Project finance and project evaluation: The Indian Oil Corporation Limited

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.

Indian Oil Corporation Ltd. is currently India's largest company in terms of sales with a turnover of Rs. 247,479 crore (US $59.22 billion), and profits of Rs. 6963 crore (US $ 1.67 billion) for the fiscal year 2007. Indian Oil Corporation Ltd. is also the highest ranking Indian company in the prestigious Fortune ‘Global 500’ list. It came in at the 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.

[...] Stations will be self-protected and be made nearly fail safe by means of Instrumentation system Telecommunication System Telecommunication system helps in the smooth operation of the pipeline project by ensuring hassle free communication at all times 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. COMMON BASIS OF ESTIMATION The costs estimated by the engineering department are developed on the basis of some common assumptions, criteria & techniques. [...]

[...] 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 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 SENSITIVITY ANALYSIS Sensitivity analysis is a procedure to determine the sensitivity of the outcomes of an alternative, to changes in its parameters. [...]

[...] 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 in-house in IOCL and a fee of 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. [...]