of calculating depreciation areB Kritten down value method =traight line depreciation method
*epreciation is considered while doing project analysis to arrive at the correct estimate of profits and to get the actual value of the asset! $t helps in reducing the profits and saving ta#es! Kritten down value method of depreciation is usually used ecause the assets do not depreciate at the same rate every year! $n the *adri-Panipat +-',- pipeline, land & +%K 5+ight of Kay6 and the P3& on it has not een included for depreciation! *epreciation has to e computed in Kritten down value method for arriving at the regular profits, whereas =traight line method is used for $ncome ta# purposes!
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Project Finance & Project Evaluation T(2 C(!CU!(TION $n project finance asically three types of ta#es are calculated while doing financial analysis and these areB 3inimum )lternate Ta# $ncome Ta# &apital -ains Ta#
'inim,m (lternate Ta; ('(T ,ormally, a comapny is lia le to pay ta# on the income computed in accordance with the provisions of the income ta# )ct, ut the profit and loss account of the company is prepared as per provisions of the &ompanies )ct! There were large num er of companies who had profits as per their profit and loss account ut were not paying any ta# ecause income computed as per provisions of the income ta# act was either nil or negative! To avoid this practice, 3)T was introduced in section 114I" of the $ncome Ta# )ct! Profit computed under the regular method is called regular profit and profit computed under sec 114I" is called "ook profit and the ta# computed is called 3)T! $f a company is having regular profits then income ta# P //!77A 5/?A ta# M 1?A surcharge M /A education cess6 is charged on it! Gowever if the ooks show losses, then 3)T is calculated and if 3)T shows profits, ta# is calculated P 11!//A 51?A ta# M 1?A surcharge M /A education cess6! )nd if 3)T shows losses, then ta# is not to e charged! '(T Credit Khen a company pays ta# under 3)T, ta# credit is allowed in respect thereof during the years when the company pays normal corporate ta#! The ta# credit earned is the difference etween the amount paya le under 3)T and the regular ta#! The amount of 3)T credit can e set-off only in the year in which the company is lia le to pay ta# as per the regular ta#! 3)T credit will e allowed carry forward facility for a period of five assessment years immediately succeeding the assessment year in which 3)T is paid!
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Project Finance & Project Evaluation '(T C(!CU!(TION First of all, the ook profits are calculated using the formula "oo5 profit8 Ta;able profit J depreciation previo,sl/ ded,cted 6 act,al depreciation as per Income ta; (ct 3)T loss is added to the ook profit to o tain the adjusted ook profit on which the 3)T is calculated P 11!//A 53)T rate6!
Capital *ains Ta; $f any &apital )sset is sold or transferred, the profits arising out of such sale are ta#a le as capital gains in the year in which the transfer takes place! &apital asset gains are of two types 'ong term capital gainsB -ains on assets held for more than /8 months efore they are sold or transferred! $n case of shares, de entures and mutual fund units the period of holding reEuired is only 1. months! +ate of ta# applied on long term capital gains is ..!88A 5.?A ta# M 1?A surcharge M /A education cess6! =hort term capital gainsB -ains on assets held for less than /8 months are included in this category! +ate of ta# applied on short term capital gains is 14A! &)'&<')T$%, %F &)P$T)' -)$, ,et capital gain is calculated with help of formulaB ,et &apital -ain L -ross -ain 5&ost of )cEuisition M $nde#ation &ost6 N E#penses on =ale $nde#ation &ost L %riginal value R Present year $nde# "ase yearFyear of )cEuisition $nde# &apital gain is calculated at ..!88A of ,et &apital -ain!
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Project Finance & Project Evaluation )s per the $%&' guidelines, &apital gains ta# is calculated on the terminal value of the project at the end of 14 years, which is estimated to e /?A of &ape# M &ost of land!
Interest 3 Repa/ment $n project finance, financing of projects is done through oth de t and eEuity! The interest on the amount financed through de t and the repayment thereof is considered under this heading! $nterest & repayment increases the cash outflows as we are paying the amount! $t helps in reducing the ta#es and increasing the profits from the project! The following points are considered while estimating interest and repayments in $%&' $nterest & repayments are not applica le on projects where &ape# less than 1?? &rores! $f the project(s &ape# is more than 1?? &rores, then de t and eEuity is considered in 1B1 ratio! $nterest rate is considered as per the latest ank lending rates, which is annually revised y Project )ppraisal -roup! +epayments are made on reducing interest rate method!
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INT$RN(! R(T$ OF R$TURN (IRR $++ is usually the rate of return that a project earns! Therefore, it is called internal rate of return! $++ is also known as time adjusted rate of return, marginal efficiency of capital, marginal productivity of capital and yield on investment! $++ is the discount rate at which present value of cash inflow is eEual to the present value of cash outflows! $n other words, it is the rate at which ,P2 of the project is 0ero! $++ is preferred y $%&' over other selection methods ecause of the following reasonsB $++ consider time value of money 5&ash flows are converted into present value6! $t takes into account all cash inflows and outflows occurring over the entire lifetime of the project! $++ is consistent with the overall o jective of ma#imi0ing the net worth!
$V(!U(TIN* ( PRO#$CT ON T+$ "(%I% OF IRR '$T+OD7 To evaluate a project through $++ method, $++ of the project is compared with the predetermined hurdle rate! Gurdle rate is the minimum rate of return that must e met for a company to undertake a project! $t is calculated with the help of &apital )sset Pricing 3odel 5&)P36! $f $++ e#ceeds the reEuired rate hurdle rate, the project would e accepted and if $++ is lower than reEuired hurdle rate, the project would e rejected! $n *adri-Panipat +-',-, the $++ was kept fi#ed at 1.A, which was also the hurdle rate of the project! The revenues for the project were estimated on the asis of the reEuired $++ i!e! 1.A!
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Project Finance & Project Evaluation %$N%ITIVIT& (N(!&%I% =ensitivity analysis is a procedure to determine the sensitivity of the outcomes of an alternative, to changes in its parameters! $f a small change in a parameter results in relatively large changes in the outcomes, the outcomes are said to e sensitive to that parameter! This may mean that the parameter has to e determined very accurately or that the alternative has to e redesigned for low sensitivity! The major parameters on which changes are made to study the revenueF$++ sensitivity are as followsB &ape# 5&apital costs6 %pe# 5%perating &osts6 Throughput Freight charges
$n *adri-Panipat +-',- project, $++ is fi#ed at 1.A and sensitivity analysis is used for calculating transmission charges with respect to changes in $++! $n this project sensitivity analysis has een carried out for the following cases! "ase &ase 51.A $++6 =ensitivity case with throughput same as ase case & 1?A $++ =ensitivity case considering non-)vaila ility of ,F' throughput for $st / years & 1.A $++ =ensitivity case considering non-)vaila ility of ,F' throughput for $st / years & 1?A $++ =ensitivity case considering without ,F' throughput & 1.A $++ =ensitivity case considering without ,F' throughput & 1?A $++
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D(DRI TO P(NIP(T R6!N* PIP$!IN$
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Project Finance & Project Evaluation R6 !N* %PUR!IN$ FRO' D(DRI TO P(NIP(T $ndian %il &orporation 'td 5$%&'6 is one of the promoters of Petronet ',- 'td 5P''6! P'' has set up a 4 33TP) ',- regasification terminal along with associated facilities at *ahej in the state of -ujrat! The pipeline infrastructure has een put up y -)$' for gas transportation e# *ahej! ) feasi ility +eport was prepared on the proposal of laying +-',- spurline from *adri to Panipat refinery y $%&', $ncluding a ranch line to feed ,F' plant, which is on the way to panipat! The spurline will originate at *adri 5<ttarpradesh6 and will terminate at Panipat 5Garyana6! $t will e hooked up to -)$'(s gas pipeline network at *adri and will transport +-',- to feed Panipat refinery(s reEuirement to economically replace naphtha currently eing used and for hydrogen generationFgas tur ine operation as well as for diesel component currently in use in $F% to meet the sulphur emission norms! The gas reEuirement for the Panipat refinery would e 1!/ 33=&3* in the year .??7 onwards, however for design purpose it was advised to consider 1!9 33=&3* for Panipat refinery! Further a 1!7. 33=&3* reEuirement of ,F' plant has also een considered to e met through this pipeline! The total volume of gas reEuired to e transported through the pipeline would thus e 8!;. 33=&3*! The total length of the pipeline from *adri to Panipat, ased on survey report, is 1/9 H3 and the length of ranch pipeline to ,F' is /H3! The proposed pipeline project is e#pected to e completed in a period of a out 19 months after investment approval!
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Project Finance & Project Evaluation N$$D 3 #U%TIFIC(TION FOR D(DRI6P(NIP(T PIP$!IN$ )n internal study y $%&' has indicated that Panipat refinery would e a le to a sor a out 1!/ 33=&3* of natural gas, which would economically replace naphtha currently eing used and is also proposed to e used for hydrogen generationFgas tur ine operation! The study has also indicated that the +-',- transmission charges to e paid to -)$' would e much higher as compared to that in case pipeline laying and operation were undertaken y $%&'! &onsidering $%&'(s dedicated reEuirement at Panipat refinery, economies of low tariff, low project implementation cost and inhouse capa ility of laying and operating the pipeline, it is proposed that this project e e#peditiously implemented to meet Panipat refinery reEuirement!
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4$& !$(RNIN*% FRO' PRO#$CT
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4$& !$(RNIN*% FRO' T+$ PRO#$CT Each and every activity in life helps us to learn new things! This project too was a perfect learning e#perience and has helped me to learn a lot! Corporate aspectB This project has provided me with good e#posure to actual working environment of an organi0ation! Indian Oil scenarioB $ndian %il is one of the ,avratna P=<(s of $ndia and also a leading company in downstream operations in %il works in actual scenario! Financing of Pro1ectsB 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 e understood y reading ooks! Proced,re of eval,ating pro1ectsB Through this project, $ have learned the various aspects of evaluating the project, financial tools for assessing the via ility of project, cost estimation and how depreciation, ta#es etc impact the evaluation of the projects! usiness! Korking in the finance *ivision 5Pipelines6 has helped me to know how the finance department
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!I'IT(TION%
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Project Finance & Project Evaluation !I'IT(TION% Each and every project or research carried out has some limitations, e it time constraints or any other such issues that invaria ly, plague the result! There was a constraint with regard to time allocation for the research study i!e! for a period of two months! *ata collection was strictly confined to secondary source thus is su ject to slight variation than what the study includes in reality! There were various technical terms used in the project, which were difficult to understand!
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CONC!U%ION% (ND R$CO''$ND(TION% Visit mbafin.blogspot.com for more
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CONC!U%ION% 3 R$CO''$ND(TION% )t the end it may e concluded that project financing is a good method for financing and evaluating the projects! $t covers all the aspects of the project and help in mitigating the risks! This project includes step wise analysis of *adri-Panipat +-',- starting from need & justification to sensitivity analysis! Recommendations7 $n $%&', Projects with &ape# less than 1?? &rores are financed through internal resources, however it is recommended to use more of de t in financing projects! ,ormally, in project financing a =pecial Purpose 2ehicle 5=P26 is created, which is a legally independent company! Gowever in $%&' =P2 is not created! )ll the projects in $%&' are evaluated using set guidelines and in the same way, however the projects vary from each other 5&rude pipelines and ',- pipelines vary in their characteristics6 and it is recommended that evaluation should e according to the project characteristics and features! 3any a times Projects are implemented due to strategic considerations rather than their financial feasi ility and do not provide e#pected results! $t is recommended not to implement projects which are not financially feasi le!
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Project Finance Project Evaluation at Indian Oil Project Report

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Project Finance Project Evaluation at Indian Oil Project Report

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Project Finance & Project Evaluation

Visit mbafin.blogspot.com for more