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Economic Analysis

Result of Economic Evaluation

An economic evaluation has been carried out based on the above input data assumptions. The results of the economic evaluation are as follows

 

 

Project will pay out within seven years of first investment

NPV @ 10% (US$) 813,804,592

IRR (%) 16.19%

PV Ratio 55.3%

NPV per bbl oil processed 1.24

Pay out Time 6.5 years

Payout year 2017

Maximum financial exposure 1.7 million US$

The results above indicate project is profitable.

 

Positive cash flow will be attained within three years of investment start up.

Since the project is 100% debt financed, all projects proceeds after settlement of operational outgoings will be dedicating to servicing debt obligation until year 2022.

 

Break-Even Analysis

At the assumed 2010 oil price of 60 $/bbl and project costs indicated above, the project will break even at the following product prices

 

 

Financial Requirement

Shayaz Nigeria Limited on behalf of the proposed “One Hundred Thousand Barrels Per Day (100,000 BPD) Refinery project shall need a total of Two Billion ($US 2,000,000,000) US Dollars to establish and start-up the refinery operation. The above mentioned fund is broken down as follows;

$USD 1.7 Billion: For total project investment cost: (CAPEX)

$USD 0.3 Billion: For refinery working capital (WC)

 

To enable the project implementation alignment with the business plan projections, it will be appreciated if the required fund is disbursed in two instalments within two financial years.

Shayaz Nigeria Limited shall on behalf of the project partners provide a Local Bank Guarantee covering the entire project cost.

 

18.0 Recommendation:

Having carried out market research and also done a feasibility study on the Nigerian energy market needs, we recommend that the proposed Ondo State Shayaz Petroleum Refinery project at Olokola Free Trade Zone (OFTZ) will be viable on the following conditions:

 

That a crude oil (refinery plant feedstock) supply contract is signed and guaranteed by Chevron Nigeria Limited. Possibly, in addition to the aforementioned contract, it is also recommended that a back-up (Ex-Ship) supply contract be signed with the Nigerian National Petroleum Corporation (NNPC). The aforementioned will enable the refinery project to manage security of supply risk.

 

It is recommended that an integrated asset management and security measures be put in place to protect the proposed OKFTZ refinery project physical assets.

 

Also, in order to command customer loyalty using product quality and brand, we recommend that the refinery plant be built by a world acclaimed Modular Refinery Designers and Manufacturers (VENTECH ENGINEERS). This is because, their track record shows that they understand the global and regional crude oil specifications and they have the capability to deliver a Nigerian Crude Oil specification customized refinery plant. It will process the crude oil into a high quality refined petroleum products that will command customer loyalty.



 

Furthermore, we recommend that the OKFTZ Refinery be managed by seasoned experts in refinery plant operations; and “An Integrated Marketing and Distribution Plan” should be put in place to ensure that the refined petroleum products from the OKFTZ refinery becomes the customers number 1 choice.

 

More so, it is recommended that in the near future (2 years after the OKFTZ refinery is commissioned, that Shayaz Nigeria Limited and their local partners should invest in

Petroleum products filling stations nationwide. This will enable them to have a secured product distribution outlet.

 

In addition, we recommend that Shayaz Nigeria Limited should make arrangements to secure oil fields whose crude oil will be dedicated to the supply of feedstock to the OKFTZ refinery.

 

Finally, we recommend that project cash flow after Operating Expenses (OPEX) deductions, should be 100% used to service the project debt (Loan). This will facilitate meeting up the financial obligations, instill discipline amongst the project partners and Shayaz and give the financial investors the confidence that their investment will be recouped in the shortest possible time.

 


 

APPENDICES


 

APPENDIX A:

DEREGULATION IN THE DOWNSTREAM SECTOR OF THE NIGERIAN PETROLEUM INDUSTRY

 

The low capacity utilisation of Nigeria’s state-owned refineries and petrochemicals plants in Kaduna, Port Harcourt, and Warri, the sorry state of disrepair, neglect, and repeated vandalisation of the state-ran petroleum product pipelines and oil movement infrastructure nationwide, the collateral damage of institutionalised corruption, with the frightening emergence of a local nouveau riche oil mafia that controls, and coordinates crude oil, and refined petroleum products pipeline sabotage, and theft ("illegal bunkering") nationwide, the insatiably corrupt military Task Force operatives that assist diversions of both crude oil and petroleum products, and large-scale cross-border smuggling of petroleum products, all of which are the root causes of the protracted, and seemingly intractable severe fuel crises that have bedevilled the country relentlessly, for close to a decade now, are all predictable outcomes of government involvement in the downstream sector of the Nigerian petroleum industry, over the past quarter of a century.

 

As expected, public opinion about deregulation in Nigeria covers a wide spectrum, and cuts across all sides of the argument. Some Nigerians hold the view that deregulation cannot be complete, whether in the downstream sector of the Nigerian petroleum industry, or indeed, in any other sector of the national economy. However, deregulation is seen as desirable in freeing government of its concurrent control, and involvement in the businesses of refining, importation, and distribution of refined petroleum products in the Nigerian market. In their opinion, the deregulation of the petroleum industry in Nigeria should be implemented in phases, so as to enable the state-owned monopolies to regain efficiency, before their full privatization.

 

Another school of thought strongly believes that the Nigerian petroleum industry must not be liberalised, or deregulated, or privatised completely, for whatever reason, and that the status quo should remain, maybe, with some minor fine-tuning made, "here and there", to improve efficiency, as appropriate, "in the overall national interest". Essentially, this is the implied position of the Nigerian Labour Congress (NLC).

 

However, some others insist that complete deregulation, including the total, and final dismantling, unbundling, and subsequent wholesale privatisation of all state-owned petroleum businesses, should proceed without further delay, with maximum dispatch, for the continued, and meaningful survival of the Nigerian petroleum industry in the 21st century. In short, for such Nigerians, the benchmarks of globalisation, not nationalisation, dictate the tempo of the new world order in international petroleum market transactions.

 

Since the early days of the on-going transition from military dictatorship to reasonable democracy, the Federal Government set up a team, led by a technocrat in the Presidency, (recently appointed the Group Managing Director of the state-owned national oil company, NNPC), to explain certain key issues of liberalisation, and to counter the arguments of those opposed to the notion and concept of deregulation of the downstream sector of Nigeria’s petroleum industry.

 

Typically, the scope of discussions covered during the "enlightenment campaign" included such issues as the burden of subsidies on the national treasury, the strain of financing Nigeria’s state-owned petroleum businesses, intra- and trans-ECOWAS smuggling of Nigerian petroleum products, the relative market prices of petroleum products in the ECOWAS sub-region, vis-à-vis their prices in Nigeria, licensing of private refineries, the need to break the monopoly of NNPC, and the general benefits of deregulation. Reactions to the government-sponsored "enlightenment campaign" range from outright objection, to cynical disinterest, through cautious empathy, to dogmatic assertion of the ultimate inevitability of the deregulation of the Nigerian petroleum industry.

Here, we will consider and make realistic assessments of probable scenarios of deregulation in the downstream sector of the Nigerian petroleum industry, against the general background of global trends in deregulation and restructuring in the petroleum industry, coupled with the current level of public awareness, and government’s posturing on the issue of deregulation in Nigeria.

 

Five (5) likely scenarios, or probable modes of implementation of the deregulation process in Nigeria, are summarised as follows:

1. Supply side deregulation.

2. Demand side deregulation.

3. Complete deregulation.

4. Phased deregulation, starting from the upstream sector.

5. Retention of the status quo.

 

The time frame of implementation of workable petroleum industry reforms, the potential effects on both Major and Independent petroleum products marketers, the role of both the currently dysfunctional state-owned refineries and prospective private refineries, salient factors of acquisition of the existing state-owned facilities, and the criteria for identifying suitable players in a deregulated downstream sector of the Nigerian petroleum industry, are all crucial to the success of the deregulation process, and are therefore considered here.

 

Below are highlights of the five (5) likely scenarios of deregulation in Nigeria:

Scenario #1: Partial Deregulation of Only the Supply Side.

The inherent assumptions of this scenario are that:

The Federal Government is sensitive to the inadequacies of the existing state-owned petroleum refining, and refined products supply and distribution systems in Nigeria, and desires to maximise supply sources for the refined products market in the country.

Federal Government monopoly of refining, pipeline operations, and primary distribution from the state-owned storage depots would be completely unbundled, and abolished.

 

Local and foreign private investors would be willing to take over the state-owned facilities (refineries, depots, and pipeline systems) in their current state of dilapidation, disrepair and poor performance, and operate them efficiently and profitably thereafter.

Private refineries would procure crude oil at competitive rates, and sell their refined products profitably, and at international prices, both in Nigeria and beyond, as desired by the refiner.

 

Private importers would procure refined petroleum products and sell such products at deregulated prices, in line with prevailing market prices.

Barriers to new entrants into private refining, pipelines and depot operations would be eliminated.

 

Hypothetically, with anti-monopoly policies (which are not yet in place in Nigeria), and with competition among private refiners, the demand for petroleum products could be met and sustained. However, because of the low buying power of the consumers in the Nigerian market, the demand for petroleum products, sold at international market rates, would be reduced significantly.

 

Profitability of business at the retail end of the downstream sector would be dictated mainly by economies of scale: only the big players in the petroleum products marketing sub-sector would survive. Consequently, up to 95% of existing Independent marketers may cease to be in their present form. Alternatively, there could be mergers among weaker Independent marketers (with between 1 ~ 10 outlets) to compete with the present top Independent players, on the one had, and individual Major marketers, on the other. In short, the market would be segmented into individual Majors, individual current top Independents, and groups of merged minor Independent marketers of petroleum products.

The current sorry state of the state-ran refineries, pipeline networks, and depot operations may not encourage private investors (local or foreign) to acquire them. And so, KRPC, WRPC and PHRC may continue to be state-owned enterprises, which may, or may not continue to operate under state protectionism. This scenario is very analogous to what happened in the Nigerian aviation industry following "liberalization".

 

Essentially, the Federal Government holds on tenuously to "fine-tuning" an evidently inefficient state-owned business that goes through a long drawn out process of slow and progressive extinction. In a sense, the medium to long-term consequences of Scenario #1 on KRPC, WRPC and PHRC is that they would decay slowly, and finally die under government protectionist cover.

 

The first generation of post-deregulation private refineries in Nigeria would be the stand-alone type: In this scenario, private refineries would manufacture petroleum products, and distribute them to targeted segments of the Nigerian market (most likely, regional) from their loading facilities within the refinery complex. In other words, there will be no private pipeline operating companies to move refined products from such private refineries to their markets.

 

The predominant mode of refined products distribution would be outlet-specific truck loading, mainly to domestic retail affiliates of the refiner. In short, private Nigerian refiners would initially secure their market, built around the retail outlets of groups of Independent marketers, while potential private foreign refiners, if any, would preferably target their distribution at both the Nigerian, and export markets, possibly through the Majors.

 


Date: 2015-01-29; view: 939


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