TNAG-0947-FCO40-1166-Oil-developments-in-and-around-Hong-Kong-1980 — Page 63

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HONG KONG

The following criteria were used:

1. All calculations are in 1980 U.S. dollars.

2. For tax relief calculation, U.S. inflation assumed at 10% per

annum throughout.

Refinery to commission in 1983, capex phased through 1980,

+

81, 82 and 83. (Note:

this date range is for illustrative

purposes; the tentative conclusions reached are not significantly changed by a one year slippage.)

4. Depreciation of plant: 10% per annum over 10 years.

5. Tax allowance against depreciation, 25% in first year, 15%

thereafter.

6. Tax paid at 17%.

7.

Investment to be remunerated over 15 years.

The gross finer's margin was calculated and expressed in terms of US$/mt of crude run. However, these results assume maximum throughput from commissioning date. If Hong Kong demand only is being met, the average gross refiner's margin is a little lower (Appendix 7) since the refinery would only reach full throughput by 1990.

These calculations show that to receive a 5% real return on the investment for a refinery geared to Chinese crude the average gross refiner's margin must be $7.3/mt whilst that for the Kuwait case is almost $2/mt less at $5.4/mt. To reach the break-even position the figures are $5.3/mt and $4.1/mt respectively.

Crude Worth

The actual level of product prices in Hong Kong has not been ascertained and so for the purpose of these calculations it was assumed that oil prices are related to Singapore postings plus freight. Light distillate feedstock (LDF), i.e. naphtha, with no significant demand in Hong Kong, has been valued at Singapore postings less freight. The worth of a barrel of Chinese and a barrel of Kuwait crude in terms of products produced at the refinery to meet local demand was thus calculated (Appendix 8).

The worth of the crude, in 1980 terms, was calculated at approximately $30/bbl. By allowing a gross refiner's margin required to remunerate the investment, say $7.3/mt (or $1/bbl), the crude must be acquired at around $29/bbl. Chinese crude has been selling on the open market at around $33/bbl, thus producing a diseconomy of some $4/bbl or $29/mt.