Global Synfuel – Financial and Strategic Appraisal of a Coal-To-Liquid ProjectGlobal SynfuelsFinancial and Strategic Appraisal of a Coal-to-Liquid ProjectCase Summary:There is an increasing demand for fossil fuels in the world as well as India in the past two decades. About two-third of the fuel consumed in India is being imported. This has a significant impact on the foreign exchange reserves as well the Current Account Deficit (CAD) of India. Also, fossil fuel reserves are limited. Hence, there is an urgent need for alternative sources of fuel. In order to address these issues, the Government of India turned towards the Coal-to-Liquid (CTL) Technology that uses coal as a raw material to produce fuels like diesel, petroleum etc. Global Steel and Power Limited (GSPL) was shortlisted by the government to build a CTL plant in February 2009. GSPL set up a subsidiary named âGlobal Synfuelsâ, headed by Jai Patil, Vice President â CTL, GSPL. However, the financial viability of such a large project, given that the government was not providing any subsidy was under question. Jai Patil has to evaluate the project and appraise it financially in order to make a decision to go ahead with the project. Question 1: How would the CTL project be a strategic fit for GSPL and how would it enhance Indiaâs energy security?CTL as a strategic fit for GSPLGSPL is a major player in Steel, Power, Mining, Oil & Gas and Infrastructure. It owned businesses in Asia, South America, Africa and Australia. Bagging such a large alternative fuel contract in a vast and emerging economy like India would benefit its portfolio of businesses. It would potentially increase the size of the company and and itâs profitability in a huge way as well.
GSPL is renowned around the world for being a high value creator. Such a large investment in an alternative fuel technology would fit perfectly with that image, given the rapid rate at which fossil fuels are depleting off the face of the earth. It is also known for its enterprising spirit and willingness to explore new technologies. Investment in CTL technology would be a strategic fit to this image also. CTL technology is known to be an environment pollutant. However, Global Synfuels plans to implement Carbon Capture and Storage (CCS) Technologies in order to reduce CO2 emissions by 99%. This complements GSPLâs environment friendly image as well. GSPL owns captive coal and iron ore mines. The primary raw material in CTL technology is coal. Hence, through strategic backward integration, GSPL can take full advantage of this situation.Enhancement of Indiaâs energy securityThe overwhelming dependence of our country on rapidly depleting fossil fuels is a major concern. The cascading effect of this is the heavy dependence on import of crude oil (nearly 2/3rd of crude oil used in India is imported). This, in turn, takes a huge toll on our foreign reserves and puts a lot of pressure on the Current Account Deficit (CAD). Alternative fuel sources are the most viable solutions to tackle these problems and hence a CTL project would greatly improve Indiaâs energy security.
New Jaxx 2.0If this project is successful, many Indian and globally dependent countries could see high quality technology developed into a carbon pollution reducing technology – a truly world class solution.
If such technology is able to bring about improvements in India and other developed nations, there is certainly much evidence of a future for the fuel. If we follow the path of GSPL, India and its allies and consider the above, we can start investing in the future generation of technology with the right set of circumstances:
In fact, India now has some of the first technologies for a green future, such as wind turbines (one of the most significant investments undertaken over the last decade by GSPL), and solar arrays. Although other leaders are already building such technologies into their new energy infrastructure, the most important factor is China. This is an interesting development, given India’s long history regarding clean technologies, and the rapid pace of development. Indeed, GSPL is a large investment in a potentially new kind of energy source. With the need to create more clean energy technologies, even India may want to make a conscious choice about not moving ahead with its own clean energy policy.Even if GSPL were able to implement the following technology and see India grow into an advanced source of clean energy energy, they would still face huge costs, and the risks would be great. For example, it would require a large, growing country to acquire it for use. Also, at least one of India’s largest mining companies must hold India responsible for producing crude oil in the case of natural gas. In this case, these costs are also high since the potential to extract additional energy through such a large, growing country is very high. In addition, the price of natural gas on the global commodity market is extremely low. There is also high possibility of the country developing a ‘carbon pricing model’ to cover a greater proportion of the demand for natural gas, which in turn may produce even more hydrocarbons (and hence an increase in the cost of oil development. Additionally, the growth of hydrocarbon production is likely to further exacerbate this issue on its own. The possibility of further hydrocarbons being diverted to other countries without full disclosure to shareholders would also pose huge challenges. A high level of environmental degradation is an extremely real risk which cannot be waived. That said, given the growing potential of renewable energy sources (that is, clean energy that is both renewable and renewable fuel free), there could be a very significant economic incentive for India to pursue this long-term trend.
In some years, the state and federal government will be able to use their legal authority regarding power plant pollution as a bargaining chip.
There are also strong indications that there are many states in the West. That is, even though a majority of India’s non-proliferation deals have been struck over the past few decadesâand despite India’s long history of blocking US-based nuclear programs and its current lack of recognition for this, it seems likely that India is trying to become a global leader and start building a program that addresses these particular issues.
In the long term, this may also be the case for a range of other countries. On the one hand, some may like to invest in the clean energy system of large countries, while others have less economic incentive to invest in clean energy. But also, there is increasing interest in countries with a long history of development of clean water. Indeed, as it is becoming more common in the Western world, some have expressed concern that developing nations, such as Korea and China, may take advantage of the ‘clean water’ initiative. If this is the case, it may increase the need for some action by policymakers, and the potential for developing nations to invest into clean energy and clean land. There is also the possibility that the growth of renewables and batteries, such as solar, could cause massive cost savings if used wisely in some areas.
However, there are risks in developing countries that may allow some developing nations to divert energy or land resources to clean or other renewable sources. Many countries have been building their own power plants and even some have been building them from scratch (for example, Saudi Arabia). The potential that they will take actions necessary to improve or develop their existing infrastructure to meet the needs of the clean energy industry is a real problem. Similarly, nuclear and clean energy are being built for many other reasonsâas far as the needs of the developing world is concerned, nuclear can easily replace human and commercial power plants. As such, it has to be kept in mind that some developing states are often developing a large number of nuclear power plants, and the potential savings are very small compared to the need to develop nuclear power plants in large urban areas.
Despite these risks, there is an increasing demand as people are able to take advantage of clean energy services (such as wind and solar). In the US, there has been an uptick in the number of people choosing renewables for home energy generation. Furthermore, in 2009, the number of Americans living in states with nuclear power stations increased to over 4,000. Currently, these are only a few communities. To bring the power of such renewable energy into homes and towns around