CHEMICAL PROJECT ECONOMICS

CHEMICAL PROJECT ECONOMICS (SECOND EDITION)

V.V. MAHAJANI S.M. MOKASHI

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Preface to the Second Edition This book is an introduction to Chemical Project Economics. However, it can be an equally good introduction to people dealing with non-chemical projects also. The basic concepts outlined in chapters covering project costs, cost of production, project finance, interest, depreciation, project profitability and project evaluation are equally applicable to other projects as well. In this second edition more examples are added in the Chapter 8 on Project Financing. Also a brief introductory note on Venture Capital is added. The authors wish to acknowledge with thanks helpful discussions with Mr Nitin Deshmukh, CEO of Kotak Venture Capital-Equity Fund, Mumbai. We also thank Dr A.B. Pandit of Institute of Chemical Technology, Mumbai-19 and Mr K.P. Chaudhari, FCA, Partner, CVK & Associates, Mumbai -28 for their useful suggestions. We acknowledge with thanks feedback from various friends and teaching faculty members. V.V. MAHAJANI S.M. MOKASHI

Preface to the First Edition Chemicals assume a unique position in the sustainable development of the human race. Consequently the study of chemical projects demands special attention. However, due to different dimensions of safety, health and environmental (SHE) issues associated with these projects, the society sometimes does not appreciate this position. This outlook can be changed by a proper selection of the site, an appropriate selection of the process or technology and timely implementation of chemical projects in order to produce products at an affordable price. The success of a chemical project is generally measured by its sustained benevolence, nonetheless, the project owner measures its success from its sustained profitability. This, in turn, depends upon several factors beginning with building a right plant of a right size, for a right product, at a right location (site) and at the right time. Selection of a product to be manufactured, its technology, design, engineering, appropriate financing and construction to achieve social benevolence are the key issues which have considerable impact on the success of the project, irrespective of the size and type of the project. This book is an introduction to chemical project economics. The objectives of the book are: to highlight the basic concepts used in the selection of process and site for the project, deal comprehensively with procedures frequently used for estimation of the project cost, and measuring the financial viability of chemical projects. We know that the economic success of a project is the function of place and time. The basic principles dealt with herein are universal in nature. This book is developed in the following sequence bearing in mind the present Indian scenario. The first chapter discusses the importance of the subject and the various types of projects. The selection of process (technology)

viii Chemical Project Economics

and site are vital for the successful implementation of a project. The second chapter discusses the social and economic factors dealing with selection of a process or technology. Chapter 3 highlights the importance of the project site selection exercise and the methodology to select the plant site. The estimation of the project cost and the cost of production are basic pre-project engineering activities to determine project viability. In the fourth chapter, different types of estimates and error analysis of various estimate methodologies are dealt with comprehensively. Estimation of various components of project cost as per recommended practice by Indian Financial Institutes are projected in the fifth chapter. As Plant and Machinery is the largest and hence the most important component of project cost, special attention has been paid to its estimation in the next chapter, while the important components of cost of production with methods of estimation are explained in Chapter 7. The sources of finance and the cost of finance (interest) are important for smart management of project and are covered in the next chapter. It gives a bird's eye-view of financing a chemical project. In Chapter 9 loan repayment schedule with interest computation is presented along with capitalised and annual cost concepts. The depreciation of fixed capital investment plays an important role in the profitability of a project. To understand the concept of depreciation and its significance a complete chapter (Chapter 10) has been dedicated to this. It discusses the importance of this concept in taxation and project profitability with methods relevant to projects in India. Finally, since the success of a project is measured through its profitability, the critical appraisal of the project profitability is essential to implement the project. These aspects are covered in two subsequent chapters (Chapters 11 and 12) thus providing estimates of working results of the project and financial evaluation of project profitability. The pricing of a product is important for sustainability of a project. An overview of the pricing concept is presented in a separate chapter (Chapter 13). The two important reports pertaining to projects, viz., feasibility report and annual report, are presented in the last two chapters

Perface

ix

(Chapters 14 and 15). These chapters give an overview of the reports; their importance with their brief descriptions of contents, apart from discussing their importance to engineers, technologists in production and in research and planning departments. This book has been designed to assist not only students, but also professionals associated with chemical projects. It would help to accomplish pre-project activities such as site selection, process selection and preparation of detailed techno-economic feasibility report. The book would also help management students to understand what differentiate chemical projects from others. This book has been developed on the course contents of Chemical Engineering and Technology courses of final year degree level at Mumbai University at the Institute of Chemical Technology, University of Mumbai, Mumbai, India where Dr Mahajani taught this course for many years. Our sincere thanks are due to Dr M. Sriram, Mr P.G. Kane, Mr K.P. Chaudhari, Mr P.D. Vaidya, Mr V.M. Paradkar and Mr O.P. Goyal, who have read the manuscript at different stages and offered constructive suggestions to make it more comprehensive. Our sincere thanks are also to Professor J.B. Joshi, Director, Institute of Chemical Technology, University of Mumbai, Mumbai where this project was designed and executed. We also sincerely thank the staff and students of this Institute. We wish to thank Dr O. P. Kharbanda and Mr Kannan of ICICI for their encouragement. We acknowledge with thanks a good gesture of Mr VK. Sood, Project Manager, Narmada Chematur Petrochemicals Limited, for providing data on Project Financing. We appreciate the efforts taken by Ms Vasudha Kulkarni for acting as an interface between the handwritten and the electronic version of the manuscript. We sincerely thank her. Last but not the least, we thank our family members for bearing with us during the preparation of this book. V.V. MAHAJANI S.M. MOKASHI

Contents Preface to the Second Edition Preface to the First Edition

v vii

1. INTRODUCTION 1.1 An Overview 1.2 Pre-Project Activities 1.3 Types of Projects 1.4 Chemical Project Classification 1.5 Price of a Product 1.6 Project: Conception to Commissioning References

1 1 6 8 11 13 13 16

2. PROCESS SELECTION 2.1 Introduction 2.2 Viability Parameters 2.3 Profitability Parameters 2.4 Process Evaluation Suggested Readings

17 17 18 29 39 42

3. PROJECT SITE 3.1 Introduction 3.2 Site Selection 3.3 Site Evaluation 3.4 The Plot A at Given Site 3.5 Site Data 3.6 Site Clearances Reference

43 43 45 58 62 64 67 68

4. ESTIMATE 4.1 Introduction 4.2 Estimate Basics Revisited 4.3 Types of Estimates References

69 69 71 74 76

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5. PROJECT COST 5.1 Introduction 5.2 Elements of Project Cost 5.3 Land and Site Development 5.4 Building and Civil Works 5.5 Plant and Machinery 5.6 Know-how and Engineering 5.7 Expenses on Foreign Technicians and Training of Indian Technicians Abroad 5.8 Miscellaneous Fixed Assets 5.9 Contingencies 5.10 Pre-Operative Expenses 5.11 Preliminary and Capital Issue Expenses 5.12 Margin Money (Working Capital) 5.13 The Project Cost Schedule References

77 77 78 81 87 90 91 99 100 102 104 112 114 121 123

6. PLANT AND MACHINERY 6.1 Introduction 6.2 The Basis 6.3 Equipment Cost Estimate 6.4 Piping, Instrumentation and Electricals, Cost Estimate 6.5 OSBL Facilities Cost Estimates 6.6 Miscellaneous Items of the Plant and Machinery Schedule 6.7 Order of Magnitude (Quick) Estimate 6.8 Computer-Aided Cost Estimate References

124 124 127 129 139 144

7. COST OF PRODUCTION 7.1 Introduction 7.2 Elements of Cost of Production 7.3 Gross Cost of Production 7.4 Normative Cost of Production 7.5 Monitor this Way 7.6 The Schedule Suggested Readings

166 166 168 176 177 177 178 181

147 151 164 164

Contents

xiii

8. PROJECT FINANCING 8.1 Introduction 8.2 Greenfield Project 8.3 Add-On Project 8.4 Ongoing Business 8.5 Illustrations 8.6 Working Capital 8.7 Venture Capital Suggested Reading

182 182 182 191 191 192 196 197 199

9. INTEREST 9.1 Introduction 9.2 Basics Revisited 9.3 Loan Repayment 9.4 Periodic Payments: Instalments 9.5 Annualised Cost 9.6 Capitalised Cost References

200 200 201 204 210 212 214 217

10. DEPRECIATION 10.1 Introduction 10.2 Depreciation Concept in Chemical Project 10.3 Depreciation Methods 10.4 Appreciation of Depreciation Concept 10.5 Depreciation Rates 10.6 The Depreciation Schedule

218 218 220 221 225 225 226

11. PROJECT PROFITABILITY 11.1 Introduction 11.2 Estimate of Working Results Suggested Readings

230 230 231 237

12. PROJECT EVALUATION 12.1 Introduction 12.2 Break-Even Analysis 12.3 Incremental Analysis 12.4 Ratio Analysis 12.5 Discounted Profit Flow Technique (DPF) 12.6 Illustration Suggested Reading

239 239 241 243 245 255 262 265

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13. PRODUCT PRICING 13.1 Introduction 13.2 Project Economics Considerations 13.3 Market Considerations References

266 266 266 271 275

14. FEASIBILITY REPORT 14.1 Preamble 14.2 Contents 14.3 The Utility of the Feasibility Report

276 276 277 282

15. ANNUAL REPORT 15.1 Introduction 15.2 Contents Overviewed 15.3 Insight into an Annual Report Index

284 284 285 291 299-305

1 Introduction 1.1 AN OVERVIEW Chemical projects have a special status in sustainable development of our society because we need chemicals in several forms such as pharmaceuticals, textiles, dyes, soap, detergents, cosmetics, food preservatives, fertilisers, fuels, metals, synthetic fibre, plastics, and so on. Without chemicals our life may become primitive and so we need plants and units to manufacture chemicals. Chemical plants deal with physico-chemical transformation of raw materials into value-added products with the help of various resources such as manpower, energy, water, space and money. The entire chemical manufacturing process could be a judicious combination of various unit processes and unit operations. For instance, in a refinery, crude oil is separated into various fractions, such as liquefied petroleum gas (LPG), naphtha, gasoline (petrol), kerosene, high-speed diesel and so on, by a series of distillation columns (distillation as unit operation). On the other hand, during the conversion of naphtha into aromatics, namely, benzene, toluene and xylenes (o, m and p), we use aromatisation as a unit process, then extraction followed by distillation as unit operations to recover the aromatics. Chemical projects differ from other projects such as an automobile manufacturing project, hydropower generation project, highway construction project, dam construction project, and so on. As mentioned chemical process plants are unique because they transform one substance into a totally different

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