Global Synfuel - Financial and Strategic Appraisal of a Coal-To-Liquid Project

Global Synfuels

Financial and Strategic Appraisal of a Coal-to-Liquid Project

Case 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 ‘Global Synfuels’, headed by Jai Patil, Vice President – 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 India’s energy security?

CTL as a strategic fit for GSPL

GSPL 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 it’s 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 GSPL’s 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 India’s energy security

The 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 India’s energy security.