A Project Report

On

“THE BRAND EXCELLENCE ON INDIAN OIL CORPORATION”

Submitted to
Indian Oil Corporation Limited

Submitted by

Mohammed Yasir Ruknuddin

REG NO: 08b61626

In partial fulfillment of the requirement for the Degree

Of

BACHELOR OF BUSINESS ADMINISTRATION

At

KARNATAKA UNIVERSITY, DHARWAD

ANJUMAN INSTITUTE OF MANAGEMENT

BHATKAL
2010-2011

1
 CERTIFICATE

This is to certify that Mr. MOHAMMED YASIR RUKNUDDIN of B.B.A

Final year (Reg. No. 08b61626) had successfully undergone the implant
training of 30 days in “KAMAKSHI PETROL BUNK” BHATKAL and
had submitted this report entitled “THE BRAND EXCELLENCE ON
INDIAN OIL CORPORATION” for the year 2010-11 in partial
fulfillment of the requirements for the award of Bachelor Degree in
Business Administration of Karnataka University Dharwad under the
guidance of Prof. MOHSIN

PRINCIPAL Prof.MOHSIN
(Prof. ZAFARULLAH KOKATNUR) (Internal Guide)

DATE:10/02/2011

2
PLACE: BHATKAL
DECLARATION

I here by declare that this project report entitled “THE BRAND

EXCELLENCE ON INDIAN OIL CORPORATION” is prepared by me towards the
partial fulfillment of the requirement of the Bachelor of Business Administration
course of the Karnataka University, Dharwad, under the guidance of Mr Mohsin
I also declare that this project report has not been submitted at any time to
any other university.

Name: MOHAMMED YASIR RUKNUDDIN

Reg. No: 08b61626

Date: 16/01/2010
Place: BHATKAL

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 Acknowledgement

A formal statement of acknowledgement will hardly meet the ends of the

justice in the matter of expression of my deeply felt sincere and allegiant
gratitude to all those who encouraged me and helped me during my study.

It gives me immense pleasure, to express my unfeigned and sincere thanks

and gratitude to Mr. MOHSIN faculty Anjuman Institute Of Management
for her assistance, advice and support throughout the preparation of this
report.

I express my sincere thanks to our beloved principal Prof. ZAFRULLAH

KOKATNUR, for giving valuable support and encouragement in preparing
this report.

I am also thankful to Mr.NAGESH BHAT for giving me valuable

information regarding his concern.

I am also very thankful to all my respondents who took time out of their busy
schedules and helped me in carrying out this project.

4
 TABLE OF CONTENTS
PAGE NO

1. Introduction
6

2. Company Profile
7

3. Objectives
13

4. Company overview
15

5. Project Finance
28

6. Capital investment proposal

37

7. Study Methodology
42

8. Statement of Optimization
62

9. Revenue Analysis
65

10. Financial Analysis

67

11. Phasing
68

13. Depreciation
69

5
14. Internal rate of return
74

15. Dadri to panipat R-lng Pipeline

77

16. Key Learning

79

17. Limitations
82

18. Kamakshi Introduction

84

19. Conclusion and Recommendations

85

20. Bibliography
87

INTRODUCTION

6
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.

7
 COMPANY PROFILE

India’s flagship national oil company and downstream petroleum major, Indian Oil
Corporation Ltd. (IndianOil) is celebrating its Golden Jubilee in 2009. It is India's largest
commercial enterprise, with a sales turnover of Rs. 2, 85,337 crore – the highest-ever for
an Indian company – and a net profit of Rs. 2, 950 crore for the year 2008-09. IndianOil
is also the highest ranked Indian company in the prestigious Fortune 'Global 500' listing,
having moved up 11 places to the 105th position in 2009. India’s Flagship National Oil
Company Incorporated as Indian Oil Company Ltd. on 30th
June, 1959, it was renamed as Indian Oil Corporation Ltd.
on 1st September, 1964 following the merger of Indian
Refineries Ltd. (established 1958) with it. IndianOil and its
subsidiaries account for approximately 48% petroleum
products market share, 34% national refining capacity and
71% downstream sector pipelines capacity in India.

For the year 2008-09, the IndianOil group sold 62.6 million tonnes of petroleum products,
including 1.7 million tonnes of natural gas, and exported 3.64 million tonnes of petroleum
products.

The IndianOil Group of companies owns and operates 10 of India's 20 refineries with a
combined refining capacity of 60.2 million metric tonnes per annum (MMTPA, .i.e. 1.2
million barrels per day). These include two refineries of subsidiary Chennai Petroleum
Corporation Ltd.

The Corporation's cross-country network of crude oil and product pipelines, spanning
over 10,000 km and the largest in the country, meets the vital energy needs of the
consumers in an efficient, economical and environment-friendly manner.

IndianOil is investing Rs. 43,400 crore (US $10.8 billion) during the period 2007-12 in
augmentation of refining and pipeline capacities, expansion of marketing infrastructure
and product quality upgradation as well as in integration and diversification projects.
Network Beyond Compare As the flagship national oil
company in the downstream sector, IndianOil reaches
precious petroleum products to millions of people everyday
through a countrywide network of about 35,000 sales
points. They are backed for supplies by 167 bulk storage
terminals and depots, 101 aviation fuel stations and 89
Indane (LPGas) bottling plants. About 7,335 bulk consumer
pumps are also in operation for the convenience of large
consumers, ensuring products and inventory at their doorstep.

IndianOil operates the largest and the widest network of petrol & diesel stations in the
country, numbering over 18,278. It reaches Indane cooking gas to the doorsteps of over
53 million households in nearly 2,700 markets through a network of about 5,000 Indane

8
distributors.

IndianOil's ISO-9002 certified Aviation Service commands over 63% market share in
aviation fuel business, meeting the fuel needs of domestic and international flag carriers,
private airlines and the Indian Defence Services. The Corporation also enjoys a dominant
share of the bulk consumer business, including that of railways, state transport
undertakings, and industrial, agricultural and marine sectors. Technology Solutions
Provider IndianOil's world-class R&D Centre is perhaps Asia's finest. Besides pioneering
work in lubricants formulation, refinery processes, pipeline transportation and alternative
fuels, the Centre is also the nodal agency of the Indian hydrocarbon sector for ushering in
Hydrogen fuel economy in the country. It has set up a commercial Hydrogen-CNG
station at an IndianOil retail outlet in New Delhi this year. The Centre holds 214 active
patents, including 113 international patents.

IndianOil has joined the league of global technology providers last year with the selection
of its in-house developed INDMAX technology (for maximising LPGas yield) for the 4
MMTPA Fluidised Catalytic Cracking (FCC) unit at the Corporation's upcoming 15
MMTPA grass roots refinery at Paradip in Orissa, as well as for the FCC unit coming up
at BRPL.

A wholly-owned subsidiary, IndianOil Technologies Ltd., is engaged in commercialising

the innovations and technologies developed by IndianOil's R&D Centre. Customer First
At IndianOil, customers always get the first priority. New initiatives are launched round-
the-year for the convenience of the various customer segments.

Exclusive XTRACARE petrol & diesel stations unveiled in select urban and semi-urban
markets offer a range of value-added services to enhance customer delight and loyalty.
Large format Swagat brand outlets cater to highway motorists, with multiple facilities
such as food courts, first aid, rest rooms and dormitories, spare parts shops, etc. Specially
formatted Kisan Seva Kendra outlets meet the diverse needs of the rural populace,
offering a variety of products and services such as seeds, fertilisers, pesticides, farm
equipment, medicines, spare parts for trucks and tractors, tractor engine oils and pump set
oils, besides auto fuels and kerosene. SERVOXpress has been launched recently as a one-
stop shop for auto care services.

To safeguard the interest of the valuable customers, interventions like retail automation,
vehicle tracking and marker systems have been introduced to ensure quality and quantity
of petroleum products. Widening Horizons To achieve the
next level of growth, IndianOil is currently forging ahead
on a well laid-out road map through vertical integration—
upstream into oil exploration & production (E&P) and
downstream into petrochemicals – and diversification into
natural gas marketing, bio fuels, wind power projects,
besides globalisation of its downstream operations.

Petrochemicals
In petrochemicals, IndianOil is envisaging an investment of Rs. 20,000 crore (US$ 4

9
billion) by the year 2011-12. Through the world’s largest single-train Linear Alkyl
Benzene (LAB) plant with an annual capacity of 1,20,000 tonnes set up at its Gujarat
Refinery, the Corporation has already captured a significant market share of LAB in
India, besides exporting the product to Indonesia, Turkey, Thailand, Vietnam, Norway
and Oman.

A world-scale Paraxylene/Purified Terephthalic Acid plant (annual capacities: PX -

3,63,000 tonnes, PTA – 5,53,000 tonnes) for polyester intermediates is already in
operation at Panipat, while a Naphtha Cracker with a capacity of 800,000 tonnes of
ethylene per annum, 6,00,000 TPA of Propylene, besides an annual production of
3,25,000 TPA of Mono Ethylene Glycol, 1,40,000 TPA of Butadiene, 6,50,000 TPA of
Polyethylene and 6,00,000 TPA of Polypropylene, equipped with downstream polymer
units is to be completed by December 2009 at Panipat.

A grassroots refinery at Paradip is proposed to be completed by the year 2011-12,

subsequently followed by the setting up of an integrated petrochemical plants with an
estimated investment of Rs 12,000 crore (US$ 2.5 billion) which will further strengthen
the Corporation’s presence in the sector.

Oil Exploration & Production

In E&P, IndianOil has non-operator participating interest in seven oil & gas blocks
awarded under various NELP (New Exploration Licensing Policy) rounds and two Coal
Bed Methane blocks in India, in consortium with other companies. In addition, IndianOil
has two onshore type ‘S’ NELP blocks, with 100% participating interest (PI) and sole
operatorship. It also has participating interest in an onshore block in Assam and
Arunachal Pradesh through a farm-in.

Overseas ventures of the Corporation includes two blocks (86 and 102/4) in Sirte Basin
and Areas 95/96 in Ghadames basin of Libya, Farsi Exploration Block in Iran, onshore
farm-in arrangements in one block in Gabon, one on land block in Nigeria, one deepwater
offshore block in Timor-Leste and two onshore blocks in Yemen. In all, IndianOil has 12
domestic exploration blocks, including 2 blocks where gas discoveries have been made
and 9 overseas exploration blocks, & the Farsi block in Iran where commerciality of gas
discovery has been established. IndianOil has incorporated Ind-OIL Overseas Ltd. – a
special purpose vehicle for acquisition of overseas E&P assets – in Port Louis, Mauritius,
in consortium with Oil India Ltd. (OIL).

Gas
In natural gas business, IndianOil sold 1.849 million tonnes of the product in 2008-09. A
technology innovation has been initiated to reach LNG (Liquefied Natural Gas) directly
to the doorstep of bulk consumers in cryogenic containers for industrial as well as captive
power applications.

To consolidate its city gas distribution (CGD) business, IndianOil has tied up with several
players such as Adani Energy, Reliance Gas Corporation, OIL and ONGC, etc., to set up
joint ventures in various cities of India. The Corporation has also entered into franchise
agreements with CGD players such as Indraprastha Gas Ltd., Mahanagar Gas Ltd., Adani

10
Energy Limited, GEECL, SITI Energy and GSPC Gas Ltd. to market CNG through its
retail outlets

Bio-fuels
To straddle the complete bio-fuel value chain, IndianOil formed a joint venture with the
Chhattisgarh Renewable Development Authority (CREDA) with an equity holding of
74% and 26% respectively. IndianOil CREDA Biofuels Ltd. has been formed for carrying
out farming, cultivating, manufacturing, production and sale of biomass, bio-fuels and
allied products and services.

A pilot project of jatropha plantation on 600 hectares of revenue wasteland is underway

in Jhabua district in Madhya Pradesh to ascertain the feasibility of revenue land-based
commercial biodiesel units and to develop benchmarks for plantation costs and output.

IndianOil has also signed an MoU with M/s Ruchi Soya Industries Ltd. to take up
contract farming on one lakh hectare of private and panchayat wasteland in the state of
Uttar Pradesh.

Wind Energy Business

IndianOiI has forayed into wind energy business with the commissioning of a Rs. 130
crore, 21 MW wind power project in the Kutch district of Gujarat. The cumulative power
generation from the 14 wind turbine generators has crossed 159 lakh KW since
commissioning in January 2009.

It has also commissioned two pilot solar lantern charging stations at its Kisan Seva
Kendra at Sathla near Meerut and Chokoni near Bareilly.

Consultancy
For over two decades now, IndianOil has been providing technical and manpower
secondment services to overseas companies. Such services have been extended to
Emirates National Oil Company (ENOC), Kenya Pipeline Company and Aden Refinery,
Yemen . For the first time, SAP implementation / IT consultancy was provided in Sri
Lanka. Consultancy on pipelines was provided to Greater Nile Petroleum Operating
Company (GNPOC), Sudan.

Globalization Initiatives
IndianOil has set up subsidiaries in Sri Lanka, Mauritius and the United Arab Emirates
(UAE), and is simultaneously scouting for new business opportunities in the energy
markets of Asia and Africa.

Lanka IOC Plc (LIOC)

Lanka IOC Ltd. operates about 150 petrol & diesel stations in Sri Lanka, and has a very
efficient lube marketing network. Its major facilities include an oil terminal at
Trincomalee, Sri Lanka's largest petroleum storage facility and an 18,000 tonnes per
annum capacity lubricants blending plant and state-of-the-art fuels and lubricants testing
laboratory at Trincomalee. Presently, it holds a market share of about 40%. In a highly
competitive bunker market, catering to all types of bunker fuels and lubricants at all ports

11
of Sri Lanka, viz., Colombo, Trincomalee and Galle. It is the major supplier of lubricants
and greases to the three arms of the Defence services of Sri Lanka. LIOC's market share
in petrol increased stands at 24.8% in 2008 with an overall market share of 16.9%.

IndianOil (Mauritius) Ltd. (IOML)

IndianOil (Mauritius) Ltd. has an overall market share of nearly 22% and commands a
35% market share in aviation fuelling business, apart from its bunkering business. It
operates a modern petroleum bulk storage terminal at Mer Rouge port, besides 17 filling
stations. In addition to the ongoing expansion of retail network, IOML has to its credit the
first ISO-9001 product-testing laboratory in Mauritius.

IndianOil Middle-East FZE (IOME)

The Corporation's UAE subsidiary, IOC Middle East FZE, which oversees business
expansion in the Middle East, is mainly into blending and marketing of SERVO
lubricants and marketing of petroleum products in the Middle East, Africa and CIS
countries. Finished lubes were exported to Oman , Qatar , Yemen , Bahrain , UAE and
Nepal .

12
OBJECTIVES OF STUDY

13
 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

14
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.

15
 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.

16
 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)

17
 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

18
 • INNOVATION
• PASSION
• TRUST

OBJECTIVES OF INDIAN OIL

IOCL has defined its objectives for succeeding in its mission. These objectives are:

• To serve the national interests in oil and related sectors in accordance and
consistent with Government policies.
• To ensure maintenance of continuous and smooth supplies of petroleum products
by way of crude oil refining, transportation and marketing activities and to
provide appropriate assistance to consumers to conserve and use petroleum
products efficiently.
• To enhance the country's self-sufficiency in crude oil refining and build expertise
in laying of crude oil and petroleum product pipelines.
• To further enhance marketing infrastructure and reseller network for providing
assured service to customers throughout the country.
• To create a strong research & development base in refinery processes, product
formulations, pipeline transportation and alternative fuels with a view to
minimizing/eliminating imports and to have next generation products.
• To optimise utilisation of refining capacity and maximize distillate yield and gross
refining margin.
• To maximise utilisation of the existing facilities for improving efficiency and
increasing productivity.
• To minimise fuel consumption and hydrocarbon loss in refineries and stock loss in
marketing operations to effect energy conservation.
• To earn a reasonable rate of return on investment.
• To avail of all viable opportunities, both national and global, arising out of the
Government of India’s policy of liberalisation and reforms.

19
 • To achieve higher growth through mergers, acquisitions, integration and
diversification by harnessing new business opportunities in oil exploration &
production, petrochemicals, natural gas and downstream opportunities overseas.
• To inculcate strong ‘core values’ among the employees and continuously update
skill sets for full exploitation of the new business opportunities.
• To develop operational synergies with subsidiaries and joint ventures and
continuously engage across the hydrocarbon value chain for the benefit of society
at large.

MAJOR DIVISIONS OF IOCL

IOCL

20
Assam
Refinerie Marketin Oil
Pipelines R&D IBP
s g Division
 BUSINESS CHART OF IOCL
IOCL has its presence in all spheres of downstream operations.

21
 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

22
 • Liquefied Petroleum Gas
• Lubricants & Greases
• Marine Fuels
• MS/Gasoline
• Petrochemicals
• Crude oil
• Superior Kerosene Oil

FINANCIAL HIGHLIGHTS

Annual Turnover of IOCL for the last 3 years

23
 Annual Turnover

300000
247479
250000 220779

200000 183172
in Crores

150000

100000

50000

0
2005-06 2006-07 2007-08

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

24
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)

25
 • Mundra - Panipat Pipeline (MPPL)
Major Product pipelines
• Guwahati-Siliguri Pipeline (GSPL)
• Koyali - Ahamedabad Pipeline (KAPL)
• Haldia - Barauni Pipeline (HBPL)
• Barauni - Kanpur Pipeline (BKPL)
• Haldia-Mourigram-Rajbandh Pipeline (HMRPL)
• Mathura-Jalandhar Pipeline (MJPL)
• Koyali - Dahej Product Pipeline

EXISTING & ONGOING CRUDE & PRODUCT PIPELINES

26
 FUNCTIONING OF PIPELINE

Pipelines Pipelines
Sea Shore Refinery Marketing
(Exploration) Division Division

Finished products
to clients

27
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 client

28
 FINANCE DEPARTMENT IN PIPELINE DIVISIONS

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

Finance Dept

Project Foreign
Main MIS &
Finance & Exchange
Accounts Payroll Budgeting Cash & Bank
Concurrence & Insurance

29
 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

PROJECT FINANCE

30
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

STAGES IN PROJECT FINANCE

31
 Generation of Ideas

Initial Screening

Is the idea Prima Facie Promising

Plan Feasibility Analysis Terminate

Conduct Market Analysis Conduct Technical Analysis

Conduct Financial Analysis

Conduct Economic
& Ecological Analysis

Is the Project Worthwhile

?

Prepare Funding Proposal Terminate

PROJECT EVALUATION

32
Project evaluation is a high level assessment of the project to see whether the project is
worthwhile to proceed and whether the project will fit in the strategic planning of the
whole organization. Project evaluation helps to decide which of the several alternative
projects has a better success rate, a higher turnover.

STEPS IN PROJECT EVALUATION

Inception of Idea

Economic Analysis

Need & Justification

Strategic Analysis

Project Design Selection

Cost Analysis

Revenue Analysis

Financial Analysis

Sensitivity Analysis

33
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.

34
 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

35
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

36
evaluating the profitability of the project. The various commonly used methods are as
follows:

1) PAY-BACK PERIOD METHOD: It represents the period in which the total

investment in permanent assets pays back itself. Under this method various
investments are ranked according to the length of their pay-back period and the
investment with a shortest pay back period is preferred. The pay-back period can be
ascertained in the following manner:

Payback period = Investment

Cash Flows/year

2) AVERAGE RATE OF RETURN METHOD: This method takes into account the
earnings expected from the investment over their whole life. According to this method
the project with the highest rate of return is selected. The return on investment is
calculated with the help of following formula.

ARR = Average Annual Profits after depreciation & Taxes x 100

Average Investment

Where, Average Investment = Original Investment + Salvage Value

2

3) NET PRESENT VALUE METHODS: The Net present value method is the modern
method of evaluating investment proposals. This method takes into consideration the
time value of money and attempts to calculate the return on investments by
introducing the factor of time-element.

NPV= Present value of cash inflows – Present value of cash outflows.

37
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

38
 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

39
 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.

40
5. Complexity: The investment decisions are amongst the most difficult
decisions, therefore these are known as complex decisions.

POLICY GUIDELINES OF CAPITAL INVESTMENT PROPOSAL

41
 Formulation of capital investment
proposal

Criteria for approval of capital investment

proposal

Evaluation of capital investment

proposal

Purchase of land/office/residential building as part of

project

Performance Appraisal of Project

SCOPE OF GUIDELINES AT IOCL

42
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.

43
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.

44
 • One of the big necessity of capital investment is that it helps in
increasing the market share of the company.

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

45
• Financial analysis
o Phasing
o Depreciation
o Tax calculation
o Interest & repayment
o IRR
• Sensitivity analysis

STUDY METHEDOLOGY AT IOCL

46
 In c e p tio n o f Id e a s

D r a ft D e s ig n

C o s t E s tim: Taetec h n ic a l D e p a r tm e n t

C o s t A n a:lyF sinisa n c e D e p a r tm e n t

D F R P r o: Sjeycst te m s D e p a r tm e n t
Im p r o v e m e n t

A p p ro ve d B oard of N o t A p p ro ve d
D ir e c to r s

R e je c tio n
F u n d in g a t C o r p o r a te le v e l

P u r c h a s e R e q: uT ise itio
c h n ic a l D e p a r tm e n t

T e n d e r: Cin og n tr a c t D e p a r tm e n t

T e c h -C
n oo m m e r c ia l e v a lu a tio n o f B id s
c o n c u r r en c e

P r ic e B id O p e n in g

A w ard of W ork

M o n ito r in g o f P r o :jeOcnt sWiteo rtek a m

P a y m e n t to V e n d o r a n d a c c o u n tin g

M o n th ly R e p(M
o r IS
tin
) g

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

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

Inception of Idea

47
IOCL pipeline division perceives the need for undertaking a pipeline project which could
be for laying a new pipeline, expanding an existing one or scouting for new areas where
pipelines can be introduces.

Draft Design Prepared

A draft design or step by step procedure is developed for the project according to which
the project needs to be carried on.

Cost Estimate
Costs are estimated by the technical departments (Civil, Mechanical, Electrical and
Telecommunication & Instrumentation) according to the individual expenditure that
would be incurred in the project. The estimated costs are passed on to the financial
department for cost analysis.

Cost Analysis
Finance department calculates the capital expenses and operating expenses based on the
cost estimates provided by the technical departments.

DFR Preparation
A detailed feasibility report (DFR) is prepared by the systems department which deals
with the systems configuration, cost, viability, implementation methodology, and other
details in respect of laying the pipeline.

The DFR is analyzed by the finance department to determine the financial feasibility of
the project. The DFR is then forwarded to the board of directors for their approval. The
board analyses the project not only from the financial point of view but also considers the
strategic and other implications. If the project is not approved by the board, it may be
rejected or improvements may be made in the project.

Funding at Corporate Level

48
Once the project is approved funds are allocated to different departments for the
expenses.

Purchase Requisition
Technical departments prepare their individual purchase requisitions which detail out
their requirements of various materials and parts for the purpose of the project. These
requisitions are sent to the finance department which checks them for the quoted prices
and their sources.

Tendering
Tenders are invited by the Contract department to fulfill the purchase requisitions of the
technical department. Tenders would have all the specifications for the materials needed.
Quotations are received in two bids – techno commercial bid and price bid.

Techno Commercial evaluation of bids

After opening the techno commercial bid, technical specifications and commercial terms
etc. offered by various parties shall be evaluated. The technical evaluation is undertaken
by the technical department whereas the commercial evaluation regarding turnover, past
experiences, tax payment record and working capital analysis of the bidder is done by the
finance department. The commercial aspects are taken into consideration for previous 3
years. The bids that do not qualify the techno commercial evaluation are not considered
for further evaluation.

Price Bid Opening

Once the bidding parties qualify the techno commercial evaluation, their price bids are
opened. The prices quoted by the bidders are compared.

Award of Work
The tender with lowest quoted price is awarded the contract for fulfilling the concerned
purchase requisition.

49
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.

50
 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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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.

52
53
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

54
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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 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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 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.

57
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.

58
 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.

59
Cost estimation has been prepared using the following basis of estimation:
• Budgetary quotations/price lists.
• Cost actually incurred in the past with appropriate escalation as applicable.
• Outline design and incomplete specifications to establish physical requirements,
and in- house cost data.
• Experience of virtually identical projects elsewhere to establish physical
requirements and the cost.
• Experience of slightly different projects, adjusted approximately to establish
physical requirements.
• Use of an empirically tested rule of thumb to establish the physical requirements
and in-house cost/data escalated to present value.
• Experience of similar projects in value/terms, adjusted for price difference by past
experience and escalation data.
• No provision has been made for price escalation during the period of execution of
the project as far as possible; the estimates have been prepared on the basis of the
costs prevalent in august 2007
• Provision for contingencies to the tune of 5% has been made in the cost estimates
• Impact of the prevailing taxes and duties has been taken into account while
preparing the estimates.

60
 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.

61
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.

62
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.

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

63
 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.

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.

64
 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.

65
 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.

66
 Steps in Preparing Optimization Statement

Cost Estimates by the four Departments

(Civil, Mechanical, Electrical, T & I) for all options.

Capex & Opex are calculated for all options

for 15 years

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

Option with the least PV (Cost) is selected

Factors Considered while preparing Statement of Optimization

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

67
68
 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.

69
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.

70
 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.

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 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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74
 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.

75
MAT CALCULATION
First of all, the book profits are calculated using the formula
Book profit= Taxable profit + depreciation previously deducted - actual
depreciation as per Income tax Act
MAT loss is added to the book profit to obtain the adjusted book profit on which the
MAT is calculated @ 11.33% (MAT rate).

Capital Gains Tax

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

 Long term capital gains: Gains on assets held for more than 36 months before they
are sold or transferred. In case of shares, debentures and mutual fund units the
period of holding required is only 12 months. Rate of tax applied on long term
capital gains is 22.66% (20% tax + 10% surcharge + 3% education cess).
 Short term capital gains: Gains on assets held for less than 36 months are included
in this category. Rate of tax applied on short term capital gains is 15%.

CALCULATION OF CAPITAL GAIN

Net capital gain is calculated with help of formula:

Net Capital Gain = Gross Gain (Cost of Acquisition + Indexation Cost) – Expenses on
Sale

Indexation Cost = Original value X Present year Index

Base year/year of Acquisition Index

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

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.

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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.

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 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%.

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79
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

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DADRI TO PANIPAT
R-LNG PIPELINE

81
 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.

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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.

83
KEY LEARNINGS FROM
PROJECT

84
 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.

85
LIMITATIONS

86
 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.

87
 AN INTRODUCTION TO
KAMAKSHI AUTO SERVICE

Corporate history

Kamakshi Auto Service was established in 1970 with the name Nayak Oil Company.
In 1975 it was purchased by M.P.Bhatt, S.S Shanbhag, K.V.Prabhu and Vinayak
Shanbhag as the four partners. Later in September 1980 excluding M.P.Bhat, rest three
partners r retired from the partnership and the kamakshi Auto Service becomes the
proprietorship concern under the proprietorship of M.P.Bhat.

SALES

MS(Petrol) Average sales per day 1.7 kl.

Average sales per month 65 kl.

HSD(Diesel) Average sales per day 4.5 kl.

Average sales per month 125 kl.

They are undertaking the sales of indian oil product only.

Milestone

• The firm is going to complete successfully thirty five year of its establishment
with the name of KAMAKSHI AUTO SERVICE.

• The firm was awarded with BEST DEALER, for achieving MS(Petrol) growth
in the year 2002.

Note: 1KL=1000ltrs

88
 CONCLUSIONS AND
RECOMMENDATIONS

89
 CONCLUSIONS & RECOMMENDATIONS

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

Recommendations:
 In IOCL, Projects with Capex less than 100 Crores are financed through internal
resources, however it is recommended to use more of debt in financing projects.
 Normally, in project financing a Special Purpose Vehicle (SPV) is created, which
is a legally independent company. However in IOCL SPV is not created.
 All the projects in IOCL are evaluated using set guidelines and in the same way,
however the projects vary from each other (Crude pipelines and LNG pipelines
vary in their characteristics) and it is recommended that evaluation should be
according to the project characteristics and features.
 Many a times Projects are implemented due to strategic considerations rather than
their financial feasibility and do not provide expected results. It is recommended
not to implement projects which are not financially feasible.

90
BIBLIOGRAPHY

91
 BIBLIOGRAPHY

 BOOKS
 Financial Management By I M Pandey
 Financial Management By D K Goel
 Projects: Appraisal, Evaluation and Financing By Prasanna
Chandra
 S.P.GUPTA, STATISTICAL METHODS

 WEBSITES
 www.iocl.com
 www.incometax.india.in
 www.google.com

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