Improvement of strategic investment decision making process in petrochemicals industry
List of Authors
  • Mohd Khairi Abu Husain , Shahrom Irwani M Sani

Keyword
  • strategic investment decision, capital budgeting techniques, net present value, internal rate of return, discounted cash flow, cost of capital

Abstract
  • Joint ventures, commercial conglomerates, and public-private partnerships must go through various stages of planning prior constructing mega-petrochemical projects. One of the most important steps is the Final Investment Decision (FID). Before approving and ordering large-scale petrochemical project construction, corporations and project partners must follow these steps. FID comes after careful preparation and before project implementation. Market attractiveness, proven production technology, and high investment return affect FID. The project's investment return—determined by IRR, NPV, and PP—is the main factor. An approved FID shows the company's willingness to invest and make a profit, while an unapproved FID prevents further losses if the project goes ahead. NPV, IRR, and PP not meeting criteria prevents a final investment decision. Economic return failure is caused by high taxes, total investment costs, product spread, capital costs, and operating costs. This study aims to improve the current techno-economic model in the petrochemicals industry's final investment decision process by investigating the main parameters of existing FID techno-economic models, developing a new model for the industry, and validating its accuracy. This study began by populating relevant final investment decision criteria, assembling production technology techno-economic data, and determining techno-economic parameters. This study is expected to improve the current techno-economic model and allow more projects to achieve successful FID for long-term profit, while preventing further losses if the economic return is still unfavourable by incorporating sensitivity and real option analysis. An improved techno-economic model should meet the needs of the petrochemical industry and provide prominent outputs for business risk management by allowing precise input consideration.

Reference
  • 1. Agca, S., & Cotone, G. (2019). Introduction to Process Plant Projects. CRC Press.

    2. Atkinson, R. (1999). Project management cost, time and quality. International Journal of Project Management, 17(6), 337–342.

    3. Baker, H. K., & Powell, G. E. (2005). Understanding Financial Management. Blackwell Publishing.

    4. Bas, E. (2013). A robust approach to the decision rules of NPV and IRR for simple projects. Applied Mathematics and Computation, 219(11), 5901–5908. https://doi.org/10.1016/j.amc.2012.12.031

    5. Bhatnagar, A. B., & Srivastava, A. K. (2022). Decision-Making for Capital Budgeting with Using Electre and Copras Methods of Multi-Criteria. Journal of Positive School Psychology, 2022(6), 9609–9620. http://journalppw.com

    6. Biezma, M. V., & San Cristóbal, J. R. (2006). Investment criteria for the selection of cogeneration plants - A state of the art review. Applied Thermal Engineering, 26(5–6), 583–588. https://doi.org/10.1016/j.applthermaleng.2005.07.006

    7. BioAge Group. (2020, July 7). Dominion Energy & Duke Energy cancel $8B Atlantic Coast Pipeline due to delays and cost uncertainty.

    8. Blackridge. (2022, June 15). What is FID? Meaning, Definition and Complete Guide to Final Investment Decision. Blackridge Research & Consulting.

    9. Cauwenbergh, A. Van, Durinck, E., Martens, R., Laveren, E., & Bogaert, I. (1996). On the role and function of formal analysis in strategic investment decision processes: results from an empirical study in Belgium. In Management Accounting Research (Vol. 7).

    10. Clews, R. J. (2016). Project Finance for the International Petroleum Industry (S. Bentley & S. Ikeda, Eds.; 1st ed.). Elsevier.

    11. Dayanada, Don. (2002). Capital budgeting : financial appraisal of investment projects. Cambridge University Press.

    12. Department of Energy and Climate Change. (2013). Final Investment Decision Enabling for Renewables Update 2: Investment Contract Allocation.

    13. Disavino, S. (2021, May 19). For LNG developers, another year of canceled projects. Reuters.

    14. Jovanovic, P. (1999). Application of sensitivity analysis in investment project evaluation under uncertainty and risk. International Journal of Project Management, 17(4), 217–222.

    15. Levy, H. (2016). Stochastic Dominance Investment Decision Making under Uncertainty Third Edition (3rd ed.). Springer.

    16. Manaf, N. A., & Abbas, A. (2021). Investment decision making for carbon capture and storage technology in high efficiency, low-emission coal-fired power plant via dynamic techno-economic-policy evaluation framework: Case study in China. Chemical Engineering Transactions, 83, 25–30. https://doi.org/10.3303/CET2183005

    17. Marchioni, A., & Magni, C. A. (2018). Investment decisions and sensitivity analysis: NPV-consistency of rates of return. European Journal of Operational Research, 268(1), 361–372. https://doi.org/10.1016/j.ejor.2018.01.007

    18. Mariani, M., Pizzutilo, F., Caragnano, A., & Zito, M. (2021). Does it pay to be environmentally responsible? Investigating the effect on the weighted average cost of capital. Corporate Social Responsibility and Environmental Management, 28(6), 1854–1869. https://doi.org/10.1002/csr.2164

    19. Morales, E. (2020). SPE-200626-MS SEC and PRMS Proved Reserves: Differences Due to Varying Interpretations of Final Investment Decision.

    20. Peel, A. (2022). Tellurian IR FID vs Reality.

    21. Project Management Institute. (2016). Construction extension to the PMBOK guide.

    22. Project Management Institute. (2017). A guide to the project management body of knowledge (PMBOK guide) (Sixth).

    23. Puška, A., Beganovic, A., & Šadic, S. (2018). Model for investment decision making by applying the multi-criteria analysis method. Serbian Journal of Management, 13(1), 7–28. https://doi.org/10.5937/sjm13-12436

    24. Siziba, S., & Hall, J. H. (2021). The evolution of the application of capital budgeting techniques in enterprises. Global Finance Journal, 47. https://doi.org/10.1016/j.gfj.2019.100504

    25. Songsak, Sriboonchitta. (2010). Stochastic dominance and applications to finance, risk and economics. CRC Press.

    26. Squire, L., & Van Der Tak, H. G. (1975). Economic Analysis of a Projects (1st ed.). The Johns Hopkins University Press.

    27. The Chartered Institute of Building. (2022). Code of Practice for Project Management for the Built Environment (6th ed.). Wiley Blackwell. http://www.wiley.com/go/permissions.

    28. Tsiga, Z., Emes, M., & Smith, A. (2017). Critical success factors for projects in the petroleum industry. Procedia Computer Science, 121, 224–231. https://doi.org/10.1016/j.procs.2017.11.031

    29. Virlics, A. (2013). Investment Decision Making and Risk. Procedia Economics and Finance, 6, 169–177. https://doi.org/10.1016/s2212-5671(13)00129-9

    30. Wibisono, M., & Putro, U. S. (2022). Final Investment Decision (Fid) Process Improvement in Oil and Gas Major Capital Project. Case Study of Pt. Vul’s Decision-Making Process. Journal of Engineering and Management in Industrial System, 10(1), 60–69. https://doi.org/10.21776/ub.jemis.2022.010.01.6

    31. Wysocki, R. K. (2019). Effective Project Management: Traditional, Agile, Extreme. John Wiley & Sons, Incorporated.