Global Synfuel - Financial and Strategic Appraisal of a Coal-To-Liquid Project

Global Synfuels

Financial and Strategic Appraisal of a Coal-to-Liquid Project

Case Summary:

There is an increasing demand for fossil fuels in the world as well as India in the past two decades. About two-third of the fuel consumed in India is being imported. This has a significant impact on the foreign exchange reserves as well the Current Account Deficit (CAD) of India. Also, fossil fuel reserves are limited. Hence, there is an urgent need for alternative sources of fuel.

In order to address these issues, the Government of India turned towards the Coal-to-Liquid (CTL) Technology that uses coal as a raw material to produce fuels like diesel, petroleum etc. Global Steel and Power Limited (GSPL) was shortlisted by the government to build a CTL plant in February 2009. GSPL set up a subsidiary named ‘Global Synfuels’, headed by Jai Patil, Vice President – CTL, GSPL.

However, the financial viability of such a large project, given that the government was not providing any subsidy was under question. Jai Patil has to evaluate the project and appraise it financially in order to make a decision to go ahead with the project.

Question 1: How would the CTL project be a strategic fit for GSPL and how would it enhance India’s energy security?

CTL as a strategic fit for GSPL

GSPL is a major player in Steel, Power, Mining, Oil & Gas and Infrastructure. It owned businesses in Asia, South America, Africa and Australia. Bagging such a large alternative fuel contract in a vast and emerging economy like India would benefit its portfolio of businesses. It would potentially increase the size of the company and and it’s profitability in a huge way as well.

GSPL is renowned around the world for being a high value creator. Such a large investment in an alternative fuel technology would fit perfectly with that image, given the rapid rate at which fossil fuels are depleting off the face of the earth. It is also known for its enterprising spirit and willingness to explore new technologies. Investment in CTL technology would be a strategic fit to this image also.

CTL technology is known to be an environment pollutant. However, Global Synfuels plans to implement Carbon Capture and Storage (CCS) Technologies in order to reduce CO2 emissions by 99%. This complements GSPL’s environment friendly image as well.

GSPL owns captive coal and iron ore mines. The primary raw material in CTL technology is coal. Hence, through strategic backward integration, GSPL can take full advantage of this situation.

Enhancement of India’s energy security

The overwhelming dependence of our country on rapidly depleting fossil fuels is a major concern. The cascading effect of this is the heavy dependence on import of crude oil (nearly 2/3rd of crude oil used in India is imported). This, in turn, takes a huge toll on our foreign reserves and puts a lot of pressure on the Current Account Deficit (CAD). Alternative fuel sources are the most viable solutions to tackle these problems and hence a CTL project would greatly improve India’s energy security.

About 10% of India’s current crude oil requirements can be met in CTL is successfully implemented. It would also create 30,000 new jobs in the country.

Fuel generated from CTL technology can be used for:

• Transportation
• Cooking Gas
• Power Generation
• Jet Fuel

Question 2: According to you, what are the mail opportunities, strengths, weaknesses and threats related to the project?

Strengths

• GSPL is a major player in Steel, Power, Mining, Oil & Gas and Infrastructure. Its annual turnover is $2.3 billion. It belongs to the $15 billion Global Group. All these factors give it financial strength and ability to take on such a large project
• GSPL owned captive coal and iron-ore mines. Since CTL used coal as the primary raw material, GSPL could use this to its advantage
• The Government of India awarded GSPL coal blocks in Orissa to obtain raw materials. This reduced the initial raw material cost for GSPL
• Jai Patil had extensive experience working with CTL technology in the Sasol CTL project in South Africa, making him apt to head this project

Weaknesses

• The project requires huge initial investment: $9.344 billion + $1.156 billion (working capital investment). This is almost 3 times the investment required in a crude oil plant
• In the past, CTL projects have never worked without government subsidies. This is a major concern since the government is not providing any subsidy for this project
• CTL projects produce high levels of CO2 emissions contributing to global warming. To keep a check on this, more investment on Carbon Capture and Storage (CCS) Technology is needed
• The project is also highly wasteful. It required 3.5 gallons of water per gallon of fuel produced

Opportunities

• This was GSPL’s chance to capture the Indian CTL market. A huge opportunity since CTL was forecasted to replace about 10% of India’s crude oil requirement
• India had about 256 billion tons of Coal reserves. This was a good chance to exploit these vast resources
• Crude oil prices were largely volatile due to various factors such as dependence on exports and global shortage of fossil fuels. Alternative fuel technology was a great way to keep a check on this price volatility by reducing the demand for crude oil
• CTL technology was unaffected by ash content in coal. This was a strategic fit for the Indian market, since coal high on ash content is found in India

Threats

• The selling price of CTL fuel was directly dependent on the price of crude oil (sold at a 10% premium on crude oil prices). Crude oil prices were highly volatile and hence affected the financial viability of the project
• There are two methods to produce fuel in CTL technology, namely; Direct and Indirect Liquefaction. The Indirect Liquefaction Method is based on German technology, the main supplier of which is Lurgi. This company has a virtual monopoly over the technology and hence GSPL would have to depend on Lurgi for the project
• With 30 simultaneous CTL projects running over the world, there were major doubts about the timely supply of technology to avoid time and cost overruns

Question 3: Briefly outline the relevant information that is normally required for the financial evaluation of investment proposals and discuss how the same would be determined for the CTL project under consideration.