Project Finance & Project Evaluation at Indian Oil project report

Project Finance & Project Evaluation

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INTRODUCTION

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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.

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OBJECTIVES OF STUDY

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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

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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.

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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.

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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)

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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

INNOVATION

PASSION

TRUST

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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.

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.

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Project Finance & Project Evaluation 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.

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MAJOR DIVISIONS OF IOCL

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IOCL

Refineries

Marketing Pipelines

Assam Oil

DivisionR & D IBP


BUSINESS CHART OF IOCL

IOCL has its presence in all spheres of downstream operations.

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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

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FINANCIAL HIGHLIGHTS

Annual Turnover of IOCL for the last 3 years

Annual Turnover

183172

220779247479

0

50000

100000

150000

200000

250000

300000

2005-06 2006-07 2007-08

in C

rore

s

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PIPELINES DIVISION IN IOCL

Indian Oil, the pioneer in cross-country petroleum product pipeline in the Indian sub-

continent constructed and commissioned its first petroleum product pipeline, Guwahati-

Siliguri 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.

Major Crude Oil Pipelines

• Salaya-Mathura Pipeline (SMPL)

• Haldia-Barauni Crude Oil Pipeline (HBCPL)

• Mundra - Panipat Pipeline (MPPL)

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Project Finance & Project Evaluation 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

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FUNCTIONING OF PIPELINE

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.

Sea Shore(Exploration)

Refinery Division

Marketing Division

Finished products to clients

Pipelines Pipelines

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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:

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Finance Dept

Main Accounts Payroll

Foreign Exchange

& Insurance

MIS & Budgeting

Project Finance &

ConcurrenceCash & Bank


PROJECT FINANCE

Introduction to Project Finance

Stages of Project Financing

Project Evaluation

Risk analysis

Demand analysis

Project cost estimation

Revenue analysis

Financial analysis

Project selection criteria

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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,

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

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STAGES IN PROJECT FINANCE

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PROJECT EVALUATION

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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 organization. Project evaluation helps to decide which of the several alternative

projects has a better success rate, a higher turnover.

STEPS IN PROJECT EVALUATION

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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.

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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

Availability Risk

Completion (technical and timing) Risk

Counterparty credit risk

Country (political) Risk

Inflation Risk

Input and throughput Risk

Market (demand) Risk

Technological Risks

2. 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

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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:

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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

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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.

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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

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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

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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.

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POLICY GUIDELINES OF CAPITAL INVESTMENT PROPOSAL

Formulation of capital investment proposal

Purchase of land/office/residential building as part of project

Evaluation of capital investment proposal

Criteria for approval of capital investment proposal

Performance Appraisal of Project

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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.

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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 for removal of operational

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.

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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

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Project Finance & Project Evaluation STUDY METHEDOLOGY AT IOCL

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Project Finance & Project Evaluation Inception of Idea

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.

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Project Finance & Project Evaluation Funding at Corporate Level

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

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Project Finance & Project Evaluation The tender with lowest quoted price is awarded the contract for fulfilling the concerned

purchase requisition.

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.

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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

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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.

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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

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Format of mechanical dept

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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

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Project Finance & Project Evaluation Format of Electrical dept

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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.

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Project Finance & Project Evaluation Format of T&I dept

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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.

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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.

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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.

51


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 inhouse 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.

52


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.

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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.

54


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.

55

Project Finance & Project Evaluation Format of Capex

56

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

Panipat refinery. However, for continuous availability of power for controls and

accessories stand-by generating unit of adequate capacity has been considered.

57

Project Finance & Project Evaluation 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.

58

Project Finance & Project Evaluation Format of Opex

59

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

Factors Considered while preparing Statement of Optimization

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

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.

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

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61


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.

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http://en.wikipedia.org/wiki/Corporation

http://en.wikipedia.org/wiki/Income


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.

63


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.

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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.

Commissioning: Commissioning is being done in the last month.

65

Project Finance & Project Evaluation Phasing graph

66


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.

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68

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.

69


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

Capital gain is calculated at 22.66% of Net Capital Gain.

Base year/year of Acquisition Index

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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.

71


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 pre-

determined 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%.

72


73


74

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

75


DADRI TO PANIPATR-LNG PIPELINE

76


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.

77


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.

78


KEY LEARNINGS FROM PROJECT

79


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.

80


LIMITATIONS

81


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.

82


CONCLUSIONS ANDRECOMMENDATIONS


83


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.

84

Project Finance & Project Evaluation 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.


85


REFERENCES


REFERENCES

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Project Finance & Project Evaluation 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


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