Financial feasibility study of investment new ammonia plant for PVFCCO

ABSTRACT The strategy, planning and orientation of Vietnam relating to Ammonia production and the preliminary Ammonia market study have pointed that investing in an Ammonia plant is impo

FINANCIAL FEASIBILITY STUDY OF INVESTMENT NEW

AMMONIA PLANT FOR PVFCCO

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

FINANCIAL FEASIBILITY STUDY OF INVESTMENT NEW

AMMONIA PLANT FOR PVFCCO

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

by

Mr Tran Vinh Loc ID: MBA 02014 International University - Vietnam National University HCMC

March 2013 Under the guidance and approval of the committee, and approved by all its members, this thesis has been accepted in partial fulfillment of the requirements for the degree Approved:

Dr Vuong Hung Cuong

This thesis would not have been possible without the guidance and the help of several individuals who in one way or another contributed and extended their valuable assistance in the preparation and completion of this study

First and foremost, I offer my sincerest gratitude to my advisor, Dr Vuong Hung Cuong –Lecturer of International University, who has provided tremendous support throughout my thesis with his endless patience and in-depth knowledge whilst allowing me the room to work in my own way Throughout the course of my thesis, he has constantly given me guidance on how to achieve the best results for my research and how to transform those into a good thesis I attribute this thesis to his encouragement and effort and without him, it would not be successfully completed

Dr Nguyen Van Phuong and Dr Le Vinh Trien have been very encouraging and supportive They have extended their help at various phases of this research, giving quality advices on how to improve my thesis, and I do hereby express my gratitude to them

It’s my honor to attend the graduated program at the School of Business of International University With engineering background, understanding economic subjects is a challenge I owe my warmest thanks to my professors for the last two years for giving me the guidance and knowledge and for making my time here a wonderful experience

Secondly, I am obliged to the Research and Development Center for Petroleum Processing (PVPro) and my colleges there for their contribution and support They have provided me great information resources and allowed me to use a wide-ranged database which helps me in the completion of this project

Last but not least, I am forever indebted to my beloved wife and daughters for their blessings, encouragement and understanding when it was most required

PLAGIARISM STATEMENTS

I would like to declare that, apart from the acknowledged references, this thesis either does not use language, ideas, or other original material from anyone; or has not been previously submitted to any other educational and research programs or institutions I fully understand that any writings in this thesis contradicted to the above statement will automatically lead to the rejection from the MBA program at the International University – Vietnam National University Hochiminh City

COPYRIGHT STATEMENT

This copy of the thesis has been supplied on condition that anyone who consults it is understood to recognize that its copyright rests with its author and that no quotation from the thesis and no information derived from it may be published without the author’s prior consent

© Tran Vinh Loc/ MBA 02014/ 2010-2012

CONTENTS

ACKNOWLEDGEMENT iii

PLAGIARISM STATEMENTS iv

COPYRIGHT STATEMENT v

CONTENTS vi

LIST OF TABLES ix

LIST OF FIGURES x

ABSTRACT xi

CHAPTER I INTRODUCTION 1

I.1 Problem Statement 1

I.2 Thesis topic 3

I.3 Rationale 3

I.3.1 Demand 3

I.3.2 Supply 4

I.3.3 Demand/Supply Balance 4

I.4 Objectives 4

I.5 Contents and Research Question 4

I.6 Scope and Limitation 5

I.7 Thesis Structure 5

CHAPTER II LITERATURE REVIEW 7

II.1 Overview about Feasibility Study 7

II.1.1 What is a feasibility study? 7

II.1.2 Expected accuracy range in FS stage 9

II.2 Market research 11

II.3 Price forecast 12

II.3.1 “Price = Cost + Margin” methodology 12

II.3.2 Long term average methodology 14

II.3.3 Moving average methodology 15

II.3.4 Regression correlation methodology 15

II.4 Cash flow and financial indicators calculation 16

II.4.1 Cash flow calculation 16

II.5 WACC calculation 17

II.5.1 WACC formula 17

II.5.2 Cost of equity (re) 17

II.5.3 Cost of debt (r ) 18

II.6 Calculation of financial indicators 18

CHAPTER III METHODOLOGY 21

III.1 Market research methodology 21

III.1.1 Formulate the problem - Research Objectives 21

III.1.2 Research design and Data collection form 21

III.1.3 Determine the sample size 25

III.2 Investment cost estimation methodology 25

III.3 Product price forecast 26

III.4 Financial indicators calculation methodology 26

CHAPTER IV FINDING AND SOLUTIONS 28

IV.1 Feedstock and Product 28

IV.1.1 Ammonia domestic market 28

IV.1.2 Forecast product price 33

IV.1.3 Feedstock 38

IV.1.4 Competitors 43

IV.1.5 SWOT analysis 45

IV.2 Total investment cost 46

IV.2.1 Construction cost 46

IV.2.2 Equipment cost 47

IV.2.3 Owner’s project management cost 48

IV.2.4 Project consultancy cost 48

IV.2.5 Miscellaneous 49

IV.2.6 Provision for Contingency 50

IV.2.7 Initial working capital 50

IV.2.8 Financial cost in construction stage 50

IV.2.9 Estimated total investment cost 51

IV.3 Economic efficiency calculation 51

IV.3.1 Basis for assessment 51

IV.3.2 Economic result 54

IV.4 Risk factors and sensitivity analysis 56

IV.4.1 Risk of exchange rate 56

IV.4.2 Risk of product price 56

IV.4.3 Risk of feedstock price 57

IV.4.4 Risk of investment cost 57

IV.4.5 Risk of domestic market share lost 57

IV.4.6 Sensitivity analysis 57

CHAPTER V CONCLUSIONS AND RECOMMENDATIONS 60

V.1 Conclusions 60

V.2 Recommendations 62

REFERENCES 63

APPENDIX 1- Total Investment Cost 65

APPENDIX 2- Debt and Payment 66

APPENDIX 3- Cashflow 67

APPENDIX 4- Income Statement 69

APPENDIX 5- Ammonia market survey answers 74

AMMONIA MARKET QUESTIONNAIRE - PVFCCo 74

AMMONIA MARKET QUESTIONNAIRE – Camau Fertilizer Plant 76

AMMONIA MARKET QUESTIONNAIRE – F.A Company 78

AMMONIA MARKET QUESTIONNAIRE – Vedan Limited JSC 80

AMMONIA MARKET QUESTIONNAIRE - Ajinomoto 82

AMMONIA MARKET QUESTIONNAIRE – Dinh Vu DAP 84

AMMONIA MARKET QUESTIONNAIRE – Lao Cai DAP 86

LIST OF TABLES

Table III.1: Respondent selection 22

Table IV.1 Domestic potential customer 28

Table IV.5 Indirect costs 47

Table IV.6 Process equipment cost 47

Table IV.7 Escalation of total investment 50

Table IV.8 Initial Working capital 50

Table IV.9 Financial cost in construction stage 50

Table IV.10 Estimated total investment cost 51

Table IV.11 Forecast Ammonia price 51

Table IV.12 Corporate income tax rate 52

Table IV.13 Annual wages and salaries estimate 53

Table IV.14 Site leasing cost 53

Table IV.15 Revenue and cost for the first year of operating at 100% capacity (2017) 54

Table IV.16 Sensitivity analysis of Ammonia price 58

Table IV.17 Sensitivity analysis of Total investment cost 58

Table IV.18 Sensitivity analysis of Total investment cost 59

LIST OF FIGURES

Figure I.1 Domestic demand of Ammonia over the period 2005-2010 3

Figure I.2 Scope of feasibility study 5

Figure II.1 AACE’s generic cost estimate classification matrix 11

Figure II.2 Price forecast model 12

Figure IV.1 Domestic Ammonia Demand from 2012-2016 31

Figure IV.2 Ammonia import classified by country in 2010 32

Figure IV.3 Ammonia import classified by region in the period 2005 – 2010 32

Figure IV.4 Ammonia and WTI crude oil price over the period 1995 – 2011 33

Figure IV.5 Correlation between Ammonia price and WTI crude oil price in the period 1995 – 2011 34

Figure IV.6 WTI crude oil price forecast (real 2010 dollars per barrel) 35

Figure IV.7 WTI crude oil nominal price forecast to 2025 36

Figure IV.8 Ammonia price forecast over the period 2012 – 2025 36

Figure IV.9 Ammonia price forecast over the period 2012 – 2025 37

Figure IV.10 Southern pipeline systems development orientation 39

Figure IV.11 Gas supply from fields in exploiting, developing and preparing development of Cuu Long basin and Nam Con Son basin in the period 2011-2025 40

Figure IV.12 Gas supply – demand balance in Southeast region in the period 2011 – 2025 with the gas resource is from fields in exploiting, developing and preparing development of Cuu Long basin and Nam Con Son basin 40

Figure IV.13 Supply – demand balance on potential supply in the period 2011-2039 42 Figure IV.14 Natural gas price 43

Figure IV.15 Ammonia Delivered Cost to South Korea 44

Figure IV.16: Historical exchange rate 56

Figure IV.17: Sensitivity analysis 58

ABSTRACT

The strategy, planning and orientation of Vietnam relating to Ammonia production and the preliminary Ammonia market study have pointed that investing in an Ammonia plant is important at this time and will be a good opportunity for Phu My Fertilizer and Chemicals Company to leap into a new phase of development A financial feasibility study therefore is an essential step in order to confirm where or not investing a new ammonia plant will be financially beneficial and feasible Detailed market research have shown that the amount of domestic Ammonia deficit will be approximately 500 KT in 2016 to 561 KT in 2020 and more than 660 KTPA from 2025 onwards At the same time, the Ammonia deficit is estimated around 2.54 million metric tons in 2011, and then increases from 4 million metric tons in 2020 to 5.8 million metric tons in 2040 Therefore, with expected capacity of 450 thousand metric tons of Ammonia every year, the products from the new Ammonia plant will

be supplied to domestic customers and the rest will be exported to countries in demand like South Korea In addition, natural gas resources are also available for this capacity of the Ammonia plant

The total investment cost (TIC) is estimated based on construction cost, equipment cost, management cost, project consultancy cost, miscellaneous cost and contingency and escalation cost Without VAT, the TIC is estimated to be $396M and the TIC including VAT is $469M This study also evaluates the financial effectiveness based

on financial indicators like IRR, NPV and Pay-back period These results show that the IRR is 30% , NPV is 1.5 billion USD and the total pay-back period is 3 years and 9 months These financial indicators prove that the project of investing an Ammonia plant is financially feasible and beneficial

Keywords: financial feasibility study, ammonia plant

CHAPTER I INTRODUCTION

I.1 Problem Statement

In the last ten years, Vietnam has started to develop petrochemical industry to utilize the gas resource effectively The Vietnam Gas and Oil Group, under the Government’s orientation, have invested in several petrochemical projects, such as plastics, textiles, fertilizers and chemicals, etc Out of all the projects, Phu My Fertilizer Plant, which came into operation in 01/19/2004, has stood out as a very successful project The Petrovietnam Fertilizer Company (PVFCCo) was established with the main functions and duties of managing and operating Phu My Fertilizer Plant effectively, producing and trading urea fertilizer, liquid ammoniac, industrial gas and other chemical products Today, PVFCCo production satisfies roughly 50% of the total urea domestic demand (total domestic demand is from 1.6 – 1.8 million tons per year) and about 40% of the liquid ammoniac With seven subsidiaries, assets of 7,419 billion VND (2,593 billion VND fixed capital and 4,826 billion VND working capital), profit before tax of 1,922 billion VND, PVFCCo is in good shape to conduct its development strategy and attain further achievements in the future (PVFCCo, 2011]

One of PVFCCo’s goals is to develop PetroVietnam Fertilizer and Chemicals stock Company to become a strong multi-sector enterprise by diversifying important chemicals production (including basic chemicals, petrochemicals, fertilizers, agricultural chemicals) Based on the market demand, the ability of technology satisfaction, and joint challenges of the chemical industry in Vietnam together with existing conditions and resources of PVFCCo, basic objectives and prospects for future development focus on developing Purified hydrogen, Hydrogen peroxide, Carbon dioxide, Ammonia, Nitric acid, etc These chemicals are given priority in development strategy from now to 2015 and towards 2025 and considered based on deep processing of natural gas, synchronous development and deep processing of many kinds of fertilizers They are used for agricultural chemicals production serving for advanced and sustainable agricultural development Considering the financial situation, the development strategy, the experiences of operating a urea plant, which includes an ammonia unit and a urea unit and recognizing the importance of producing Ammonia to substitute the imported products and to actively supply materials for production of Ammonium Nitrate which is the main material for

Joint-explosive production for national security, PVFCCo has strong interest in investing an ammonia plant at this point

From bigger view, the investment of Ammonia manufacturing plant is also an important project in supplying raw material for fertilizers, chemicals, petrochemical and defense industry in order to meet domestic demand as well as distributing a competitive product over the regional market according to targets mentioned in strategies, master plans approved by the Political Bureau and Government (According

to Decision No 343/2005/QĐ-TTg, No 459/2011/QĐ-TTg, No 386/2006/QĐ-TTg,

No 150/2007/QĐ-TTg, No 06-NQ/TW, No 6868/2010/QĐ-BCT, No DKVN) As a feedstock, Ammonia will be used to produce ammonium nitrate, which

1538/TB-is material for industrial explosive to meet the needs of mining, infrastructure

construction, security and defense of the country It’s also used to produce nitric acid, other chemicals and petroleum chemicals such as melamine, agricultural chemicals, synthetic fibers, solvents and rubber processing, food processing, etc In the future, Ammonia plant will open the possibility to develop other chemicals such as methanol, sodium carbonate, ammonium chloride based on using the CO2 co-production in the Ammonia production

An Ammonia plant will directly contribute to the development stage of the downstream petroleum industry, deep processing of natural gas, diversification of products, in the purpose of:

- Enhancing the value of domestic natural gas resources several times higher compare with using gas for electricity or gas as fuel;

- Substituting the imported Ammonia, saving average 280 million USD each year;

- Providing materials stably, creating the active position, making the premise to promote the development of national defence industry, fertilizer, chemical, resin, textile, explosive, freezing agent producing industries and supporting service industries;

- Enhancing revenue, profit, position and contributing to national budget of Investor;

- Contributing to national budget and enhancing revenue, profit and position of Investor;

- Realizing the objectives of approved strategies and plans of national defence industry, petroleum, fertilizer, chemical industry as well as of the cities, provinces;

- Contributing significantly to local, regional and national economic restructuring towards increasing the proportion of producing and processing industry;

- Promoting experience of highly qualified labours who have the ability in managing, operating, servicing, maintaining from Phu My and Ca Mau Fertilizer Plants;

- Promoting regional and national development, creating jobs and developing infrastructure;

- Contributing effectively to the national industrialization and modernization and ensure the national security and defence

In general, a new ammonia plant will bring many benefits to PVFCCo as well as meet the development strategy of PVFCCo, Vietnam Oil and Gas Group as well as the

Government However, even with strong belief and good reasons, building a new ammonia plant is still a big investment for PVFCCo and will greatly affect the development orientation of the company, the financial situation and the company’s position in fertilizers and chemicals fields A decision made without research can be

costly A feasibility study will help to reduce the risk of making poor decisions and

increases the chance of success A feasibility study of investment a new ammonia plant is essential in order to provide

I.2 Thesis topic

A feasibility study of investment a new ammonia plant is essential in order to provide PVFCCo an overview of the strengths and weaknesses of the company, the opportunities and threads presented by the environment, the resources required and ultimately the prospects for success In simple words, a financial feasibility study will analyze and estimate the cost required and present the value and the benefits to be attained in building a new ammonia plant With that reason, this research will focus on

“Financial feasibility study of investment of a new ammonia plant for PVFCCo.”

I.3 Rationale

Prior to doing a feasibility study for the investment of a new ammonia plant, the necessity of investment was carefully evaluated based on preliminary ammonia market survey

I.3.1 Demand

Domestic demand for Ammonia surged from 542 thousand metric tons in 2005 to 697 thousand metric tons in 2010 There was an increase in domestic Ammonia demand including for production of DAP, MSG and other fields beside Urea production from

77 thousand tons (KT) to 114 thousand tons during the same period The start-up of Dinh Vu DAP Plant has been a driven factor for the growth of domestic Ammonia demand since 2009 During the period 2005 - 2010, Ammonia demand for MSG production slightly increased with the annual average growth rate (AAGR) of 2%, while that for others almost unchanged Southern market was occupied for 67 % of total domestic demand, followed by Northern market with 33%

Figure I.1 Domestic demand of Ammonia over the period 2005-2010

Due to the population growth together with the orientation of exporting agricultural products, projects for fertilizers production is expected to continue increasing from

2025 onwards According to Decision No 6868/QĐ/BCT of Ministry of Industry and Trade and current situation, domestic Ammonia demand is forecast over 560 KT in

2020 and more than 660 KT in 2025

I.3.2 Supply

By 2010, there have been two Ammonia manufacturing plants namely Ha Bac Nitrogen Fertilizers and Chemicals Company and Phu My Fertilizer Plant in Vietnam, with total supply approximately 615 KT of Ammonia However, both of them are integrated with Urea facilities Domestic supply for Ammonia, therefore, only meets other fields demand (excluding Urea) in the case that Urea facility is suspended but Ammonia unit does still operates The Ammonia surplus was relatively small, satisfied nearly 28 % of total demand in 2010, and then fell down to 6 % in 2011 since Phu My Fertilizer Plant has invested Carbon dioxide recovery system and revamped Urea nameplate capacity up to 800 KTPA

In the future, other nitrogen fertilizer plants about to come on stream such as Ca Mau, Cong Thanh, or Ninh Binh are not designed to have Ammonia surplus to supply for market Thus, domestic Ammonia supply is expected not to meet demand for other areas excluding Urea

I.3.3 Demand/Supply Balance

The amount of Ammonia deficit was about 83 KT in 2010, and expected to increase from approximately 500 KT in 2016 to 561 KT in 2020 and more than 660 KTPA from 2025 onwards in order to meet the demand of MSG manufacturers, current DAP plants, proposed Ammonium Nitrate facilities, and scheduled DAP, SA plants according to Decision No 6868/QD-BCT as well as other industries Thus, if there is not any project for constructing Ammonia manufacturing plant, import will be the main source to supply Ammonia for Vietnam

In summary, investment of a new ammonia plant will follow the strategy and master plants of the Government; will contribute to the petroleum and gas industry as well as the chemicals and fertilizers industry Besides that, building a new ammonia plant at this point will supply the lacked ammonia in domestic market in the upcoming years

I.4 Objectives

The purpose of the thesis is to conduct a financial feasibility study on building a new ammonia production plant, encompassing the following concerns:

 Understand theories and research papers on financial feasibility study of a project;

 Evaluate the feasibility of the ammonia project in Vietnam in the fields of:

o Feedstock supply and product market;

o Total Investment Cost and Economic Efficiency

I.5 Contents and Research Question

During the feasibility study stage, the following questions need to be answered:

 Is there a market for the final product?

 Is the feedstock supply secured for the lifetime of the project?

 Is the project financially, economically and socially feasible?

 What are the main risks?

 Will this project go on the next stage?

In order to answer these questions, the contents will cover:

 Market Analysis;

 Financial analysis;

 Economic analysis

I.6 Scope and Limitation

In general, a feasibility study composes of the following steps:

Figure I.2 Scope of feasibility study

Since some parts of this feasibility study (Technology selection, Site selection, Environmental Impact Assessment, ) have already done by my colleagues, the content will concentrate on the Feedstock & Product Market Analysis, Investment Cost Estimation and Economic Efficiency Evaluation

I.7 Thesis Structure

The thesis will contain the following main contents:

Chapter 1- Introduction: This chapter will go over the problem statement, the rationale, the objectives as well as the scope and limitation;

Chapter 2 – Literature Review: To answer the questions that are stated in the first chapter, the author will present a review of literature for related problems;

Chapter 3 – Methodology: This chapter introduces the market research methodology, product price forecast methodology, how to calculate the investment cost and how to analyze the financial indicators;

Chapter 4 – Findings and Solutions: This chapter will present all the findings and solutions such as product market, feedstock supply, price prediction, total investment cost and risk factor and sensitivity analysis;

Chapter 5 – Conclusions and Recommendations: Based on the findings from chapter

4, this chapter will summarize the answers to all the research questions stated in Chapter 1 Recommendations are also made to the investor

CHAPTER II LITERATURE REVIEW

II.1 Overview about Feasibility Study

II.1.1 What is a feasibility study?

A feasibility study’s main goal is to assess the economic viability of the proposed business The feasibility study needs to answer the question: “Does the idea make economic sense?” The study should provide a thorough analysis of the business opportunity, including a look at all the possible roadblocks that may stand in the way

of the cooperative’s success The outcome of the feasibility study will indicate whether or not to proceed with the proposed venture If the results of the feasibility study are positive, then the cooperative can proceed to develop a business plan

If the results show that the project is not a sound business idea, then the project should not be pursued Although it is difficult to accept a feasibility study that shows these results, it is much better to find this out sooner rather than later, when more time and money would have been invested and lost

It is tempting to overlook the need for a feasibility study Often, the steering committee may face resistance from potential members on the need to do a feasibility study Many people will feel that they know the proposed venture is a good idea, so why carry out a costly study just to prove what they already know? The feasibility study is important because it forces the investor to put its ideas on paper and to assess whether or not those ideas are realistic It also forces the investor to begin formally evaluating which steps to take next

The investor’s organizers will typically hire a consultant to conduct the feasibility study Because the consultant is independent of the cooperative, he or she is in a better position to provide an objective analysis of the proposed venture The consultant should have a good understanding of the industry as well as the new generation cooperative model of business He or she should have previous experience in directly related work

A feasibility study should examine three main areas:

be pursued

Questions that need to be answered in this area of the feasibility study include:

What type of industry is the investor planning to enter? What are its primary features? What are the possible target markets for the investor’s product? What demographic characteristics do they possess? How large are these markets? Where are they located? Is the market expected to grow in the future?

Will the investor be competing in a mature industry or a growth industry?

Who are the investor’s competitors in this market? How large are these competitors? How established are they? How do they price their goods? How will these competitors react to the entrance of the investor?

How will the investor differentiate its product from those of its competitors? What are the competitors’ strengths and weaknesses, and how would the investor compare against them? How does the investor plan on gaining market share?

What is the projected market share for the investor?

Data that can help to answer these questions may be found in already-published information or through primary research activities such as market surveys conducted

on behalf of the investor Relevant information may be found through various sources such as government statistical publications, trade journals, industry reports, or consultant companies The Internet has also opened up new routes to obtaining information

The answers to market-related questions should help the investor develop realistic estimates of the projected demand for the investor’s product for the first several years

of operation Based on this projected demand, the investor can determine its anticipated level of business volume, which is needed in order to design the processing facilities If the projected business volume is not large enough to justify a processing facility, then the project is not feasible

Technological and organizational requirements:

This area concerns the internal set-up of the cooperative Questions to be answered in this area include:

Plant and equipment issues:

What type of equipment and technology will the business need to produce its product? What are the costs involved? This includes both the initial purchase and installation costs of the equipment as well as the operational costs of running the equipment

Who are the potential suppliers of this equipment? Where are they located? What sort

of service and warranties do they provide? How long will it take to acquire the equipment and begin operations?

Based on its projected business volume, how much raw product will be required by the investor? What are the quality specifications? Will the investor have a sufficient membership base that can provide the raw materials?

What are the possible locations for the plant’s facility? What size of facility is needed? What are the costs of the building? Does the proposed location have adequate access to infrastructures and services such as major highways, railways, and utilities? Will the plant build its own facility, or purchase an existing location?

Where will the facility be located relative to the plant’s customers? Who will be responsible for the transportation of goods between the facility and the market? What are the transportation costs involved?

Managerial and organizational issues:

Is the plant organizational structure the right one for this business? How important are delivery contracts and a fixed source of supply to the success of the business?

What qualifications are needed to manage these operations? What are the key staff positions that need to be filled?

What type of experience should management have? Are there potential candidates available to fill such positions? What will be the cost factor involved in finding and retaining acceptable candidates?

What are the operating costs involved? These include the daily costs involved in running the business, such as wages, rent, utilities, and interest payments on outstanding debt These will determine the cash flow requirements of the project

Based on the estimated demand, what are the plant’s revenue projections? How will the plant determine its pricing arrangements?

What are the possible sources of financing for the project? Who are potential lenders? What will be their required terms and limitations of borrowing?

Based on the estimated revenues and costs, what is the projected profit (loss) of the project? What is the break-even point?

If the results of the feasibility study indicate that the proposed venture is economically viable, then the investor can begin to develop a business plan

II.1.2 Expected accuracy range in FS stage

Project cost estimate is a key component as it will put everything on the table and estimate the costs relating to the project Depending on the stage of the project, which will define the detailed level of the project, the estimate accuracy will change As the

level of project definition increases, the expected accuracy of estimate tends to improve As guidelines, the Association for the Advancement of Cost Estimate (AACE) has developed the cost estimate classification system to provide a classification method as well as identify, cross-reference, benchmark and evaluate multiple characteristics related to the class of cost estimate AACE guidelines have gained broad acceptance within the engineering and construction communities and within the process industries

Intent of the guidelines is to improve communication among all stakeholders involved with preparing, evaluating and using cost estimates The various parties that use project cost estimates often misinterpret the quality and value of the information available to prepare the cost estimates, the various methods employed during the estimating process, the accuracy level expected from the estimates, and the level of risk associated with estimates

Classification methodology

In order to categorize the cost estimates type, the AACE have stated several characteristics that can be used, such as degree of project definition, usage of estimate, estimating methodology, effort and time needed to prepare the estimate, etc Out of those, the AACE International Recommended Practice No 17R-97 “Cost Estimate Classification System” (AACE International Recommended Practices, 2007) has chosen the project definition as primary characteristic

Five cost estimate classes have been established These class designations are labeled Class 1, 2, 3, 4 and 5 Class 5 estimate is based on the lowest level of definition, and a Class 1 estimate is closest to full project definitions and maturity The table below shows the generic cost estimate classification matrix

Estimate

Class

Primary characteristic

Secondary characteristic

Level of Project

Definition (expressed at

% of complete definition)

End Usage (typical purpose of estimate)

Methodology (typical estimating method)

Expected Accuracy Range (typical +/- range relative to best index

of 1 (a)

Preparation Effort (typical degree of effort

relative to least cost index of 1 (b)

Class 5 0% to 2% Screening or

Feasibility

Stochastic or judgment

4 to 20 1

Class 4 1% to 15% Concept

Study or Feasibility

Primarily Stochastic

3 to 12 2 to 4

Class 3 10% to 40% Budget,

Authorization

or Control

Mixed, but Primarily Stochastic

2 to 6 3 to 10

Class 2 30% to 70% Control or

Bid/Tender

Primarily Deteministic

1 to 3 5 to 20

Class 1 50% to 100% Check

Estimate or Bid/Tender

Figure II.1 AACE’s generic cost estimate classification matrix

As seen in the above table, the feasibility study can be categorized as Class 4 or Class

5 level of estimate Class 5 level means the project definition is expressed as 0-2% of complete definition Class 4 level means the project definition is expressed as 1-15%

of complete definition

The budget estimate for this class 4 estimate is typically from -15% to +30%

II.2 Market research

As mentioned above, the primary area that the feasibility study needs to address is potential market opportunities Therefore, market research is a necessary step in order

to find out the answers to the questions stated in the market issues

According to Churchill and Jacobucci (2004) in “Marketing Research: Methodological Foundations”, through market research, the product, the pricing, the distribution as well as market trends, diversification opportunities, etc can be explored The stages of market research process normally go through the following steps:

- Formulate the problem;

- Determine the research design;

- Design the data-collection method and forms;

- Design the sample and collect data;

- Analyze and interpret data;

- Prepare the research report

II.3 Price forecast

Forecast is an extrapolation of historical data and historical relationships based on expectations of the future and how those relationships may change or stay the same in the future

According to CMAI (2010), Forecast Methodology, there are some popular price forecast methodologies in oil and gas industry: “Price = Cost+ Margin”, Simple average methodology, Moving average methodology and Regression correlation methodology, etc

II.3.1 “Price = Cost + Margin” methodology

The price forecast methodology considers numerous factors when projecting cost & margins: energy costs, economic growth, production costs, alternative values as a proxy for cost, competitive pressures, trade flows, availability of supply, capacity and demand The price forecast methodology provides a cycle forecast for one complete future cycle, generally 5 – 7 years, and then reverts to a trend forecast for the long term

Source: CMAI, 2010

Figure II.2 Price forecast model

Production cost is the key element in “Cost + Margin = Price” Methodology, and strong impact on product price forecast Production costs include variable cost and fixed cost

Where:

Variable Cost = Raw material cost – Margins by product + All utilities cost

Fixed Cost = Labor cost + maintenance + insurance & taxes + overhead

In the models, production costs do not include depreciation, corporate overhead, interest payments, taxes or a return on investment Only variable (raw material, utilities, and by-product credits) and direct fixed costs are included the production cost

Factors impacting cash margins are market momentum and psychology, supply/demand fundamentals & effect of operating rates, return on investment and other factors such as inventory level, threat of substitutes etc

Prices will be done in different periods, including short term, mid-term and long term

In general, forecasts are always changing and becoming less accurate for longer forecast periods Thus, making reliable predictions requires the predictor’s correct prediction methodology, as well as experience and good market identification

II.3.1.1 Short Term Forecast Methodology

Present through 3 – 6 Months

Price forecasts are based on individual experienced consultants examining significant impacts on price as follows:

 Energy price fluctuations;

 Sudden increase in demand;

 Inventories;

 Operating problems;

 Damaged goods during transportations;

 Operating new capacity

3 – 6 Months through 24 Months

Consultants are considering all the above and how they impact margins Models build price forecasts via a “cost plus margin” methodology as a “starting point”; then adjustments are made on cost and margins for the below key considerations:

 Discussions with industry market makers;

 Other short term methods for forecasting

II.3.1.2 Mid – Term Price Forecast

Consultants utilize historical understanding of margin cycles and supply/demand balances in conjunction with analysis of any paradigm breaking market occurrences such as migration of significant capacity to low cost regions of the world or breakthrough low cost production technology

This should be strongly supported by annual supply/demand balance new projects timing and demand patterns that are relatively well – known for the next 5 – 7 years for below key considerations:

 Cycle position in capital build cycle;

 Announced capacity changes;

 Some of the same factors as the short – term;

 Macro economic impact (jobs, recession, etc);

 Relationships;

 Pricing sustainability with respect to whole value chain

II.3.1.3 Long Term Price Forecast

Long term prices are estimated to provide adequate return on investment (ROI) invested for construction of new or maintenance of existing marginal production

Cycles are no longer forecasted (although can be estimated if needed based on historical patterns)

Key Considerations:

 What is the price setting increment? Location? Technology? Size?

 Where are expected capacity additions?

 What will be future trade flow patterns to justify regional differentials?

 What effect do low cost regions have on future production?

 What is derivative outlook?

 Are there regulatory considerations?

 What are the relationships to competing products?

II.3.2 Long term average methodology

This method levels off the random, mass calculation and needs a huge archive of data that is suitable for models of which data is not significantly influenced This means factors and business environment impact on predicted objects are relatively stable

By carrying out such an approach, forecast price in the year t is calculated by averaging historical prices Likewise, forecast price for the next year is the average of historical prices and previous predicted figure Therefore, forecast price of a certain product is generalized as follows:

= Where: Ft + 1 : product forecast price in the year t + 1;

Dt : product price in the year t;

n: the number of years used to calculate the average value

II.3.3 Moving average methodology

This is also the forecast methodology in accordance with the model that does not have large fluctuations of product prices data

Given a series of numbers and a fixed subset size, the first element of the moving average is obtained by taking the average of the initial fixed subset of the number series Then the subset is modified by "shifting forward", that excludes the first number of the series and includes the next number following the original subset in the series

Formula:

Note: “n” is usually rather small: 3, 4, 5…

II.3.4 Regression correlation methodology

Regression correlation methodology is applied to: estimate the average value of product prices when given the value of related factors, verify hypotheses about the nature of the dependence between product prices and factors, forecast the average value of product prices when given the values of related factors and forecast the marginal impact or elasticity of related factors through regression coefficients

II.3.4.1 Linear regression model

A linear regression model attempts to explain the relationship between product prices and one or more factors impacting on prices such as raw material costs, product supply and demand using a straight line

When considering the past relationship between product prices and factors, if the correlation coefficient R2 is approximate one, the regression line equation will fit perfectly, whereas R2 is closer to zero, there’s no relationship between product prices and related factors

The statistical relation between X and Y may be expressed as follows:

Yi = 1 + 2X2i + 3X3i + + kXki + Ui

Where: Yi: product prices;

Ui : random error;

    k regression coefficients;

Xki: related factors impact on prices

According to the estimates, regression coefficients are calculated using least squares methodology

In this model, we accept the hypothesis that the impacts of factors on product prices are independent, do not interact and have a constant variance In fact, when studying the specific cases, we conducted analysis of the variance and correlation to find the dependent relationship and check whether the self-correlated, multi-collinearity or variance changes (usually using the Durbin Watson verification)

A linear regression model is called a multiple linear regression model based on the relationship between product prices Y and many related factors X The regression model is called a simple linear regression model if there is just one independent variable, X, in the model

II.3.4.2 Nonlinear regression model

Nonlinear regression model is a form of regression analysis in which observational data are modeled by a function which is a nonlinear combination of the model parameters and depends on one or more independent variables A few examples are Cobb Douglas production function, parabolic regression, and hyperbolic regression Regression coefficients are calculated using nonlinear least squares methodology Because the estimation of coefficients is very complicated, the people should convert nonlinear equations into linear equations

With the form of Hyperbolic equation: y = a/x:

Place 1/x = z to convert the equation into a single linear regression model: y = az and conduct simple linear regression

With the form of Parabolic equation: y = ax 2 + bx + c:

Place z1 = x2, z2 = x to convert the equation into a multiple linear regression model y =

az1 + bz2 + c

With the form of Cobb Douglas production function: Y = AX 1 b1 X i b2 X n bn :

Use the logarithm to convert into a linear regression model: lnY = lnA + b1lnX1 + … + bnlnXn Then use a multiple linear regression model’s formulas to estimate regression coefficients

II.4 Cash flow and financial indicators calculation

II.4.1 Cash flow calculation

The income statement of these projects will be calculated as following form:

1 Revenue from sales goods

II.5 WACC calculation

II.5.1 WACC formula

One of the important elements to calculate NPV is WACC of the project WACC will

be calculated by following formula:

- Rd: cost of debt (interest rate)

- T: income tax rate

II.5.2 Cost of equity (r e )

The cost of equity will be calculated by Capital Asset Pricing Model (CAPM) model CAPM is the most commonly accepted method for calculating cost of equity which is part of discount rate The CAPM is developed for measuring the relationship between return from a particular share and that of market return (Brealy et al., 2007):

re = rf + β(rm- rf)

where,

re: expected return on equity

rf: risk-free rate

rm: expected return on market portfolio

The cost of equity obtained by CAPM is often destined for estimating the weighted average cost of capital (WACC) which in turn used as discount rate in discounted cash flow model

In case of investing outside US, the cost of equity can be calculated as follows:

Cost of equity = Risk- free rate + Beta x (U.S risk premium) + Country Equity Risk Premium

The Country Equity Risk Premium can be calculated as follows:

Country Equity Risk Premiumcountry X = Risk PremiumUS x Relative Standard Deviationcountry X

Where the default risk of US is the base value and the country risk is added according

to the above equations

II.5.3 Cost of debt (r d )

The cost of debt measures the current cost to the firm of borrowing funds to finance projects In general terms, it is determined by the following variables:

The riskless rate: as the riskless rate increases, the cost of debt for firm will also increases

The default risk (and associated default spread) of the company As the default risk of a firm increases, the cost of borrowing money will also increase

The tax advantage associated with debt

II.6 Calculation of financial indicators

After creating cash-flow, the thesis will compute the financial indicators to evaluate the feasibility of the projects The common indicators are NPV (Net present value), IRR (Internal Rate of Return), PP (Payback Period), PI (Profitability Index) …

II.6.1.1 NPV

The Net Present Value (NPV) of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows of the same entity

NPV is a central tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of money to appraise long-term projects Used for capital budgeting, and widely throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in present value terms, once financing charges are met

NPV is an indicator of how much value an investment or project adds to the firm With a particular project, if is a positive value, the project is in the status of positive cash inflow in the time of t If is a negative value, the project is in the status of discounted cash outflow in the time of t Appropriately risked projects with a positive NPV could be accepted This does not necessarily mean that they should be undertaken since NPV at the cost of capital may not account for opportunity cost, i.e comparison with other available investments In financial theory, if there is a choice between two mutually exclusive alternatives, the one yielding the higher NPV should be selected

NPV > 0 The investment would add

value to the firm The project may be accepted

NPV < 0 The investment would

subtract value from the firm The project should be rejected

NPV = 0

The investment would neither gain nor lose value for the firm

We should be indifferent in the decision whether to accept or reject the project This project adds no monetary value Decision should be based on other criteria, e.g strategic positioning or other factors not explicitly included in the calculation II.6.1.2 IRR

The internal rate of return (IRR) is a rate of return used in capital budgeting to measure and compare the profitability of investments It is also called the discounted cash flow rate of return (DCFROR) or the rate of return (ROR) In the context of savings and loans, the IRR is also called the effective interest rate The term internal refers to the fact that its calculation does not incorporate environmental factors (e.g., the interest rate or inflation)

The internal rate of return on an investment or project is the "annualized effective compounded return rate" or "rate of return" that makes the net present value (NPV) from a particular investment equal to zero

Internal rates of return are commonly used to evaluate the desirability of investments

or projects The higher a project's internal rate of return, the more desirable it is to undertake the project Assuming all projects require the same amount of up-front

investment, the project with the highest IRR would be considered the best and

undertaken first

II.6.1.3 PP

Payback period in capital budgeting refers to the period of time required for the return

on an investment to "repay" the sum of the original investment Payback period as a tool of analysis is often used because it is easy to apply and easy to understand for most individuals, regardless of academic training or field of endeavor When used carefully or to compare similar investments, it can be quite useful As a stand-alone tool to compare an investment to "doing nothing," payback period has no explicit criteria for decision-making (except, perhaps, that the payback period should be less than infinity)

The payback period is considered a method of analysis with serious limitations and qualifications for its use, because it does not account for the time value of money, risk, financing or other important considerations, such as the opportunity cost Whilst the time value of money can be rectified by applying a weighted average cost

of capital discount, it is generally agreed that this tool for investment decisions should not be used in isolation

The ratio is calculated as PV of future cash flows divide initial investment

Rules for selection or rejection of a project:

- If PI > 1 then accept the project

- If PI < 1 then reject the project

Besides, the others indicators such as MIRR (modified Internal Rate of return), DPP (discounted Payback period) can be considered to bring more information for the investment decision

CHAPTER III METHODOLOGY

As presented in Section I.6, Scope and Limitation, this financial study focuses on market analysis, total investment cost and economic efficiency The economic efficiency will be evaluated based on the financial indicators Therefore, the methodology used in this study will focus on these three fields:

- Market research methodology;

- Investment Cost estimate methodology;

- Financial indicators calculation methodology

III.1 Market research methodology

The market research methodology will follow the steps as suggested in Section II.2

III.1.1 Formulate the problem - Research Objectives

The purpose of this market research is to find the domestic demand and supply balance In order to do that, the following matters have to be analyzed:

For product - Ammonia:

- The suppliers and consumers: who they are, how much they produce or consume, what source do they get Ammonia from, how do they use to transport Ammonia?

- Future expectations of Ammonia demand and supply: do they plan to expand, will their demand changes?

- What is the required specification of Ammonia?

For feedstock – Natural gas:

- What are the main resources of natural gas, the current supply and demand?

- What is the gas price applied for this project?

III.1.2 Research design and Data collection form

In order to find the answers to these questions, this study will apply two types of research: primary research and secondary research

III.1.2.1 Primary Research

The goal of primary research is to gather data from analyzing current import and sales

of ammonia product, and the possibility of gas supplying from gas production company

Collecting primary research can include:

- Questionnaires or in-depth interviews: ammonia-related companies;

- Interviews: gas production companies

III.1.2.1.1 Ammonia consumers and suppliers

Due to the specific information needed for this study, which requires both numerical and textural data, the mixed method (Duffy, 2008 and Williams, 2007) was chosen for market research of Ammonia consumers The advantage of this method is that it draws

from strengths and minimizes the weakness of quantitative and qualitative research approaches This method of research will help investigate the current usage of Ammonia, predict the trend, explore and understand the Ammonia market more clearly Research on Ammonia consumer is collected using the following steps:

- Select respondents;

- Send questionnaire, set up phone interviews or face-to-face interviews;

- Analyze collected data

Step 1: Respondent selection

Table III.1: Respondent selection

3 Occupation Working in fertilizer and chemicals

industry

4 Role in decision making Procurement officer, production

manager or higher authorities

The purposes of the questions are to get as much information as possible with the minimum work for the question receivers The questions are designed based on the expected outcomes that we want from this questionnaire or interviews, details are as follows:

- End use of Ammonia: the questionnaire will list possible application of Ammonia

so that the respondent can choose from the list;

- Annual amount of Ammonia consumption: the question is designed so that the receiver can just write a number to answer;

- Expected demand in the future and the specific time of change: the question is designed so that the receiver can just write a number to answer;

- The current supplying source of Ammonia: a list of possible supplying source is provided for the receiver to choose from;

- The method of Ammonia transportation: a list of possible transportation method is provided for the receiver to choose from;

- Specification of currently used Ammonia;

- Expectation from domestic companies: this is additional information in order to support data analysis

Therefore, the questionnaire is filled with checked boxes for the receivers to simply check and the questions are designed so that the receivers can answer shortly with a number or a few words

The questionnaire therefore will look like this:

-

AMMONIA MARKET QUESTIONNAIRE

1 Your company uses Ammonia for the following purposes (click all that applies): Fertilizer production

If checked, please specify fertilizer type:

Urea, annual demand is……… DAP, annual demand is……… ………

SA, annual demand is……… Others, which are………

Plastics, annual demand is……… Fiber, annual demand is……… Explosives, annual demand is………

If checked, please specify:……… Chemicals, annual demand is……… Foods, annual demand is………

If checked, please specify food type:

Others, which are………

2 Annual ammonia consumption demand (thousand tons):………

3 Expected demand in the future (thousand tons/year):……… From year:………

4 The current source of Ammonia for your company is (click all that applies):

Self-production, if checked, please specify:

Capacity (thousand tons/year) = ……

Extra ammonia if any (thousand tons/year) = ………

What do you do with the extra ammonia production?

Foreign suppliers

Domestic suppliers

Others, please specify:………

5 The current method of supplying Ammonia for your company:

6 Specifications of the Ammonia product your company is currently using?

7 What do you expect from domestic ammonia production companies?

-

III.1.2.1.2 Feedstock suppliers

Domestically, PVGas, under the guidance of Vietnam Oil and Gas Group, is the only natural gas suppliers Therefore, in order to find out the feedstock supply and demand,

an interview is set up with PVGas representative to collect information regarding the natural gas price, the plan for current and future gas resource The interview will cover the following information:

- Current gas resource;

- Future gas resource;

- Gas price

Additional information regarding the planning and strategy of natural gas resources for the future will be based on documents collected from Vietnam Oil and Gas Group III.1.2.2 Secondary Research

The goal of secondary research is to analyze data that has already been published With secondary data, you can identify market size, competitors, establish benchmarks, and identify target segments and feedstock supply possibility

The source of secondary research is published information from custom office, website, magazines, etc

III.1.3 Determine the sample size

Different from other types of products, Ammonia is a very narrow field and type of chemicals As mentioned in the previous part, one of the criteria used to select respondent is working in fertilizer and chemicals industry and another criteria is that the respondent has to be the person in charge of procurement or production of that company Therefore, the sample size is limited Based on that, the sample size is limited to the following companies:

industrial Vietnam Oil and Gas Group;

- Petrovietnam Fertilizer Company (PVFCCo);

- Ca Mau Fertilizer Plant;

- F.A Company;

- Vedan Limited JSC;

- Ajinomoto Vietnam Co., Ltd;

- Dinh Vu DAP

The results from this market research is reported and analyzed in Section IV.1

III.2 Investment cost estimation methodology

According to Circular No 04/2010/TT-BXD of Ministry of Construction, the total investment cost includes:

- Construction cost;

- Equipment cost;

- Owner’s project management cost;

- Project consultancy cost;

- Miscellaneous;

- Provision for contingency;

As mentioned in section II.1.2, expected accuracy range in FS stage, the total investment cost will be estimation has the accuracy range from -15% to +30% and will be estimated as below:

- The equipment cost is provided by licensors including process equipment and site, utilities insides battery limit of the plant;

off The construction cost includes direct and indirect cost The direct cost is express as percentage of equipment cost The percentage will be referred from Conceptual Cost Estimating Manual, 1996, Gulf Publishing and adjusted using Vietnamese labor cost The indirect cost is calculated according to the norms in the Circular dated 04/2010/TT-BXD of Ministry of Construction;

- Owner’s project management cost is calculated based on the norms in Decision

No 957/ QĐ-BXD of Ministry of Construction

- Project consultancy cost includes site survey cost, FS cost, EPC bidding, cost for verifying the FS … will be is calculated based on the norms in Decision No 957/ QĐ-BXD of Ministry of Construction, Circular No 109/2000/TT-BTC of Ministry

of Finance;

- Miscellaneous includes land leasing cost in construction time, construction insurance, audit and cost are mainly calculated based on the norms in Decision No 957/ QĐ-BXD of Ministry of Construction, Circular No 19/2011/TT-BTC of Ministry of Finance and referred from similar projects such as Phu My fertilizer,

Ca Mau Fertilizer…

- Provision for Contingency includes contingency and escalation cost Based on experience of PVFCCo and suitable with the regulations of Viet Nam, the contingency rate will be 10% The escalation will be classified to three groups: equipment, construction and others with the different escalation rate

III.3 Product price forecast

According to the Long term average and Moving average methodology, these methods level off the random, mass calculation and need a huge archive of data that is suitable for models of which data is not significantly influenced From the collected product price from Vietnam Customs during the period 1995-2011, the data of Vietnamese Ammonia price is fairly small Besides that, the product price is impacted mostly by the WTI crude oil factor It has a close relationship with WTI crude oil from IEA (International Energy Association) at the same period Therefore, the product price will be forecasted based on the forecast of WTI crude oil This thesis uses the “Linear regression model” (Section II.3.4.1) to forecast the product price

III.4 Financial indicators calculation methodology

Three main financial indicators used to evaluate the feasibility of the project are NPV, IRR and pay-back period (PP)

In order to calculated those financial indicators, the project cash-flow will be built includes in-flow and out-flow

- The in-flow includes sales return of the project and calculated multiplication of production quantity and product price Besides, the in-flow includes the Working capital recovery at the end of project;

- The out-flow includes investment cost, production cost, interest, income tax and increasing of Working capital each year

CHAPTER IV FINDING AND SOLUTIONS

IV.1 Feedstock and Product

The simple general process of Ammonia production is as followed:

IV.1.1 Ammonia domestic market

IV.1.1.1 Demand

Based on the results from the interviews with PVFCCo (Phu My Fertilizer Plant) and

Ca Mau Fertilizer Plant, the Ammonia that they need is about 450 KTPA each However, Ammonia is self-produced within the plant and used for urea production for these two plants The demand for external Ammonia is therefore none at present and they have no plan of increasing urea production in the upcoming years Therefore, the demand is unchanged for the next years

Domestic Ammonia demand primarily concentrates on two regions: the South and North of Vietnam with big customers such as the Ammonium Nitrate plant, Mono-sodium glutamate manufacturers (Vedan, Ajinomoto), Di-Ammonium Phosphate (DAP) The customers do not self-produce Ammonia The demand, the expected delivery method and also demand in the upcoming years as well as the expected year

of new demand are presented in the following table:

Table IV.1 Domestic potential customer

Company

Current Ammonia demand (KTPA)

Future Ammonia demand (KTPA)

Starting time of future demand

Expected delivery method

Ammonia plant

Utilities (power, water,…)

3) mainly used for: -Urea production -DAP production -SA production -MSG production -AN production