Tender - DHDS Reactors Project

Turkmenistan is coming to the fore as one of the biggest players in CIS region in hydrocarbon space. TMOC
Oil is a leading player in Turkmenistan in Hydrocarbons business. After the successful tendering for its
offshore production and process platform in the Caspian Sea fields, TMOC Oil invites commercial bids for
project management, engineering, procurement, manufacture, erection and commissioning of one number
refinery unit.
EPC contractors worldwide have participated in this tender and market intelligence has reported that
Petrofac is leading the pack to land the said order for full scope of refinery complex. Petrofac will in turn
invite tenders for various sub-units within a complete refinery complex via International Competitive
Bidding route.
In the internal risk review of XYZ limited, the committee approved quoting to Petrofac for DHDS (diesel
hydro desulfurization) reactor package. We intend to quote to Petrofac for DHDS reactor packages

Scope of Work
Quotes for 10 nos of DHDS reactor packages are invited which are part of large refinery complex.
We intend to win highest possible number of DHDS reactors
The cost break up for the entire scope of work including the receiving & distribution substations is as
follows:
S.No
1
2
3

Work
Engineering
Supply
Manufacturing/ fabrication

Approximate % of total value

10%
60%
30%

Project Duration: 22 months

Bid Currency: Multiple currency bids allowed
Petrofac will accept bids in USD, EURO, JPY and INR
Bid submission Date: 27 November 2014
Bid opening date: 27 February 2015 (5.30 PM)
Bid Validity: 90 days (27th Nov 2014 to 27th Feb 2015)
Evaluation criterion:
On the date of tender opening 27th February 2015

a) For the purpose of Commercial Evaluation of the Bids, exchange rates published by Reuters at 5 p.m.
GMT, one day prior to the day the commercial bids are opened (27 Feb 2015) shall be used. All bids will
be converted into USD equivalent and order will be placed on the lowest bidder
b) For the purpose of LOA and contract price, client shall pay the fixed price of the respective currencies
as submitted in the commercial bid.
Payment Terms:
45 days from the receipt of invoice by the client
Important milestones
Milestone
Acceptance of engineering design
Order placement for raw material
Dispatch of material from vendor
Dispatch of reactor

Scheduled Completion
4 months
8 months
11 months
22 months

Value
10%
20%
20%
50%

L/D: For each month of delay 2% of total contract value will be charged. The total L/D capped at 10% of
the total contract value.

Technical/Commercial inputs
Likely Bid Value: USD 100 million (for 10 DHDS reactors)
Technical inputs:
Function wise the whole work can be divided as:
1. Engineering: Engineering will include detailed engineering specification of DHDS reactors.
Majority of this work will be done in India and all the cost will be incurred in INR. In past,
engineering cost has amounted to roughly 10% of the total project value.

2. Procurement:
DHDS reactors require special grade of steel which is essentially alloyed with Cr - Mo - V
Kobe Steel, Japan and Dillinger Steel, Germany are capable of providing the required grade of
steel.
Kobe can quote either in JPY or USD
Dillinger can quote either in EUR or USD

Tata steel is building a plant at Kalinganagar. The plant once commissioned can cater to demand
of Cr - Mo V steel. Plant is likely to be commissioned by June 2014. Being a new entrant in the
market, Tata steel is expected to give discounts to the tune of 10% over prevalent market prices.
Price quoted will be in INR thus significantly increasing INR portion in total cost structure.
There is likelihood that plant commissioning may get delayed beyond June 2014 in which case our
supply schedule will get hampered.
Procurement constitute about 60% of the total project value. Out of total procurement, 90% will be
on account of steel and rest 10% will be special equipment which will be sourced from European
vendor.
Commodity Outlook
Major commodity exposure will be in the form of CrMoV Steel
Stainless Steel Outlook
Stainless steel price has come off the highs witnessed in 2008 due to slowing demand from Europe,
China and US i.e. both emerging and developed markets for variety of reasons. One of the primary
reasons for the fall in 2012 prices in both stainless steel and its feedstock cost (Nickel, Chromium,
Molybdenum and Vanadium) has been the waning demand in nuclear applications post Fukushima
disaster. The US Shale boom which is resulting into slew of petrochemical investments provides a
ray of hope for the industry which has been in doldrums in past few years.
Near term outlook remains range bound with prices increasing from bottom levels in 2013 and
demand recovery in US. Reference price level for CrMoV steel can be considered at $3000/ MT.

Last five year trends

Ferro Chrome (USD/ lb)

Ferro Vanadium (USD/ kg)

Ferro Molybdenum (USD/kg)

Payment terms from vendors

Vendors are insisting on the following payment terms 10% advance
90% on shipment
However considering the working capital requirements, appropriate strategy would have to be put in place.
As a trend, Japanese vendors although being more cost effective demand 25% advance.
Bid validity
Petrofac has asked for bid validity of 90 days. However TMOC Oil has history of not awarding contracts
on time and generally seeks extension without giving opportunity to revise the prices.
Accordingly it is likely that Petrofac may not be in position to stick to 90 days of bid validity and may try
to negotiate terms with us for extension of bid validity with no changes in price submitted.

Competitors
1. One European player specialized in DHDS reactor having unutilized factory capacity
2. Two Japanese firm having executed similar type of project with the same client before.
3. There would be Korean and Chinese competitors who would bid aggressively.
Objectives of the bid
1. To get the job and execute it profitably. We are expecting price bid clearly mentioning currency
mix and quantum.
2. There is a mandate by management to have an Operating profit margin of 10% (on sales price).
3. Use of a carefully calibrated strategy to take advantage of the financial markets overview, tender
conditions as well as the competition landscape and balance the risk reward payoff.
4. The business vertical wants to maintain almost zero working capital and in case a credit period is
requested by the client, the price would have to be accordingly adjusted keeping the competitive
pressures in mind. During a recent informal discussion with the client, it was mentioned that the
retention clauses are flexible. Corporate Finance has indicated a cost of 13.5% p.a as Weighted
Average Cost of Capital (WACC).
5. DHDS reactor is one of packages required in the whole refinery complex and we are hopeful of
further tenders in connection with the same refinery complex. This order can pave way for it.
6. Based on recent interactions with the Treasury team, the following analytical inputs have been
received from the Treasury
Macro snapshot (Annex 1)
Requirements:1. Your team is expected to submit the price bid in the answer sheets. Final prices mentioned in the
Price table shall be taken for calculating the bid prices.
2. Along with the bid price, each team has to make a 10 to 15 slide presentation covering the following:a. Key assumptions made in the bid
b. Strategies used in bid pricing / structuring
c. Application of financial risk management concepts (Fx & Commodities) in the bid strategy
d. Teams shall be evaluated based on the strategy / presentation as well as the competitive price bid
submitted after reckoning all the relevant factors

ANNEXURE 1

MARKET SNAPSHOT
(September 2014)

Spot

Forward

USD / INR

60.8100

+6.00%

USD / CNY

6.1407

+0.10%

USD / JPY

109.07

-0.80%

EUR / USD

1.2840

+0.30%

USD / KRW

1040.60

+0.90%

GBP / USD

1.6330

-0.15%

USD / KWD

0.28747

+1.20%

ECO-POLITICAL SCENARIO

The US economy will continue to grow at an above-trend pace through 2015, as economic
fundamentals have improved. The improving financial conditions are providing a significant
tailwind for growth. The inflation in the US is also likely to drift higher, while remaining within the
Feds comfort zone, below 2%.

The bounce-back in growth in US will probably drive the unemployment rate below 6 percent
later this year. The Fed continues to maintain an accommodative stance along with its tapering
7

its use of quantitative easing (QE). The Fed has been cutting asset purchases by $10 billion per
meeting and should complete the program by October end. The Fed is expected to start hiking US
rates around middle of 2015, and this should start the process of normalization of rates.

The picture is exactly opposite in Europe and Japan. We look for both central banks (BoJ and ECB)
to downgrade their economic forecasts and to launch major QE programs in Q4-2014 or perhaps
Q1-2015.

In the euro area, the inflation is close to zero, inflation expectations are falling sharply, and any
growth is unlikely to be strong.

In Japan, recent comments suggest that the BoJ is now becoming more worried about growth
prospects.

With new government (with clear mandate) in place, the Indian economy stands at the cusp of a
recovery. In addition to the improving growth/inflation balance, there has been meaningful
progress on the twin deficit front. New governments focus is to boost growth through investment
revival and fast tracking execution/clearances. The RBI governor continues to focus on financial
services expansion while simultaneously devising a monetary policy framework that could help
achieve low and stable inflation.

Global oil markets are caught between bearish fundamentals and bullish geopolitics. There are
bearish risks from Libya and potentially Iran, but with Iraq on edge and Russia/Ukraine still
simmering, oil prices are expected to find support. Meanwhile, emerging market demand is not
the performer it once was, though US demand looks a little brighter

As the advance of ISIS in Iraq poses a theoretical (but small) risk of disruption in global oil supplies,
the focus has turned to Saudi Arabia and other OPEC member's ability to make up any potential
shortfall in Iraqi exports. Saudi oil production has been in the 9.6mbpd-10mbpd range since mid2013, while capacity remains at around 12.5 mbpd. The Kingdom has never pumped more than
10mbpd on a sustained basis, and the ease with which it can cover any Iraqi crude losses is thus
uncertain.