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FABO Oil and Gas Company

Principals of the Business:SHAHJAHAN MOHAMMED

CEO

Corporate Office:1157, Agrabad Access Road

Hajeepara, Singapore Market, Unit-2, 3rd FloorChittagong, Bangladesh.

Tel: +88-031-710666, Fax: +88-031-710666Mobile: +88-01711-797748

Dhaka Office:Mahtab Centre, Suite-03, 12 Floor

177 Shahid Sayed Nazrul Islam SaraniBijoynagar, Dhaka-1000, Bangladesh

Tel: 01711-797748E-mail: jahan@btcl.net.bd, jahanfabo@gmail.com

The Project at a GlanceNature of the Business:

FABO oil & gas company is going to be a LP gas company in Bangladesh. The business plant will be operate on import based LPG (Liquefied Petroleum Gas)

and supply bottled LPG to the households cooking, restaurant, Ship breaking yard and industry in Bangladesh through its effective supply chain and distribution network. The company will construct a LPG storage and Bottling plant at Goartakia, Mirsarai, Chittagong, Bangladesh.

Statement of Financing Needed:The business will require a total investment of BDT 1000 Million (USD 12.82 million) for covering its capital expenditures. The primary start-up summary is shown in the graph below:

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Figure 1: Start-up Summary

Statement of Confidentiality of the Report

The undersigned reader acknowledges that the information provided in this business plan is confidential; therefore, the reader agrees not to disclose it without the express written permission of FABO Oil and Gas Company.

It is acknowledged by the reader that information to be furnished in this business plan is in all respects confidential in nature, other than information that is in the public domain through other means, and that any disclosure or use of this confidential information by the reader may cause serious harm or damage to FABO Oil and Gas Company.

Upon request, this document is to be immediately returned to FABO Oil and Gas Company.

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Executive Summary FABO Oil and Gas Company is committed to be a fuel supply company

formed with the mission to provide safe, economically feasible and environmentally friendly cooking & industrial solution to the energy-starved urban and rural households and various users in Bangladesh through its LPG Bottling facilities with a capacity of 20000 MT/ year which will distributed throughout the country through an effective supply chain network.

Bangladesh, a home to 150 million has a severe energy crisis. More than 90% of the population depends on solid biomass for cooking due to the lack of a viable cooking fuel. Only 12% of the total production of natural gas is available for household cooking purpose. As a result there is a growing demand for alternative cleaner fuel in the country.

Among all the existing fuel solutions LPG has several advantages over traditional fuels. LPG is an eco-friendly, efficient and time-saving cooking fuels. At present, only 100,000 MT LPG is being supplied in the market against the actual demand of 500,000 MT to 800000 MT per year. Thus there is a huge demand-supply gap of 400,000-700000 MT LPG/year. Additionally, the market has been growing recently at a double digit growth rate (18% growth rate in 2012). Thus the sector is highly promising with high profit potential.

FABO Oil and Gas Company understands the great potential that lies in the business and thus it will be incorporated as a joint stock company to market LPG to urban and rural households initially. The secondary and tertiary target market of the company will include the commercial units (Hotels, Restaurants, industry) and Small and Cottage Industries and Food processing industries in all the six divisions of Bangladesh except Sylhet.

Initially, the company will market LPG in 12 kg cylinders.The price per 12 kg cylinder of LPG will be set at BDT 1300 which will be lower than the price offered by its competitors.

FABO Oil and Gas Company will initially import LPG jointly with Premier LPG Company and bottle the LPG in its bottling plant located at Mirsarai, Chittagong. The bottled LPG will be supplied to all the upazillas and unions of the country through individual entrepreneurs and Dealers. After the construction of import terminal at Sitakunda by the BPC (Bangladesh Petroleum Corporation), the company will import LPG and store it in central storage from which LPG will be supplied to high-rise buildings and flats through individual metering system. In the tertiary stage, bulk LPG will be supplied to small and cottage industries and Food processing industries in the needed areas.

The LPG market is dominated by 4-5 major players namely: Bangladesh Petroleum Corporation (BPC), Bashundhara LPG, Kleenheat Gas and TotalGaz Bangladesh. The state-owned BPC accounts for 20% of the current market supply whereas the rest 80% is dominated by local importers.

Initially, the Company will recruit a total of 12 expertise and 23 Executive staffs. To ensure proper maintenance and safe handling of the plant, FABO Oil and Gas Company will ensure extensive training of its employees.

The financial highlight of the project is given below:

Through its operation, FABO Oil and Gas Company is expected to reduce the

energy crisis of Bangladesh and will eliminate the current malpractices in the market.

Total Investment Cost BDT 1000 MillionUSD 12.82 million

Net Present Value (NPV) USD 6.63 Million BDT 516.93 Million

Internal Rate of Return (IRR) 20.57%Payback period 10.16 yearsProject Implementation Period 24 monthsOperational Period (Project Life) Unlimited renewableMode of Financing Equity

Table of Contents

FABO Oil and Gas Company...................................................................................1The Project at a Glance..........................................................................................2

Nature of the Business:......................................................................................2Statement of Financing Needed:........................................................................2

Statement of Confidentiality of the Report............................................................3Executive Summary...............................................................................................4The Problem: Fuel Crisis in Bangladesh.................................................................8Business Overview...............................................................................................10

Business Model of FABO oil & gas company.....................................................10FABO oil & gas company at a Glance...............................................................11

Market Analysis...................................................................................................13Market Opportunity..........................................................................................13The Demand-Supply Situation..........................................................................13

Demand Analysis by RTM Engineering Limited..............................................14Demand Analysis by M/S Martech International Inc.......................................14

Supply Situation analysis..................................................................................14Government-owned Suppliers..........................................................................15Private Importers..............................................................................................15Implementation Plan.........................................................................................18

Financial Analysis................................................................................................20Assumptions.....................................................................................................20Source of Capital..............................................................................................20Financial Highlights..........................................................................................21

Financial Statement Analysis...............................................................................22Sales Revenue..................................................................................................22Cost of Sales.....................................................................................................23Cash flow Statement........................................................................................26Return on Investment.......................................................................................27

The Problem: Fuel Crisis in Bangladeshccess to modern energy and fuel is indispensable in developing countries and it is a key for improving life standard of people. Bangladesh is a promising country of 150 million people living in 32 million households. It A

is the 6th most densely populated country in world with 1142 people per sq. km on average. 72% of the population (25,012,806 households) lives in Biomass fuel user areas and 28% lives below the poverty line (Ministry ofPower, Energy and Mineral Resources, 2013). Like most other developing countries, Bangladesh faces two problems: growing scarcity of traditional fuels (Fuel woods and biomass) and devastating foreign exchange bill for purchasing essential liquid petroleum fuel requirements. In the case of Bangladesh, richly endowed as it is with natural gas reserves, it may seem surprising that both of these crises persist and, if anything, are worsening. The problem, also common to other gas-rich developing countries, is the difficulty of deployment of these gas resources as more than partial substitutes for existing fuels. Most of the traditional fuels are used primarily for cooking by the rural and poorer urban households. Even in the urban centers it is difficult to justify, on pure economic grounds, the capital-intensive cost of the mains and individual connections for a relatively small cooking fuel requirement. In the case of the rural households, gas connections are generally out of the question, regardless of individual fuel requirements. Even with subsidized connections, natural gas has had limited impact on the urban household energy scene in Bangladesh. The rate of urban household formation in the areas served by gas far exceeds the rate at which new household gas connections are being made. In the case of imported petroleum fuels, the problem is that the end-users are now generally limited to a few critical applications for which there is little scope for substitution by natural gas, e. g. kerosene in rural household lighting; urban household lighting and cooking and small commercial cooking; gasoline and diesel in transport and agricultural equipment; and jet fuel in transport. Another problem which Bangladesh has in deployment of its gas resources is the major North-South (Jamuna-Ganges-Meghna) river system which divides the country. All the gas reserves found to date are located on the east side of this river system. The difficulty and attendant high capital cost of a river crossing has so far excluded west side consumers from the benefits of natural gas as a fuel. It should be emphasized, however, that even if the west side were connected and the gas network developed to connect all major urban centers (as will soon be the case in the east, with completion of Brahmaputra Basin) there would be limited impact on the household energy balance and on the two “crisis” areas depletion of fuel wood resources and foreign exchange cost of importing liquid fuels. With only 12% of the total production of pipeline gas lighting up domestic kitchen burners in the country, most domestic users have to rely on alternate sources of fuel, of which liquefied petroleum gas (LPG) is one. To tackle the severely crippling energy crisis in Bangladesh, the government has recently given permission to the Private Sector companies to take part in the importing of fuel to ease the critical situation of the country.

Business OverviewBusiness Model of FABO oil & gas company

o establish a safe, economically feasible and environmentally accountable cooking fuel bottling and supply system FABO oil & gas company will import bulk LPG from source country/ local sources. Initially the capacity of

the project will be 20000 MT/year. This LPG Bottling Project is expected to meet the growing demand of LP Gas, especially by mitigating existing fuel crisis in our country with its production capacity and effective distribution channels.

TFABO oil & gas company plans to inaugurate this project by January 20145 In near future, to enhance the import facilities of this project a terminal will be constructed at Sitakundaby the BPC (Bangladesh Petroleum Corporation), Chittagong for the expansion of its business and then the project will be operated by establishing more satellite plants/depots in different districts of Bangladesh. For the easy transportation of the useable products to the different parts of the country from the main bottling plant at Mirsarai, Chittagong, waterways will be preferred mostly. Considering the purchasing capacity of our targeted users in Upazila/Unions in the potential areas, we have planned to procure, bottle and distribute a unique 6.00 kg & 45 kg cylinders along with our 12.00 kg cylinders for small household and large commercial use in future.

Project Title LPG Storage & Bottling Plant at Goartakia, Mirsarai, Chittagong.

Project Location Goartakia, Mirsarai, Chittagong.

Approving Ministry/Division

Ministry of Power, Energy and Mineral Resources/ Energy and Mineral Resources Division & BPC (Bangladesh Petroleum Corporation)

Executing Agency FABO oil & gas company.

FABO oil & gas company at a Glance

Problem StatementAbove 90% of both Urban and Rural population of Bangladesh do not have a

source of Efficient, Eco-friendly, Available Cooking Fuel SolutionObjective

To establish a safe, economically feasible and environmentally accountable

cooking fuel bottling and supply systemTo meet the growing demand of LP Gas with its production capacity and

effective distribution channelsTo form a safe and environmentally responsible operation and to make

significant contribution to Bangladesh’s sustainable economic prosperity as well as energy equilibrium

Rationale AssumptionsGovernment do not have any sustainable solution to face the energy crisis

Initiative from private sector to mitigate the energy crisis is highly appreciated by Government and such initiatives can improve the crisis scenario

Rural people need efficient and eco-friendly solution within affordable buying range

Biomass fuel users and Rural people will switch to LP Gas if it is sold at an affordable price

Inputs Activities OutputsBulk LPG will be Collect on import based from source country/ Local sources/ private importersEfficient Distribution system (mostly waterways)LPG Import Terminal

Distribution of bottled LPG to all districts of the six divisions of Bangladesh (except Sylhet initially) Supply of LPG to individual entrepreneurs Supply of LPG from a centrally installed storage tank to all flats of high-rise buildings through individual meter system Supply of LPG to small/cottage industries and food/vegetables processing units in rural areas

# of people having access to cooking fuel# households being saved from respiratory diseases caused due to poisonous smoke emission# of small/ cottage industries getting access to gas# of Flat dwellers in urban areas getting access to gas in their houses# of local entrepreneurs and Dealers

Outcomes

Short Term Long Term

Better Fuel solution for cooking purpose Improved energy scenario

Increased productivity of rural households Better supply of fuel to meet the growing demand of the consumers

Reduced environment pollution Better coverage of Gas connectivity nationwide

Market AnalysisMarket Opportunity

here is a huge need for Bottled LPG in urban and rural areas of Bangladesh. Pipeline natural gas connections to households had been stopped for almost 3 years. Though Government has started to provide

new natural gas lines to the households within a very limited scope very recently, it has been confirmed by the policymakers that in future no pipeline natural gas would be used for cooking purpose. Thus, LPG would be one of the viable options for cooking for most of the households by replacing pipelined natural gas, kerosene and fuel woods.

TBesides the households, there are several industries like glass and ceramics, auto bricks etc. where they have to use burners. In absence of a continuous supply of natural gas, LPG is the possible solution for these industries. For welding purpose use of LPG is increasing very fast. Despite the huge demand, the initiative from public and private sector in the LPG sector has been low in the last few years. Every year the demand gap is being increased due to the scarcity of alternative fuel resources. Under this circumstance, private sector LPG Bottling and supply projects have a huge growth prospect. FABO Oil and Gas Company has identified this huge market void and plans to market its products through efficient distribution system to ensure a sustainable solution to the ongoing energy crisis in Bangladesh. The LPG sector has been experiencing high growth; according to the data of 2012, the market experienced a growth rate of 18%.1

The Demand-Supply SituationThere is a huge demand-supply gap in LPG sector in Bangladesh. According to Ministry of Energy of Bangladesh, the gap was over 400,000 MT in the year 2012. And it is obvious that this scarcity will be increasing day by day. Two feasibility studies regarding prospect of LPG as a cooking fuel in Bangladesh have already been done by two foreign companies, abstract of the studies are presented below:

Demand Analysis by RTM Engineering Limited

RTM Engineering Ltd., Calgary, Alberta, Canada conducted a feasibility study in 1989 to determine demand of LPG in Bangladesh on behalf of Canadian International Development Agency. RTM determined 2,589,600 LPG Potential Urban Households in Bangladesh in 1995 with a yearly growth rate of 4% and these Potential Urban Households will use 1.45 cylinder LPG (1 cylinder = 12.50 Kg) per month. The incomes of these Potential Urban Households were over 1http://www.thedailystar.net/beta2/news/lpg-prices-go-up/

Tk.2000.00 per month at that time. RTM’s projection of yearly LPG demand in Bangladesh in 1995 for Urban Household Cooking were as follows-Yearly LPG demand in Bangladesh in 1995 for Urban Household Cooking with a growth rate of 4% over 1989

In the year 2012 demand of LPG at a growth rate of 4% in Bangladesh as per RTM’s projection is approximately 5.63x1.68 Lac MT = 9.46 Lac MT. But presently actual use of LPG in Bangladesh is around 100,000 MT which is about 10% of 9.46 Lac MT and rest 90% of cooking fuels are being provided by natural gas, kerosene, fire woods etc.

Demand Analysis by M/S Martech International Inc.

In 1997 Bangladesh Petroleum Corporation and Petronas, Malyasia jointly appointed M/s. Martech International, Inc, USA to conduct a feasibility study on the demand of LPG in Bangladesh. Martech’s yearly projection of LPG demand in Bangladesh in the years 1997, 2000, 2005 and 2010 were respectively 675,503 MT, 745,124 MT, 889,347 MT and 1,060,656 MT. According to Bangladesh Petroleum Corporation, at present, the annual demand for LPG in Bangladesh is not less than 500,000 MT.2

Supply Situation analysisLPG is being supplied in Bangladesh by both Government and Private sectors simultaneously. State-owned LPG producers supply 20% of the total supply and the rest 80% is supplied by Private sector importers. Private firms import 80,000 MT of LPG, while the government produces 20,000 MT a year against the actual annual demand of 500,000 MT.3

A brief overview of the Capacity of the government-owned suppliers and private importers are given below:

Government-owned SuppliersLP Gas Limited, the first Govt. owned LPG Bottling Plant of the country was installed at North Patenga, Chittagong based on LPG available from crude oil processing at ERL in the year 1977-78 as a project of Bangladesh Petroleum Corporation (BPC). Installing capacity of this Plant was 6000 MT/year. With the enhancement of LPG production by ERL, the capacity of LP Gas Limited (LPGL) was subsequently increased to its highest capacity of 15000 MT/year in different phases. A second LPG bottling Plant of 8500 MT/year capacity was

2 Source: BPC Document (Development project Proposal for 100000 MTPA Capacity LPG Bottling Plant at Mongla, Bagerhat)3 Source: http://www.dhakatribune.com/economy/2013/may/03/chevron-plans-set-lpg-plant-bibiyana#sthash.hRgthX38.dpuf

Yearly LPG demand in Bangladesh in 1995=2,589,600 x 1.45 x 12.5 x 12/1000 MT = 563,238 MT.

Actual Demand of LPG: 500,000 MT/year

Current Supply of LPG: 100,000 MT/year

Government Supply of LPG: 20,000 MT/year

Private Sector Supply of

LPG: 80,000 MT/year

installed in 1997-98 as a project of BPC at Kailashtilla, Sylhet, based on LPG extracted from Natural Gas Liquid (NGL) fractionation by RPGCL. It couldn’t achieve its highest capacity as yet because of the shortage of quality NGL production from different gas fields.

Private ImportersThere are four import-based LPG Bottling Plants in Bangladesh:

Supplier CapacityM/s. Premier LPG 60,000 MTM/s. Bashundhara LPG 70,000 MTM/s. Kleenheat LPG 35,000 MTM/s. Summit LPG 35,000 MT

These companies at present altogether bottle around 70,000 to 80,000 MT per

year. Total LPG production in the country is inadequate against estimated demand of not less than 500,000 MT/year which is being radically increased day by day because of short supply of natural gas as cooking fuelThe overall demand-supply gap can be represented in the diagram below:

Figure 2: Demand-Supply Gap

From the above analysis it can be seen that, about 20% of the total demand is currently being met by the existing players in the industry while there is a huge gap for the rest 80% demand. Yearly Bangladesh has a demand –gap of 400,000 MT of LPG which cannot be met by the existing players of the industry based on their existing capacity. Although Government is now allowing private sector players to come to the business, long bureaucratic procedures for gaining permission will require huge time for those companies to implement their plan. Due to the huge demand-supply mismatch and relatively low number of players in the industry, the companies can control the price as they want which in turn causes pressure on the households of Bangladesh.Under this scenario, FABO Oil and Gas Company possess high profit potential as the company have already completed all its necessary paper-work and gathered government permission.

Demand: 500,000 MT/year

Supply: 100,000 MT/ year

Gap: 400,000 MT/ year

Implementation Plan

Financial AnalysisAssumptions

1 US Dollar BDT 78Required Rate of Return 15%Capacity utilization in year 2 40%Capacity utilization in year 3 55%Capacity utilization in year 4 65%Capacity utilization in year 5 75%Depreciation on Machinery and Equipment

10%

Depreciation on Civil works 5%Depreciation on Vehicles 20% with negligible residual valueDepreciation on Office Equipments 33.33% with negligible residual valueTax rate 37.5%

Projected financials are prepared for 20 years assuming a maximum capacity of 20000 MT. But the management has a plan to increase the capacity to 50000n MT in future. It is estimated that this increase in capacity will only incur additional working capital requirement. For this reason, after sixth year, a significant amount of cash holding is considered to meet up the increased expenses for the expanded operations.

Source of CapitalTotal investment required for the project is BDT 1,000 Million. 75% of the investment will be spent on foreign costs and the rest 25%% will be spent on local costs. In year 0 (July 2014-June 2015) Capital investment will be made for land development, for building temporary facilities, temporary access preparation, land cleaning, laydown areas and site cleaning, pile load test, PIT tests and other testing inspection, Transportation and Office equipment purchasing.In year 1 (July 2015-Dec 2016), Capital investment will be made for civil construction activities and Machineries and equipment purchasing. Other activities will require capital investment in both the years.

Financial HighlightsTotal Investment Cost BDT 1000 Million

USD 12.82 millionNet Present Value (NPV) USD 6.63 Million

BDT 516.93 MillionInternal Rate of Return (IRR) 20.57%Payback period 10.16 yearsProject Implementation Period 24 monthsOperational Period (Project Life) Unlimited renewableMode of Financing Equity

Financial Statement AnalysisSales Revenue

t is projected that in the 2nd year of its operation FABO Gas and Oil Company will generate a gross sales revenue of BDT 1111.11 million (USD 14.25 million). Majority (78%) of this revenue will come from LPG selling which will

be sold at BDT 1300 (USD 16.67) per 12 kg. The rest 22% of the revenue will be generated from selling cylinders at BDT 2200 (USD 28.21). The Sales Revenue projection of first 5 years of the project is shown below:

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Cost of SalesCost of Sales in the 2nd year of operation will be BDT 953 million (USD 12.12 million). The expense is forecasted to be BDT 1099.97 (USD 14.10) million, BDT 1257.74 (USD 16.12) million and BDT 1441.35 (USD 18.48) million in the next three years. Majority of the cost will be incurred to procure the raw materials and cylinders. The graph below shows the total cost of sales over the 20 years of the operation:

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Gross Profit MarginThe gross margin for the second to eighth years of operation will be 13.86%, 13.84%, 13.95%, 14.06%, 14.42%, 14.70% and 14.28%. The gross margin will show a steady growth over the remaning years of the operations in the market. The growth in gross margin for the twenty years of operation is shown in the graph below:

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Net Profit

Net profit in the 2nd year of operation will stand at BDT 154.58 million (USD 1.98 million) which will grow to BDT 184.07 million (USD 2.36 million) in the next year. The subsequent years will see high growth in profit due to decreasing cost of Cylinders. The growth in net profit is shown in the graph below:

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Cash flow StatementFABO Oil and Gas Company is an all equity firm. 75% of the equity will be provided by the foreign investors and 25% of the equity will be provided by the local investors. The projections are made with the capacity consideration of 20000MT LPG per year. But, since the demand supply gap is quite high, it is expected to increase the production to 50000Mt per year after 10th year. For the working capital and other financing needs huge podsitive cash balance is kept for that period.The loan will be paid within 5 years and due to the initial debt repayment expenses, the net cash flow will be negative for the first two years. From the third year of operation the net cash flow from operating activities will be higher than the cash outflow from financing activities. The following graph shows the net cash flow and cash balance for twenty years of the company’s operation:

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Return on InvestmentThe Return on Investment will show a high growth pattern over the years and reach from 7.03% to 18% from second to sixth year. The growth in ROI is shown in the graph below:

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