Establishment of Oil Field Equipment Manufacturing Unit. Heavy Engineering Government of Gujarat

Transcription

1 Establishment of Oil Field Equipment Manufacturing Unit Heavy Engineering Government of Gujarat

2 Contents Project Concept 3 Market Potential 4 Growth Drivers 7 Gujarat Competitive Advantage 9 Project Information 10 - Location/ Size - Infrastructure Availability/ Connectivity - Raw Material/ Manpower - Key Players/ Machinery Suppliers - Potential Collaboration Opportunities - Key Considerations Project Financials 15 Approvals & Incentives 17 Page 2

3 Project Concept What is oilfield and oilfield equipment? An oilfield is a region which has abundance of oil wells used for petroleum extraction from below the ground. Specialized machinery is required to perform extraction in an oilfield. Oilfield equipment is used to extract oil and gas from natural reservoirs of oil wells. Project overview The proposed project involves establishment of a manufacturing facility for oil field equipment at Dahej Petroleum, Chemical, and Petrochemical Region (PCPIR) The manufacturing process in the proposed unit includes casting, inspection, heating, and forging ingots. Other processes include heat treatment of metals, first inspection, mechanical machining, final inspection etc. The total cost of setting-up of the proposed unit at Dahej will be ~INR 6.75 billion for a production capacity of 1,200 units per annum. The proposed unit and investment is justified considering the increasing demand for process plant equipment which is set to grow at a CAGR of 13.5% between , and Drilling equipment where demand is set to grow at a CAGR of 14% between Oilfield equipment categories Oilfield equipment Drilling equipment Field production machinery Pumps and valves Other equipment Drilling equipment is a component used for the purpose of drilling oil Their demand is driven by vast drilling activities. It includes tubular products, drill bits, downhole motors drilling rigs and stimulation tools. Page 3 Field production machinery is used in oil wells to accumulate and lift fluids from reservoirs. It s demand is driven by both onshore and offshore drilling activities. It includes production casing, tubing, packers, well intervention equipment and remedial cementing tools. Global oilfield equipment market , Technavio Report Pumps and valves are used to handle crude oil and water as well as to control the equipment in oil and gas rigs. Their demand is majorly driven by production rates in mature oilfields. The pumps and valves segment includes intelligent well completion equipment and artificial lifts. Other equipment include wellhead equipment, hydraulic workover, wireline and slickline. Demand is driven by onshore well intervention activities

4 Market Potential Global oilfield equipment market Global oilfield equipment market is estimated to reach US$114.9 billion in 2019 from US$100.7 billion in 2014, growing at a Compounded Annual Growth Rate (CAGR) of 2.7%. Growth is driven by expansion of drilling activities in countries like Saudi Arabia, Kuwait, Qatar and Venezuela. Oilfield Equipment market size (US$ billion) e 2017e 2018e 2019e Global oilfield equipment market by categories Global oilfield equipment market segmentation, 2016e 10% 6% Drilling equipment dominates the global market for oilfield equipment. Demand for drilling equipment is driven by increased exploration and production activities and a shift focus towards unconventional reserves. Drilling equipment market size is estimated to reach US$74.9 billion in 2019 from US$65.6 billion in 2014, growing at a CAGR of 2.7%. 19% 65% Drilling Equipment market size (US$ billion) Drilling equipment Field production machinery Pumps and valves Other equipment e 2017e 2018e 2019e Global oilfield equipment market , Technavio Report Page 4

5 Market Potential Indian market potential of key oilfield equipment* Process plant equipment Indian process plant equipment market is estimated to reach INR350 billion in 2017 from INR163.5 billion in 2011, growing at a CAGR of 13.5%. India receives demand for process plant equipment from foreign developing countries due to increasing domestic manufacturing capabilities. Major process plant equipment includes pressure wells, columns, heat exchangers, towers, storage tanks, evaporators and furnace. Process plant equipment market size (INR billion) Drilling equipment e Indian drilling equipment market is estimated to reach INR54.5 billion in 2020 from INR9.9 billion in 2007, growing at a CAGR of 14%. India receives a large demand for drilling equipment due to increasing drilling activities across the country, specially north east India and focus towards unconventional resources. Drilling equipment market size (INR billion) e 2017e 2018e 2019e 2020e Note: 1 Drilling equipment market size is forecasted with industry average assumption CAGR of 14% and 2007 as base year *The market size of process plant equipment, drilling equipment, pipes and valves have been taken as a proxy for oilfield equipment market since the consolidated market size of Indian oilfield equipment market was not available. Centre for Monitoring Indian Economy Make in India- Oil and Gas Sector Report Economics India Research Report Page 5

6 Market Potential Indian market potential of key oilfield equipment Valves Indian valves market is estimated to reach INR517.4 billion in 2020 from INR117.1 billion in 2012, growing at a CAGR of 13%. Valves are an integral part of the upstream equipment and downstream distribution network of oilfields. Large size complex choke valves are extensively used in the exploration and production of oil. Valves market size (INR billion) e 2020e Make in India- Oil and Gas Sector Report Economics India Research Report Page 6

7 Growth Drivers Shifting focus to unconventional reserves Increase in oil and gas drilling activities Technological advancement Government initiatives in the sector Increasing Capital investment by Indian players Explorers are shifting focus to complex hydrocarbon reserves like oil sands, heavy crudes, shale oil and bitumen due to decline in production from conventional oil and gas reserves. Since these resources cannot be easily recovered through conventional drilling methods, this would result in growth of oilfield equipment industry. High demand for oil and gas has resulted in an increase of drilling activities worldwide. New gas field discoveries along the eastern coast of India could mark a significant increase in gas production and distribution. An estimated 650 billion cubic meters of gas reserves of Oil and Natural Gas Corporation (ONGC) and Reliance Industries lie untapped in the Krishna-Godavari basin. Tapping these unexplored resources will boost production of oilfield equipment significantly. With advancement in technology, explorers are adopting different drilling methods, such as horizontal and directional drilling. As a result, oilfield equipment manufacturers are increasing their investment to improve their production efficiency, enhance the oil and gas production techniques, and reduce the impact on the environment. Government of India (GoI) has targeted reducing oil import dependence of country by 10% over a period of 6 years. GoI plans to add 91 Million barrels to its crude oil capacity to protect the country from supply disruptions by India projects an increase of the country s refining capacity to 310 million tons per annum (tpa) by 2017 from 216 million tpa in 2012 based on its current Five-Year Plan ( ) to meet rising domestic demands and export markets. These projections by GoI is expected to attract investments in oilfield equipment industry. Indian oil and gas companies are investing across the value chain in order to bridge the demand and supply gap from indigenous sources, which would in turn support investment in oilfield equipment industry. During FY15 17, oil and gas companies plan to invest ~INR2.8 trillion across the value chain. Out of this, ONGC accounts for 34.2% of the total investment, followed by RIL with 28.4%. Make in India- Oil and Gas Sector Report Global oilfield equipment market , Technavio Report Page 7

8 Gujarat - Competitive Advantage Ease of doing business Established infrastructure Flourishing economy Gujarat ranked first in ease of doing business as per Department of Industrial Policy and Promotion (DIPP) report Only state with 100% compliance with environmental procedures. Gujarat ranked No.1 in e-transactions for government services Gujarat was ranked No. 1 in terms of setting up a business, allotment of land and obtaining a construction permit. Located on the west coast of India, Gujarat is well connected to the major cities of the India and to the rest of the world by air and sea routes. The state has 45 ports, 12 domestic airports and 1 international airport in addition to an extensive rail and road network. Gujarat is the one of the power surplus states in the country. This helps it in attracting huge amount of investment from the industries and tagged as preferred investment destination in the country. Gujarat contributes 7.31% of the Nation GDP in 2015 and shows leadership in many areas of manufacturing and infrastructure sectors. Gujarat s GSDP (Gross State Domestic Product) at current prices registered a growth of 11% during the year Gujarat has attracted cumulative FDI worth US$12 billion from April 2000 to March Gujarat contributes around 19.1% to India s total exports of goods in High availability of skilled manpower (engineers) Engineering seats in Gujarat by specialisation (Academic year ) Mechanical Computer Electronics & Communication Civil Electrical Information Technology Others 8% 8% 14% 13% 17% 17% 23% Total seats: 46,069 for admission through Gujarat Common Entrance Test As of June 2016, Gujarat had ~126 undergraduate engineering colleges and ~70 post graduate engineering colleges with intakes of ~68,447 and ~6,694 students per year, respectively. More than 80% of the seats were in selffinanced private colleges, while 15% seats were in Government colleges. Leading engineering colleges in Gujarat: Indian Institute of Technology (IIT), Gandhinagar Sardar Vallabhbhai National Institute of Technology, Surat Gujarat Technological University, Ahmedabad Nirma University - Institute of Technology, Ahmedabad Page 8

9 Gujarat - Competitive Advantage Gujarat: petro-capital of India Major strengths of Gujarat Highest crude oil refining capacity in India, ~43.5% share in FY15. 25% share in onshore oil production in India till December 2015; second largest after Rajasthan. 18% share in total number of crude oil reserves of the country. Reliance Petroleum Limited, Asia's largest grass-root petroleum refinery is located in Jamnagar, Gujarat. Proximity to the Middle East gas sources. GSPC is India s only State Government-owned company in the oil and gas exploration and production business. Gujarat tops in e-transactions for government services, Times of India, accessed 03 July State Wise Number of Ports, Indian Ports Association, accessed 05 July Airports, Our Airports, accessed 05 July Indian petroleum and natural gas statistics , Government of India, Ministry of Petroleum & Natural Gas Industrial park development in the state of Gujarat, Gujarat Infrastructure Development Board Page 9

10 Project Information Proposed Location: Dahej-PCPIR Dahej III in Bharuch District is an indicative location for establishment of transmission wire manufacturing plant. Alternatively, other suitable locations along the coast in Gujarat can also be considered. Key highlights of Dahej-PCPIR District Area Bharuch 453 sq. km Population 13,495 Workers 5,163 Literacy rate 83.84% Industrial Infrastructure Logistic hubs 8 Special Economic Zones(SEZs) and 16 industrial estates Ankleshwar and Jhaghadia Petroleum, Chemical and Petrochemical Investment Region (PCPIR) is a specifically delineated investment region planned for the establishment of production facilities for petroleum, chemicals and petrochemicals. Dahej is an ideal location to serve north, west and central India as well as middle east, Africa, Europe and North America. Petrochemical and downstream petrochemical industries, synthetic organic chemicals, packaging industry, shipbuilding/fabricating unit and other small chemical industries have presence in Dahej. Major business conglomerates including Indian Petrochemicals Corporation Limited (IPCL), Petronet LNG and Gujarat Chemical Port Terminal Company Limited (GCPTL) have their facility in Dahej. Dahej PCPIR has rich of natural resources and a well established infrastructure with effluent disposal pipelines, common effluent treatment plants and solid waste disposal sites. Gujarat Industrial Development Corporation (GIDC) accessed on 23 July accessed on 23 July Global energy Summit Gujarat report, Energy and petrochemicals Department, Oil and gas sector profile report, Industries Commissionerate Government of Gujarat Page 10

11 Project Information Logistics and Connectivity Rail Road Existing Dahej is connected with Delhi Mumbai Broad Gauge railway line at Bharuch Proposed Bharuch-Dahej rail line (62 km) Delhi-Mumbai Dedicated Freight Corridor (DFC) will touch the PCPIR on the eastern side Bharuch-Dahej broad gauge line to be connected to the DFC at Dayadra Jn Existing 50 km of four-lane Dahej-Bharuch state highway connects six lane Delhi-Mumbai National Highway and National Expressway Proposed 6 laning of Dahej-Bharuch road 42 km of State Highways within PCPIR to be upgraded to four lane Link Road (Stretch linking PCPIR to NH-8) Air Port Existing 250 km from international airport at Ahmedabad 90 km from domestic airport at Vadodara 85 km from domestic airport at Surat Proposed Greenfield airport for PCPIR Utility Water Existing Old Port of Gujarat Maritime Board (GMB) Solid cargo jetty (4.50 MMTPA) of Birla Copper Proposed Solid cargo port of Adani Group (3 MMTPA) to be expanded to 12 MMTPA Marine Shipbuilding Park by Gujarat Maritime Board Power Gujarat Industrial Development Corporation (GIDC) supplies 33 MGD raw water drawn from Narmada river Gujarat Water Supply and Sewerage Board (GWSSB) provides drinking water through Narmada Canal. Power is available in Dahej from Gujarat Urja Vikas Nigam Ltd. from 220 KV substation, linked with the state grid by 220 KV circuit line accessed on 23 July 2016 Page 11

12 Project Information Oilfield equipment manufacturing process 1 Ingot Inspection Heating Forging Heat treatment Ingot is a piece of metal that is cast into a suitable shape for further processing Inspection of ingot is carried out in order to detect faulty parts at an early stage in manufacturing Heating is a metal working process which is used to alter physical and chemical properties of the ingot at extreme temperature Forging is a metal forming process that involves applying compressive forces to a work piece to deform it and create a desired geometric change to the material. Heat treatment involves heating the metal above the critical temperature and cooling at a rate fast enough to allow the material to transform to a much harder, stronger structure and then tempering. First inspection Mechanical machining Final inspection Packaging Delivery First inspection is performed to check if the manufactured equipment meets all engineering, design and specification requirements In mechanical machining, the inspected equipment is cut into a desired final shape and size by a controlled materialremoval process. Final inspection is performed to for identification of defects, if any, in the manufactured oilfield equipment The finished oilfield equipment is packaged for long distance transportation The packaged oilfield equipment is delivered at it s destination usually involving long distances Key equipment required 2 Induction furnace Arc furnace Oil fired/electric furnace Heavy duty lathe Drilling machine Metal milling machinery Hydraulic press brakes Note: 1 The process depicted is illustrative and may involve further sub-steps and other processes as well 2 The list only includes key equipment and is not exhaustive Page 12

13 Project Information Sourcing of raw material Different grades of steel and other metal alloys are the key raw materials used in oilfield equipment manufacturing. Gujarat has several well-established metal manufacturing industry clusters from where raw material can be easily sourced. Below is a list of the key industry clusters: Industry Foundry, castings and forgings Location (Distance from Dahej) Vadodara (121Km) Anand (132 Km) Ahmedabad (234 Km) Machine tools Rajkot (354 Km) Steel re-rolled products Ahmedabad (234 Km) Fabricated metal products Vadodara (121Km) Ahmedabad (234 Km) Surendranagar (265 Km) Bhavnagar (271Km) Key Players Sector Up stream Mid and down stream Key Manufacturers in India Bharat Heavy Electricals (BHEL), Larsen & Toubro (L&T,) Thermax, JindalPipe, United Drilling, Deep Industries, Praveen Industries, Emerson, Weir BHEL, L&T, Godrej and Boyce, Alfa Laval, Thermax, ISGEC Heavy engineering, Kevin enterprises, Alstomindia, Doosan Manpower Requirement 1 Approximately highly skilled manpower will be required. As the output increases, it can be ramped up to 800-1,000 people within 3-4 years of operation. Note: 1 Manpower requirement is indicative of a comparable project and may vary by individual project Make in India- Oil and Gas Sector Report Oil and gas equipment industry in India, EY report SME clusters in Gujarat, accessed on 27 July 2016 Page 13

14 Project Information Potential collaboration opportunities Participation in Artic Ocean oil exploration with Russian collaboration: US$4 billion deal between Indian and Russian oil companies provides a big opportunity to India to give a major boost to its oil assets overseas. India would be able to participate in Artic Ocean oil exploration programme with Russian collaboration. Thus, giving a boost to oilfield equipment manufacturing industry in the country. Hydrocarbon collaboration with Africa: India is looking for opportunities to collaborate with Africa to explore new opportunities in hydrocarbon exploration and production, export of oilfield services and construction of fertilizer plants. With several mature oil fields across Africa facing decline in production volumes, it will be an opportunity for Indian manufacturers having enhanced oil recovery techniques and expertise to provide support to the African industry. India, with the fourth largest oil-refining capacity in the world, is an ideal partner for Africa s needs. Collaboration with Myanmar and Bangladesh: As GoI plans to make the north-eastern region the energy hub, the Myanmar-Bangladesh gas pipeline project, which was stalled for years, may be revived. Under Hydrocarbon vision 2030, GoI aims to double the north eastern region s oil and gas output, increase refining capabilities and expand product pipelines through this project. Key Considerations Significant competition from low cost Chinese and foreign manufacturers: Global players capture a dominant share of Indian oilfield equipment market as domestic companies are unable to establish themselves due to limited technology availability. Infrastructure constraints: In order to meet global demands, oilfield equipment facility needs to have a large capacity in order to manufacture large size equipment. Due to logistic issues, It takes far less time to import goods from Middle East & Europe than to move the equipment over 200 km on Indian roads. Import of re-manufactured and used equipment: Refurbished and used equipment are increasingly imported due to cost benefits offered by them to Indian oil and gas companies. Make in India- Oil and Gas Sector Report Oil and gas equipment industry in India, EY report accessed on 28 July accessed on 28 July accessed on 28 July 2016 Page 14

15 Project Financials Project cost The total project cost of setting up a n oilfield equipment manufacturing facility at Dahej, Gujarat, will be ~INR 6.75 billion for a production capacity of 1,200 units per annum. Project specifications INR million Land (Area: 100,000 square meters) 144 Rate: (INR1,440 per sq. meter. as of 1 January 2016) 1 Building (plant area, office, store, factory shed, lab and packaging, open space) Built-up area: 50,000 sq. metres. Average rate: INR11,200 per sq. metre. Machinery, working capital and other miscellaneous expenses 6046 Total cost 6750 Payback period Capacity (units) 560 1,200 Average capacity utilization in industry (%) 80% Production (units) 960 Average price per unit (AR) (INR / unit) 2 80,00,000 Industrial average EBITDA margin 16.20% Forecasting revenues at expected industrial growth rate % Time (years) Revenue (INR million) EBITDA (@16.2% of rev.) Undiscounted cumulative cash flows (INR million) Investment (INR million) 6750 Estimated payback period: 4.8 years 1 Land rate is for Dahej (rate may vary depending on the location of the site in Dahej PCPIR). 2 Average price per unit is considered by taking industry average of oilfield pump manufacturers. 3 Industrial growth rate of 5% is considered taking into account the potential growth of oilfield equipment industry in India. Note: The estimated project financials have been calculated based on the capital requirement/investment of a typical oilfield equipment manufacturing unit. However, they may vary by individual project. Page 15

16 Project Financials Means of finance Estimated Debt percentage of total capital investment 50% Debt raised (INR million) 3358 Equity invested (INR million) 3392 Minimum viable size EBIT margin (Industry average) Total operating costs (as% of revenues) Total costs 768) (INR million) Depreciation cost= (%Depreciation of machinery * machinery cost Industry average is used for depreciation% for estimation purposes Machinery cost is considered to be 60% of Machinery, raw materials, component import and other miscellaneous expenses as it is the major cost is attributed to import of electronic components. 2 Emoloyee cost is calculated on the basis of annual payroll of a comparable oilfield equipment manufacturing company Note: 1. Exchange rate of 67.5 is used to convert US$ to INR 2. The estimated project financials have been calculated based on the capital requirement/investment of a typical oilfield equipment manufacturing unit. However, they may vary by individual project. Page % Depreciation cost 1 (10% of PPE cost) 363 Employee cost Finance cost (16% of debt) 537 Others (including insurance and miscellaneous) (2% of total investment) Total fixed cost (FC) (INR million) Variable cost (VC= TC-FC) (INR million) 5233 Variable cost/unit (INR million) 5.5 Average revenue/unit (INR million) Minimum viable size (FC/(AR-VC)) (units) Estimated debt raised (INR crore): ~3360 Estimated minimum viable size: 556 units Comparable projects:

17 Approvals and Incentives Indicative List of Approvals Approvals/clearance required Incorporation of company Registration/Industrial license Allotment of land No objection certificate (NOC) under air and water pollution control acts Approval of construction and country planning Finance Registration under state sales tax act and Central and State excise act Code number for export and import Environmental clearance Hazardous waste import and export approval Exiting business Registrar of companies Concerned Departments Secretariat if industrial assistance (SIA) for large and medium scale industries State Industrial Development Corporation State Pollution Control Board Town and Country planning Municipal and local authorities Chief inspector of factories Pollution control board Electricity board For loans higher than INR 1.5 crore, all India financial institutions like Industrial Development Bank of India(IDBI), Industrial Credit and Investment Corporation of India(ICICI), Industrial Finance Corporation of India(IFCI) etc. Sales tax department Central and state excise department Regional office of director general of foreign trade Ministry of environment, forest and climate change after conducting environment impact assessment (EIA) for any project Ministry of environment, forest and climate change Ministry of corporate affairs Government of Gujarat (GoG) has introduced single window facilitation portal for investors providing undermentioned benefits: Centralized system to monitor applications User friendly and simplified application process for investors The unit shall be facilitated through Investor Facilitation Portal for obtaining all the necessary state approvals/ clearances - Gujarat Textile Policy, Industries and Mines Department, Government of Gujarat, 5 September 2012 Approvals required for setting up plant, _required_for_new_projects.pdf, accessed 8 July 2016 Environment clearance accessed 8 July 2016 Gujarat single window clearance, accessed 8 July 2016 Exiting business, accessed 9 July 2016 Page 17 Manufacturing Sector Profile, Vibrant Gujarat website, 7 October 2014 Industries Commissionerate website, accessed on 1 June 2016 Textile industry welcomes amended TUFS, Business Standard, 2 January 2016 Approvals Licence.pdf, accessed 27 June 2016 List of defence equipment requiring industrial license,

18 Approvals / Incentives Gujarat Industrial Policy 2015 Government of Gujarat has announced an ambitious Industrial Policy, in January 2015, with the objective of creating a healthy and conducive climate for conducting business and augmenting the industrial development of the state. Quantum of incentives The incentives under this policy will be available to all the Talukas listed in Government Resolution dated 25/7/2016 except areas falling within municipal corporations. Category of Project Location (Taluka) % of eligible fixed capital investment entitled for Incentive % of Net VAT reimbursement to the unit % of Net VAT to be paid to Government Incentive period (no. of years) Net VAT incentives Net VAT incentive will be reimbursed to the industrial undertaking in one financial year will not exceed one-tenth of the total amount of eligible incentive. Classification of the Project Amount (in INR crore) Ultra Mega Industrial Unit 500 Mega industrial Unit 400 Large Industrial Unit 150 Micro, Small or Medium Industrial Unit 50 Industries in the manufacturing sector can opt for either the general incentives under the Gujarat Industrial Policy or the incentives as provided below: As per the Gujarat Industrial Policy 2015, following are the key incentives provided to the labour intensive industries such as forging and casting industry: Interest Subsidy :7% maximum up to INR 1 crore per annum for a period of 5 years. VAT related incentives: Only 70% of eligible fixed capital investment of eligible unit will be considered for reimbursement. The eligible unit shall be entitled for reimbursement up to 1/5th of eligible limit in a particular year. Payroll assistance will be per person & additional INR 300 per women employment. In case of expansion this payroll assistance will be provided only for additional domicile employees. Assistance will be eligible to new enterprise as well as to existing enterprise for one time expansion. Page 18

19 Approvals and Incentives Incentives from Government of India Green technology and practices: 5% interest in reimbursement and 10% capital subsidy for the production of equipment/machines/devices for controlling pollution, reducing energy consumption and water conservation. A 10% one-time capital subsidy for units practising zero water discharge. A rebate on water cess for setting up wastewater recycling facilities. Incentives for renewable energy under the existing schemes. Industries Commissionerate website, accessed on 17 August 2016 Make in India website, Government of India, accessed on 17 August 2016 Page 19

20 Ministry of Heavy Industries and Public Enterprises Industries & Mines Department Gujarat Industrial Development Corporation Office of Industries Commissioner Industrial Extension Bureau This project profile is based on preliminary study to facilitate prospective entrepreneurs to assess a prima facie scope. It is, however, advisable to get a detailed feasibility study prepared before taking a final investment decision. Office of The Industries Commissionerate Block No. 1, 2nd Floor, Udyog Bhavan, Gandhinagar Gujarat Ph.: / ID: iccord@gujarat.gov.in