Q1.

A proposal to extend the ABC Gas Company Ltds gas distribution network to the NOIDA
industrial cluster, about 40 km east of Delhi, at distance of about 20 kms from the ABCs
existing transmission line, is under the consideration of its CEO, Prerna Goyal. the
NOIDA industrial cluster is dominated by the textiles industry including texturising,
weaving ,spinning and yarn units with over 2,500 small and medium size units. The
potential of gas consumption in these industries is mainly on account of captive power.
Power constitutes 40 -65 percent of the production cost in the key target sectors for gas
supply. The units in the cluster have been considering reduction of power costs by moving
away from the expensive grid supply to captive power generation. The total estimated
potential of captive power presently is 45 MW which corresponds to 0.30 million standard
cubic meters per day (MSCMD) of gas. The proposed project is essentially an extension of
the distribution network in the existing Delhi distribution zone.
A market survey of potential customer to assess the gas demand potential in the region has
identified over 40 customers with a combined gas demand of 0.25 MSCMD for captive
power. Negotiation for gas supply has also been initiated with them. ABC Gas Ltd has
received expression of interest for over 0.075 MSCMD. However, timing of gas supply is
the key since alternative fuel option such as solid and liquid fuels and wind energy are
available. The expression of interest would fall through if gas is not supplied by mid 2008.
Amit Kumar, an engineer consultant, is hired by Prerna Goyal to identify the most feasible
and economical route for laying down the gas pipeline. A preliminary site survey is
followed by reconnaissance survey by Amit. After conducting Quantified Risk Assessment
and evaluating several pipeline options, the consultant has proposed a 12 inch, 150 class
low pressure (19 bar) pipeline for a total length of 30 kms from the ABCs transmission
pipeline. The capacity of the proposed pipeline will be 0.75 MSCMD.
The base investment/capital expenditure is estimated to be Rs 24 crore consisting of the
following heads:
i)
ii)
iii)
iv)
v)
vi)

Engineering Rs 0.50 crore

Project clearance Rs 1.2 crore
Material costs Rs 13.2 crore
Contacts Rs 7.7 crore
Commissioning Rs 0.10 crore and
Contingency and insurance Rs 1.3 crore.

The pipe line has an expected life of 10 years.

The other parameters of the projects have been identified by the consultant as listed below
1) Volumes build up (in MSCMD)
YEAR
1
2

VOLUME
0.075
0.083

YEAR
6
7

VOLUME
0.121
0.133

3
4
5

0.091
0.100
0.11

8
9
10

0.146
0.161
0.177

2) Sales price of Gas, Rs 8.90 per standard cubic meter (SCM) with an increase of 3%
every year.
3) Purchase price of Gas Rs. 7 per SCM with an increase of 3 % every year.
4) Variable costs are assume to be constant throughout the 10 year life of the pipeline @
Rs. 28 lakhs per annum (Consisting of pigging of pipeline, Rs. 20 lakhs ; cathodic
protection of pipeline, Rs. 2 lakh, supervision cost, Rs. 3 lakh; pipeline surveys Rs. 2
lakh; and electricity charges Rs. 1 lakh).
Assuming a straight line method of depreciation of material cost of initial capital
investment for tax purposes and 12% required rate of return, analyze as a financial
consultant, the financial viability of the proposal and make a recommendation to the CEO
of the ABC Gas Limited.