Question

KrisEnergy Company Limited is involved in searching for locations to drill for oil. The company holds oil exploration rights with 13 licenses in Bangladesh, Cambodia, Indonesia, Thailand, and Vietnam covering a gross acreage of approximately 33,124 sq. km. It operates nine of the contract areas.

KrisEnergy’s oil portfolio contains two producing assets in the Gulf of Thailand and the onshore gas field in Bangladesh. Nine contract areas contain a combination of development projects, appraisal targets, and exploration prospects.

The company hires professional experts like geoscientists, engineers and operations specialists each have at least 20 years of experience in the upstream oil and gas industry in South East Asia and have a successful track record across every facet of the exploration and production (E&P) life cycle. Through the firm’s experience and regional focus, KrisEnergy Company has firmly established relationships with national governments, service providers, and other E&P companies in South East Asia.

With the recent spike in crude oil prices, KrisEnergy Company Ltd is considering restructuring part of their facility for the production of crude oil products that could help to avoid waste. The project feasibility committee has collated forecasted investments and financing cash flows and other information for this project. The cost of capital is 12%.

KrisEnergy decided to create a product that could help avoid that waste. The company is appraising the feasibility of investing in a new production line that converts crude oil into fuel oil and gasoline, the material can be converted to a variety of products that are used in everyday life. This also helps increase revenues of plastics, detergent, pesticides, and other chemical manufacturers respectively. The following information involves required investment, projected revenues and expenses, and other information for this project.

• Core machinery assets and production facilities would have to be acquired and installed. These assets are estimated to cost $100 million, including installation costs. These would have to be fully paid before the commencement of production.
• The proposed production facility will need to re-claim an entire lower floor of the factory building, which is currently being leased out to a steel product processor, at a monthly rental of $200 000.
  

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• The newly acquired assets are expected to have a 10-year useful life, till the next technological disruption. There is no scrap value at the end of the asset’s life. Depreciation on the new assets will be at a cost over 10 years using a straight-line method.
• Annual sales of gasoline in dollars over the next 10 years are projected to be as follows:
  
• Production would require an increase of working capital of $4 million to finance operations such as inventory purchases. Current liabilities will also be expected to increase by $1.5 million. This net working capital will be released at the end of the asset’s life.
• Each gallon of gasoline would be $10.107. The per liter of gasoline would sell for $2.7.
• Monthly fixed expense (excluding depreciation) is projected at $1.5 million. Included in fixed expenses are administration, sales, and marketing expenses. Variable costs of production of gasoline would be $1.95 pe.
• Krisenergy pays a corporate tax rate of 18%. Capital gain on asset disposal is charged at the corporate tax rate.