Lpg Feasibility Report

Pre-Feasibility Study

LPG Mark eting & Distribution Business ((SSM ME ED DA AD DO OC CU UM ME EN NT T))

Small and Medium Enterprise Development Authority

Pre-Feasibility Pre-Feasibility Study

LPG Marketing & Distribution Business

DISCLAIMER The purpose and scope of this information memorandum is to introduce the subject matter and provide a general idea and information on the said area. All the material included in this document is based on data/information gathered from various sources and is based on certain assumptions. Although, due care and d iligence has been taken to compile this document, the contained information may vary due to any change in any of the concerned factors, and the actual results may differ substantially from the presented information. SMEDA does not assume any liability for any financial or o ther loss resulting from this memorandum in consequence of undertaking this activity. Therefore, the content of this memorandum should not be relied upon for making any decision, investment or otherwise. The prospective user of this memorandum is encouraged to carry out his/her own due diligence and gather any information he/she considers necessary for making an informed i nformed decision.

The content of the information memorandum does not bind SMEDA in any legal or other form.

DOCUMENT CONTROL



DISCLAIMER The purpose and scope of this information memorandum is to introduce the subject matter and provide a general idea and information on the said area. All the material included in this document is based on data/information gathered from various sources and is based on certain assumptions. Although, due care and d iligence has been taken to compile this document, the contained information may vary due to any change in any of the concerned factors, and the actual results may differ substantially from the presented information. SMEDA does not assume any liability for any financial or o ther loss resulting from this memorandum in consequence of undertaking this activity. Therefore, the content of this memorandum should not be relied upon for making any decision, investment or otherwise. The prospective user of this memorandum is encouraged to carry out his/her own due diligence and gather any information he/she considers necessary for making an informed i nformed decision.

The content of the information memorandum does not bind SMEDA in any legal or other form.

DOCUMENT CONTROL


1.

P ROJECT PROFILE

1.1

OPPORTUNITY RATIONALE


Currently out of 25 m illion households in Pakistan, 4.3 million are connected to natural gas network and the rest are relying on LPG and conventional fuels like coal, firewood, kerosene, dung cake etc, which indicate the strong demand for Liquefied Petroleum Gas (LPG) sector. Liquefied Petroleum Gas (LPG) is used as fuel for cooking and heating in the northern Pakistan particularly in Punjab. It is also used as fuel in vehicles particularly taxi and rickshaws. More than 30,000 rickshaws and taxis in Karachi and other parts of the country are run on LPG. The demand of LPG in Karachi is consistent throughout throughout the year and increases during du ring winters in Punjab and Northern Pakistan. Although demand of LPG is persistent throughout the year, supply of LPG from producers (or extractors) to distributors and marketing companies has been limited due to maintenance and overhauling shutdowns, which often creates shortages. Besides that, LPG producers are also limited in numbers and LPG marketing companies need to have a quota of gas to be allocated by the producer. This factor makes LPG business vulnerable in the hands of LPG producers. LPG (Liquefied (Liquefied Petroleum Petroleum Gas) is the generic generic name for commercial commercial propane propane and commercial butane. These are hydrocarbon products produced by the oil and gas industries. Commercial Propane predominantly consists of hydrocarbons containing three carbon atoms, mainly propane (C3H8). Commercial Butane predominantly consists of hydrocarbons containing four carbon atoms, mainly n- and iso - butanes (C4H10).



allocated by one of the LPG producer and this allocated LPG will be supplied to the marketing company through Bowzer (gas supplying trucks). The company will store this LPG in its storage facility from where, supply to the sub-distributors will be made. Sub-distributors will bring their cylinders and get them filled against payment. 1.3

MARKET ENTRY TIMING

There is no specific time for the entry in LPG marketing. After allocation of quota from the producer, a marketing company can start its operations immediately as demand is persistent in urban and rural markets. 1.4

PROPOSED BUSI NESS LEGAL STATUS

The legal status of business tends to play an important role in any setup; the proposed LPG Marketing and Distribution business is assumed to operate on as a private limited company. It is mandatory for an oil or gas company to register as a private limited company. 1.5

PROPOSED LPG BOTTLING / DISTRIBUTION PLANT CAPACITY

The capacity of the proposed LPG storage and distribution facilities would be around 80 M. Ton, whereas, filling capacity would be about 5 ton per day (based on 8 hours shift). 1.6

PROJECT COST

Total project cost of the LPG Marketing & Distribution business would be approximately Rs. 48.92 million. Out of this, capital cost of the project is around Rs. 47 million and remaining will be the working capital.


1.9


PROPOSED LOCATION

Location for setting up a LPG distribution plant has imperial implications on fixed costs, operational costs and procedures. The proposed LPG plant can be established at Port Qasim, Karachi in Sindh, and Multan Road in Punjab. These locations have basic infrastructure and facilities required for LPG bottling and distribution plant, however for the purpose of this pre-feasibility study Port Qasim industrial area has been assumed. 1.10

KEY SUCCESS FACTOR & PRACTICAL TIPS

Following are the ke y success factors in LPG business: 





2.

LPG quota allocation: Most of the existing plants with fully operational facilities are out of work because of delays in their quota allocation by the LPG producers. Dealing with the sub-distributors: Sub-distributors play important role in the successful operations of a LPG Marketing company because they distribute gas among agency holders who further sale it to the retailers. Survival during the critical period when cheap Irani LPG is available in the market: In such circumstances when cheap Iranian gas is available, a LPG marketing and distribution company may face a situation where it would be forced to lift its quota as per agreement from the producer at a higher cost and sell it at lower price.

SEC TOR & INDU STRY ANALYSIS



LP Gas supplies although the ratio between gas processing and refining varies among regions. LP Gas production from these sources is a natural derivative. That means production of LP Gas is assured since the primary motive for gas processors and refiners is to produce fuels other than LP Gas but first the LP Gases are produced. Although tied to the production of natural gas and crude oil, LP Gas has its own distinct marketing advantages and can perform nearly every fuel function of the primary fuels from which it is derived. 2.1

SECTOR CHARACTERISTICS AND OVERVIEW

LP Gas can be transported, stored, and used virtually anywhere in the world. It does not require a fixed network and does not deteriorate over time. LP Gas is very clean burning and has lower greenhouse gas emissions than any other fossil fuel when measured on a total fuel cycle. Originating mainly from natural gas production, it is also non-toxic and will not contaminate soil or aquifers in the event of a leak. LP Gas is cost-effective, since a high proportion of its energy content is converted into heat. LP Gas can be up to five times more efficient than traditional fuels, resulting in less energy wastage and better use of energy resources. LP Gas is a multi-purpose energy. There are more than a thousand applications, from cooking, heating, air conditioning and transportation, to cigarette lighters and even the Olympic torch. INVESTMENT OPPORTUNITY IN THIS SECTOR

The Government has focused on this sector and has approved “LPG production and distribution policy 2006”. This policy aims at increasing LPG supplies, streamlining its distribution at affordable prices, especially to LPG starved areas of the country and



LPG LICENSING

Any company willing to distribute and market Oil and Gas needs to obtain a license from OGRA. Additionally, license from Explosive department is also required for the proposed LPG marketing and distribution business. OGRA (Oil & Gas Regulatory Authority) issues provisional licenses to technically and financially sound applicants/ parties for construction of works commensurate with their work program, for a period of one year. OGRA inducts reputable third party inspectors to check/monitor compliance with the terms and conditions of licenses. The licenses can be cancelled in case of non-compliance with licensing terms and conditions. Pre-Qualification for LPG License 1

Following requirements are required to be fulfilled for obtaining a license: 

Application on the prescribed proforma in triplicate



Pay Order / Bank Draft of Rs.100,000/- in favour of Oil & Gas Regulatory Authority, as License fee (Payable at Islamabad).



Proof of registration of the Company (Company incorporation certificate).



Memorandum and Articles of Association.



Attested copies of ID cards of all Directors.



Location of the tentative / p roposed site.



Financial Competence Certificate issued by a Bank (original and stamped).



Last three years’ Audited Reports (not applicable for new co mpanies).


2.2 2.2 .1


SECTO R CHARACTERISTICS 2

PRODUCTION2

The following table presents production data for the last two years for LPG, Petroleum and Diesel. Item

Quantity

LPG Petroleum Diesel

‘000 Liters ‘000 Liters ‘000 Liters

August 2006 2005 41,124 40,895 2,097 1,998 276,888 324,691

July – August 2006-07 2005-06 82,999 85,450 4,518 4,209 596,176 709,773

It is evident from the table that LPG production which was around 40,895,000 liters during the month of August 2005, increased to 41,124,000 liters during August 2006 which suggests a substantial increase in production. According to last year during July and August LPG production was 85,450,000 liters, which decreased in during the same period in 2006-07 around 82,999,000 liters. It is expected that after commencement of operations of JJVL-II, the production will further increase which would help in maintaining demand and supply gap in future.

2.2 .2

PRODUCT PRICING3

During the study of LPG industry, it was observed that product price for LPG are revised generally every 15 days and government launch its prices on fortnightly basis. Latest prices for the week as compared to last week are as under.


Ratio LPG price calculation = A x B Wt. Avg. price US $ /M. TON Avg. US $ exchange rate for Feb. 07 Rs per US$ * Maximum Base-Stock price of LPG Rs. /M. TON effective March 03, 2007


B

40 21,040.00

60 31,560.00 526.00 60.74 31,949.45

* Monthly average of the mean of the daily Bid and Offer of Weighted Average Exchange Rate qu oted by the State Bank of Pakistan for February 2007, has been provisionally adopted pending clarification from the Federal Government, which has already been sought.

2.2 .3

DEMAND

About 90% of auto rickshaw and taxi are fueled by LPG, whereas, majority of the rural population of Pakistan use LPG as cooking and house warming fuel at home. LPG prices move in a similar manner to petrol prices as its demand grows.

2.2 .4

TH REATS TO TH IS INDUSTRY

LPG Distributors Association Pakistan said on November 11, 2006, that the sale of Liquefied Petroleum Gas (LPG) had dropped 30 percent due to unprecedented increase 4 in its prices by producer and marketing companies for the past 7 months . The association said that the LPG domestic consumers had abandoned its use and turned to firewood while rickshaw owners and other transporters preferred petrol and diesel as LPG firms had been fleecing them by constantly raising LPG rates without any justification.



forming potential (a measure of the tendency to generate photochemical smog), between 10 and 15 per cent lower greenhouse gas emissions and only one fifth air toxics emissions. 5

LPG delivers clear environmental benefits over diesel and petrol. Recent independent automotive tests submitted to the Department for Transport have shown that LPG emits: 

120 times less particulate matter compared to d iesel;  less than half the NOs o f petrol and less than one twentieth the NOs of diesel;  and 17 per cent less CO 2 compared to petrol and 2 per cent less CO2 compared to diesel, on a well to wheel basis LPG’s impact on the environment in the unlikely event of a spillage is minimal as propane is lighter than water. It therefore readily disperses without combustion and with no contamination of water courses or surrounding land – unlike petrol or diesel where spillage is a major environmental concern. 2.2 .6

PRODUCT / PROJECT STANDARDS AND COMPLIANCE ISSUES

Rules and regulations which govern any explosive material also apply on LPG. Its transportation, storage, construction of storage facility, filling of cylinders and their transportation, etc. all need to be carried out according to the standards and specifications provided by the explosive department, government of Pakistan. For LPG business, a license will be required from explosive department of the concerned province. Details have been provided in the following lines. 2.2 .7

REQUIREMENTS FOR GRANT OF PERMANENT LICENSE UNDER EXPLOSIVES



1260000-Economic Services Receipts 1264000-Industrial and Mineral Resources 1264100-Industiral and Mineral Resources Industrial Safet y Explosives Department V) No objection certificate along with the signed plan from the District Authority concerned to the effect that the Authority has No objection to the grant of license to the application for possession/sale of Explosives. No objection certificate if not submitted by the applicant will be obtained by the Department from the District Authority after receipt of other complete particulars from the applicant. VI) Six copies of plan duly signed by the applicant and drawn to scale on durable paper showing full constructional details of the proposed LPG storage site, and site with full surroundings and important land marks to facilitate its location. The distances maintained around the proposed LPG storage site shall be marked clearly. VII) Documents showing the extent of possession/ownership of land for maintaining required safety distances from the explosives storage magazine. VIII) Present consumption of explosives in the area and nature of work requiring use of explosives. IX) Expected market potential in 5 years from now with full justification. X) Complete details of the present consumers of explosives in the area giving their names, complete postal addresses, nearest Police station(s), approximate daily consumption of explosives by each consumer stating their nature of work requiring explosives.



7

XV) Certificate to the effect that guard over the magazine will be provided 24 hours by the license. An LPG tank after ten years shall be examined for re-qualification. Re-qualification is a procedure by which a cylinder is inspected and retested to determine its acceptability for continuous service. This method determines if a tank is condemned (a cylinder that does not pass the required tests and can not be repaired), or, repairable. A tank shall be repaired for cuts, corrosion or dents five years after the time of re-qualification. Repair is defined as the removal and replacement of parts or attachments of LPG cylinders and other corrective measures. A condemned cylinder, as the standard specifies, is a scrap and should be destroyed either by cutting diagonally, or crushing the c ylinder or any part so that it can no longer be used. Consumers are enjoined to make sure that the embo ssed markings of the brand name or name of the owner is printed o n the cylinder. To ensure safety throughout the LPG supply chain, LPG storage tanks, cylinders bowzers, and distribution outlets of the licensees should meet the minimum safety standards as laid down in applicable Rules. Decanting of LPG from cylinder to cylinder is prohibited and OGRA can cancel licenses of the LPG marketing companies involved in this activit y directly or indirectly. 2.2 .8

SPECIFICATIONS FOR TEMPORARY STORAGE OF EXPLOSIVES

Following detailed guidelines have been provided by the explosive department of the government for the companies dealing in explosive materials. It is mandatory for the



7. The explosives shall be covered with tarpaulins awaning so as to protect against sun and rain and the margin of a pit shall be so raised as not to allow rainwater to drain inside it. 8. Shelves, benches and fitting shall be of wood or bamboo free from iron nails and grit. 9. The capacity of a pit or a cabin per 16 sq.ft. of the base area with 30% more area as working space. 10.At least 6 feet high barbed-wire fencing shall be provided all round at a distance of not less than 30 feet from the storage cabins/pits. Other safety distance shall be maintained as per Schedule VI of the Explosives Rules, 1940. 2.2 .9

CONDITIONS FOR TRANSPORT OF COMMERCIAL EXPLOSIVES IN A VAN BY ROAD8

1.

The vehicle shall be in perfect serviceable condition in all respects.

2. The words DANGER and EXPLOSIVES shall be written conspicuously in Red color on three sides of the vehicle so as to be clearly visible from a d istance and electric lamp with siren shall preferably be fixed on the vehicle for use in emergency. 3. There shall be no naked iron or steel in the interior of vehicle and no footwear with exposed iron or steel shall be worn by attendants on the vehicle. 4. The interior of vehicle shall be kept thoroughly clean from grit, oil rag, waste and other combustible material at all times. 5. All electric cables must be heavily sheeted. No junction boxes, switches, fuses, lamp fittings or other electrical appliances or cable joints shall be allowed within the cargo compartment.



11. Every consignment of explosives for transportation shall be accompanied by a license in Form C and a pass issued by licenses in Form H and attested photo-copies of these documents shall be sent to the Chief Inspector of Explosives, Karachi and to the 9 Inspector of Explosives and District Magistrate in whose jurisdiction the magazine in situated. 12. Loading and unloading shall NOT be done in the vehicle while its engine is running or its fuel tank is being filled. 13.

Explosives in excess of the authorized limit shall NOT be carried on the vehicle.

14.

Damaged packages shall NOT be loaded in the vehicle.

15.

Explosives shall NOT be carried in the Driver s Cabin under any circumstances.

16. Detonators or other explosives containing their own means of ignition and Fire works shall NOT be loaded together or with any other explosives and must be transported separately. 17. All packages must be well secured and effectively protected against weather and the risk of pilferage or sabotage. 18.

All packages must be appropriately labeled as to the nature of Explosives.

19. If loading, unloading takes place in wet weather, adequate stops shall be taken to keep the packages of Explosives dry. 20. The loading or unloading of explosives when once begun shall be proceeded with all due vigilance until the same has been completed. 21. No extra fuel shall be carried during conveyance other than in the fuel tank of the vehicle.



27. The vehicle shall NOT be driven at the speed more than 30 miles (50 Kilometers) an hour on smooth road. 28. Populated areas shall be avoided as far as possible and vehicle SHALL NOT be parked in any building during journey. 29. The vehicle shall NOT be driven in any street or public place within the limits of a municipality or cantonment except and in accordance with the conditions of a written permit granted by the District Author ity. 30.

Explosives shall be delivered to authorize consignee only.

31. In case of any emergency, one person shall warn other traffic and one person shall inform police, and the consignor or consignee, as may be convenient by the quickest possible means. 32. One copy of the drawing approved by the Department of Explosives shall always be kept with the driver of the vehicle for production on demand by an inspecting officer.

3.

MARKET INFORMATION

3.1

CURRENT MARKET

Currently there are 61 LPG marketing and distribution companies operating in 10 Pakistan . Based on the information provided by the existing pla yers, about 50 of them are operating and rests are waiting for the allocation of LPG quota. LPG’s use as fuel for coo king and household requirements is most common in the rural areas of Punjab and NWFP (with a daily demand of about 500 to 800 ton). In the



saving of Rs. 140 per day, and for a CNG operated vehicle, the saving is Rs 160 per day. This clearly suggests a cost benefit of LPG and CNG over petrol hence has a greater attraction for vehicle operators. With a view to ensure adequate supplies of LPG in remote, rural and hilly areas of the country, and to halt deforestation, OGRA has ruled out a policy that all LPG marketing companies receiving LPG from sources in Punjab and NWFP will be obligated to supply at least 7% of their local LPG in Northern Areas, 7% in AJK and 6% in FATA. All LPG marketing companies receiving LPG from sources in Sindh and Balochistan will be obligated to supply at least 10% of their local LPG in Balochistan province. 3.3

11

LO CAL PRODUCTION OF LPG11:

At present, the following eight producers are producing around 1600 M. Tons of LPG per day in the country. S.No.

Name of Producers

Location/Phone No.

1

Pakistan Refinery Limited

7-B, Korangi Industrial Zone, Korangi, Karachi. Ph: 021-5062005.

2

National Refiner y Ltd.

Karachi. Ph. No.021-5064981-86

3

Attock Refinery Limited

Morgah, Rawalpindi. Ph.No.051-5487041.

4

Pak-Arab Refinery Ltd (PARCO)

Korangi Creek Road, Karachi Ph. 0215090100-13

5

Pakistan Petroleum Limited

PIDC House, Dr.Ziauddin Ahmed Road, Ph.


3.3 .1


12

LPG PRODUCED12

Following table provides LPG producers with their production sites and quantity of produce during 2006-07: Producer OGDCL

POL

Name of Field

Dhakni

572

Dhodak

5,750

Kunnar

1,104

Bobi

2,500

Sub Total

9,926

Dhulian

287

Meyal

622

Pariwali

1,854

Pindori

2,379

Turkwal Sub Total OPI

PPL PRL

LPG Produced (M.Tons)

3 5,145

Ratana Mayal

62

Naimat Basal

1,404

Siraj South

0

Umar

0

Sub Total

1,466

Adhi

2,133 1,192


Name of the Company SHV Energy Fon Gas Wak Limited Shell Gas Pakistan State Oil Caltex Eirad Company Limited Lub Gas Pakistan Oil Fields Limited Mehran LPG Baluchistan Gas Cap Gas Sun Gas Petrosin Gas Muhammadi Gas Ravi Gas Aftab Traders Agha Gas Bolan Gas Pro Gas Gas Man Power Gas Links International Synergy Gas Baluchistan Minerals Cress LPG


LPG Uplifted (M. Tons) 4,972 3,350 3,219 2,786 1,719 1,984 2,112 4,466 6,079 2,483 836 625 607 385 2,048 1,216 1,180 144 184 1,122 118 283 448 717 148 686


4.


LPG DISTRIBUTION PROCESS (SUPPLY CHAIN)

Typical distribution process and supply chain of LPG has been illustrated in the following diagram: LPG DISTRIBUTION PROCESS

LPG Production Company

LPG Marketing & Distribution Company

LPG Distributor / SubDistributor

LPG Retail Agent

LPG Retail Sales Shop

Marketing and distribution companies uplift LPG from the production site using own/rented bowzers and store it at their storage site. In Karachi such sites are located at Port Qasim, Hub, Super Highway etc. Marketing/distribution companies which are also known as bottling companies fill gas cylinders with LPG and store them for distribution. Appointed Distributors/Sub-distributors bring their gas cylinders on their own vehicles on the marketing company site, get them filled (or exchange them with the filled cylinders), make payment and carry their cylinders on the distribution point. From their distribution points cylinders are supplied to the retailers or agents from where it is provided to the end user. In case of household or commercial use small capacity cylinders (normally 6 kg to 11.8 kg) are further filled and supplied to t he users directly by the sub-distributor. This filling process also be carried out at marketing company site and sub-distributors uplift cylinders from the site and store them at their



column are fractionated in the solvent regenerator column which separates LPG’s overhead and lean solvent produced at the bottom. After heat recuperation, the lean solvent is pre-saturated with absorber overhead gases. The chilled solvent flows in the top of the absorber column. The separated gas from the presaturator separator forms the pipeline sales gas. Depending upon the economics of ethane recovery, the operation of the AET LPG plant can be switched on-line from ethane plus recovery to propane plus recovery without affecting the propane recovery levels. The AET LPG plant uses lighter lean oils. For most applications, there are no solvent make-up requirements. AET can design retrofits for heavy lean oil facilities.

Production Process Flow Diagram


Gas filling dispensers Pumps Storage Tanks


Technology French German Pakistani

Company/Supplier Siraga CE Sterling Descon Engineering

Contact addresses of the companies are given below:

Descon Headquarters Lahore 18 km Ferozepur Road, Lahore, 53000 Pakistan Tel: (92 42) 5990034, 5805134 UAN : (92 42) 111-DES-CON Fax: (92 42) 5811005, 5811135 Email: [email protected]

Descon Karachi Office 9th Floor Business Avenue, 26-A Block-6, P.E.C.H.S, Main Shahrah-e-Faisal, Karachi, 75400 - Pakistan Phone: +92.21.454.4481-4 Fax: +92.21.454.4480 E-mail: [email protected] Contact Person: Murtuza Ali ([email protected] )

Siraga France and CE Sterling Germany can be contacted using the following URLs http://www.siraga.com/siraga/siraga-contacts.php?langue=uk http://www.sterlingfluid.com/sterlingsites/group/index.htm

4.4

PLANT AND MACH INERY REQUIREMENT

Machinery required for the LPG distribution plant would include the following:



There are few local suppliers/ manufacturer of storage Tanks and other related machinery for LPG distribution setup. During the course of study for this prefeasibility, we have contacted the following local manufacturer and fabricator of LPG distribution setup: 4.6

PLANT AND MACH INERY MAINTENANCE

All machines require routine cleaning and maintenance after every three months and an annual service which costs around 1% to 5% of the total cost depending upon the use of the machine and operator's skill. We have assumed an average of 3% of the initial plant and machinery cost as the annual maintenance cost.

5

LAND AN D BUILD IN G R EQUIREMENT

5.1

SITE DEVELOPMENT

LPG Plant is sophisticated and require fool proof system, because Liquefied Petroleum Gas is flammable and during site development, prescribed instructions for fire extinguishment systems must be complied with. Qualified Consultant Engineers shall be engaged for preparing structural drawings for LPG site. 5.2

LAND REQUIREMENT FOR PLANT

In order to comply with structural standards prescribed by the explosive department and provisioning for the future expansion in the storage capacity, a minimum of 2 Acre area would be required for the proposed LPG setup. 5.3

BUILDING CONSTRUCTION COST

The LPG storage and distribution site can be divided into three areas:



Total Construction Cost

3,028,000

As the plan and machinery to be installed on the site would be of permanent nature and would be immovable for a longer period, it has been assume that the plot will be purchased for the proposed business purpose. This will cost around Rs. 20 million.

6

H UMAN RESOURCE RE QUIREMENT

A team of approximately 20 staff would need to be hired for establishing and running LPG marketing and distribution business. The following table presents details about the staff to be hired and their estimated payroll requirements. No of Persons 1

Individual Salary

Monthly Salary

Annual Salary

Plant Incharge

1

60,000

60,000

720,000

Supervisor - Operations

1

25,000

25,000

300,000

Supervisor - Dispatch

1

18,000

18,000

216,000

Operators - Dispenser

3

8,000

24,000

288,000

Clerk / Gate Keeper

2

6,000

12,000

144,000

Technical Staff

1

10,000

10,000

120,000

Guard

2

6,000

12,000

144,000

161,000

1,932,000

45,000

540,000

Staff Title

Business Unit Manager/Owner Plant Staff

Total Plant Staff

12

General Administration/ Marketing Staff

Marketing Manager

1

45,000


7


FINANCIAL ANALYSIS & KEY ASSU MP TIONS

The project cost estimates for the proposed “LPG Marketing and distribution business” have been formulated on the basis of discussions with industry stakeholders and experts. The projections cover the cost of land, Plant, machinery and equipment including office equipment, fixtures etc. Specific assumptions relating to individual cost components are given as under. 7.1

LAND & BUILDING

Land for setting up the proposed LPG Production & Distribution unit would be purchased which will cost around Rs. 20 million {for a 2 Acre Plot at industrial area of Port Qasim}. For the site development, construction and renovation of office approximately Rs. 3 million will be required, which has been assumed to be depreciating at 10% per annum using diminishing balance method.

7.2

OVERALL PLANT & OFFICE RENOVATION

To renovate the Plant / office premises in Year 5 and Year 10 a cost would incur for which an amount equivalent to 5% of the total construction cost is estimated. 7.3

PLANT & OFFICE FURNITURE

A lump sum provision of around Rs. 310,000 for purchase of furniture is assumed. This would include table, desk, chairs, air conditioner and office decoration articles etc. The breakup of these expenses is given below:


7.4


DEPRECIATION TREATMENT

The treatment of depreciation would be on diminishing balance method at the rate of 10% per annum on the following. The method is also expected to provide accurate tax treatment. 1. 2. 3. 4. 7.5

Machinery & Equipment Land & Building Construction Vehicles Furniture and Fixtures etc. UTILITIES

LPG Marketing and distribution business will be operated using electricity for plant operations. This would draw considerable amount of electricity. The cost of the uti lities including electricity, diesel/fuel, telephone; and water is estimated to be around Rs. 1.35 million per annum. Breakup of the utilities expenses has been given below:

Utility

1. 2. 3. 4.

Electricity Diesel for Vehicles Water Telephone

Total

7.6

WORKING CAPITAL REQUIREMENTS

Total Monthly Cost (Rs.)

Total Annual Cost (Rs.)

Annual %age Increase

75,000 20,000 2,500 15,000

900,000 240,000 30,000 180,000

5% 5% 5% 5%

112,500

1,350,000


7.7


VEHICLE FOR SUPPORT

A loading vehicle would be required for providing services for the transportation of cylinders and staff traveling from different locations. For this purpose, a minimum of two vehicles have been proposed which will cost around Rs. 400,000/- each.

7.8

SELLING & DISTRIBUTION EXPENSES

Although marketing, promotion and distribution activities are limited in the LPG business, for the purpose of this pre-feasibility, it has been assumed that the proposed LPG Marketing and Distribution business would work with the sub-distributors and may require direct supply to the key customers. The business may also need to give incentives to the marketing staff for the business development purpose. Besides that, advertising material would also need to be printed on periodical basis announcing incentives and facilities to the customers. These arrangements would raise a considerable cost to the business for which an amount equivalent to 1% of the annual sales has been assumed.

7.9

MISCELLANEOUS EXPENSES

Miscellaneous expenses of running the business are assumed to be Rs. 10,000 per month. These expenses include various items like office stationery, daily consumables, traveling allowances etc. and are assumed to increase at a nominal rate of 10% per annum.

10

&



found to be almost zero. It has been assumed that the proposed business will initially sell 5 ton LPG per day which will grow by 10% annually. Besides that, a 10% increase in sales price has also been assumed on annual basis. 7.13

ACCOUNTS RECEIVABLES

Considering the industry norm, particular to the LPG Production & Distribution sector and all of its allied industries, it has been assumed that 100% of the sales will be on cash. 7.14

FINANCIAL CHARGES

It is assumed that long-term financing for 5 years will be obtained in order to finance the project investment cost. This leasing facility would be required at a rate of 15% (including 1% insurance premium) per annum with 60 monthly installments over a period of five years. The installments are assumed to b e paid at the end of every month. 7.15

TAXATION

Tax rate used is that applicable on SMEs which is 20%. 7.16

COST OF CAPITAL

The cost of capital is explained in the following table: Particulars Required return on equity Cost of finance Weighted Average Cost of Capital

Rate 20% 15% 17.5%

The weighted average cost of capital is based on the debt/equity ratio of 50:50.






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Lpg Feasibility Report

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