CHEN 4016 Curtin University Process Economics and Management Questions

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I have an assignment on “Process Economics and Management unit”. Please see attached details of the assignment.

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CHEN4016 and CHEN5036 2021
Group Assignment (Details and Tasks)
We have identified petroleum reserves in Australia totalling 400 million barrels, and want to evaluate the
attractiveness of building our own refinery to process the crude oil versus shipping it to a refinery in
Singapore. Our company’s extraction operations around Australia will produce 50 million barrels of crude
oil per year that can either be sold in Singapore for US $60/barrel (net of transport costs) or processed
through our own refinery. The purpose built refinery will process the crude oil into diesel fuel and fuel
oil, with a recovery factor of 96% of feed. These two products will be sold within Australia where the
current price of diesel is AU $180/barrel and the market price for fuel oil is AU $110/barrel (both net of
transport costs).
To date, AU $3 million has been spent on an initial scoping study, and we are now asking your group to
help identify the feasibility of building the refinery by providing an assessment of its value. The refinery’s
design is being based on an existing refinery that processes 60 million barrels of crude each year and cost
US $2 billion to construct and commission in 2018 real money terms.
The project will require the investment in capital to be committed over 2 years of construction, with 70%
of the capital being spent in year 1 and the remaining 30% spent in year 2. Once commissioned it will
take another 3 years to ramp up to full production. During this ramp-up period, the flow rates will be 30
million barrels processed (feed) in year 1, increasing to 39 million barrels in year 2, and reaching full
design feed capacity in year 3.
Operating costs are forecast to commence at US$23/bbl of feed in the first year of production, dropping
to US$22/bbl in the following year and then reaching US$21.50/bbl of feed in real terms over the
remaining life of the project. From each barrel of crude oil that is processed through the refinery, we will
produce 0.5 barrels of diesel fuel and 0.4 barrels of fuel oil.
Australian inflation will affect both revenue and costs to the same degree and is expected to average 2.1%.
Your forecast is that the long-term exchange rate will be 1 US$ = 1.40 A$, with US CPI forecast at 1.8%
per annum. The Australian Corporate Income Tax rate is 30% and the Federal and State royalty rate
(combined) is 10% of gross revenue. For tax purposes, assume capital assets in this project depreciate
using the diminishing value method over a life of 7 years, with a premium of 200%.
Owing to the sovereign setting, the upfront capital or development costs will be sourced in the ratio of
70% equity and 30% debt. The targeted long-term capital structure of the company reflects a preferred
30% debt target level. Woodside Petroleum (ASX : WPL) proxies as a comparable company in terms of
its stock’s volatility in the Australian market. In addition, financial institutions will charge the project
LIBOR plus 300 basis points for a 10-year debt facility, with an initial 3-year interest roll-up, capital-andinterest repayment moratorium (i.e. non-payment) period.
From the above, address the following questions using the provided template:
1. Determine the appropriate variable costs of capital (WACC) to use in the discount rates for this
project.
2. Derive the value of this petroleum extraction project for the company.
3. Comparatively discuss the discount rates you chose in 1 above against using a single discount
rate for the project over its life (max 1,000 words).
CHEN4016 and CHEN5036 2021
Group Assignment/Project: Expectations and Marking Guideline
The following are the expectations and marking guideline for your Group Assignment:
Each group is to submit a single solution that includes a completed model in Microsoft Excel
using the template provided, as well as answers to the 3 questions at the end of the
Assignment page.
The total of 40 marks for this assessment task will be broken down as follows:
•
•
•
•
25 marks for completion of the Excel Model (including all 3 tabs);
5 marks for your answer to question 1;
5 marks for your answer to question 2; and
5 marks for your answer to question 3.
INPUTS AND ASSUMPTIONS
INPUTS
CAPEX (US$ million) (Real)
OPEX (US$ Real bbl)
Reserves (Mbbl)
Recovery %
Crude Oil Price (US$/bbl)
Diesel Fuel Price (AU$/bbl)
Fuel Oil Price (AU$/bbl)
Exchange Rate (AUD:USD)
Recoverable Oil (Mbbl)
Variable production cost (KES/bbl)
CPI AU
CPI US
Percentage Debt
Corporate Debt Rate
Corporate income tax %
Royalty Rate
Nominal Discount Rate %
Diesel Production / bbl Crude
Fuel Oil Production / bbl Crude
YEAR
General inflator AU
General inflator US
0
Target / actual capital structure
Market cap of Holding Company (A$’bn)
Attributable net debt (A$’bn)
Enterprise value (A$’bn)
1
2
3
4
5
6
7
8
9
10
11
2
3
4
5
6
7
8
9
10
11
Debt ratio
Debt
Real growth
Beta
Geared Beta (of proxy or comparative Co)
Ungeared Beta (of proxy or comparative Co)
Target capital structure operation
Operation net debt (A$’m)
– Gross (A$’m)
– Permanent cash (A$’m)
Equity
Net debt
Total capital
Regeared Beta according to adjusted target capital structure
WACC
Cost of equity
– Rf (GTAUD15Y:GOV)
– Market risk premium
– Beta
pre tax
post tax
post tax
Cost of debt
LIBOR
– Pre-tax (LIBOR plus 300bp)
– After-tax
Nominal WACC after tax
Project adjustment
Nominal WACC after tax
Nominal WACC pre-tax
Real WACC after tax
YEAR
Real, after tax single discount rate
Real, after tax variable discount rate
Government discount rate
0
1
YEAR
(AU$ Million)
Crude Oil Feed (Mbbl)
Revenue per bbl feed (AU$ Nominal/bbl)
Realised Gross Revenue ($ million)
Royalty ($ million)
Opex per bbl feed (AU$ Real/bbl)
OPERERATING EXP. ($ million)
Operating Profit
Depreciation
Interest Expense
PROFIT BEFORE TAX ($ million)
Loss Carry Forward
Cumulative Loss Carry Forward
Loss Utilised
Tavable Income
TAX ($ million)
PRODUCTION PROFIT AFTER TAX ($ million)
Addback:
Loss Carry Forward
Depreciation
Interest Expense
CAPEX ($ million)
Working Capital ($ million)
NET CASH FLOW – NCF – ($ million)
Discount Factor
PRESENT VALUE OF NCF ($ million)
CUMULATIVE DCF ($ million)
NPV ($ million)
Debt Schedule
Debt Facility
Opening Balance
Interest
Repayment
Closing Balance
Effective Tax Rate
0
1
2
3
4
5
6
7
8
9
10
11
DEPRECIATION SCHEDULE
YEAR
Real dollar CAPEX estimates AU$M
Nominal dollar CAPEX estimates AU$M
Inflation Rate
Inflation Factor
ANNUAL WRITE-OFFS AND DEPRECIATION $M
Diminishing value depreciable assets
Average effective life (years)
Premium
Opening written down value
Depreciable base
Depreciation charge
0
1
2
3
4
5
6
7
8
9
10
11

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