Good question. I will go with it.
The bottom line is that in order to produce a FEL 1, both parties (the Owner and the EPCM hired to do the consulting work) must bring to the table all of the information they need. What they need is a projection of all of the cash flows going forward, +ve and -ve, and the ability to use some simple math (NPV, ROI) to come up with an ROI for the project. That is then compared with the Cost of Capital and they decide whether to proceed or not. When I worked in the national E&C group of a Fortune 500 industrial gases company, the hurdle rate was around 20% for project approval, and the Cost of Capital was around 5%, I believe. In that case they outsourced one major Engineering discipline, they had a Technology Center to assist, everything else was done in-house. The reason they outsourced the one discipline was that they were no good at it, and it required data that was maintained by the consulting firm.
I also worked at a Mining company, where the entire engineering study was outsourced to a major EPCM. The reason was that they simply did not maintain that kind of expertise. They are too big to make it work, and just operate at a much higher level. They did have a fair grip on Commodities prices (Gold, Metals, etc).
fyi the projects I was working on had a Capital Cost over 1 Billion and were to happen over a 10-year span.
EPCMs typically bring to the table excellent estimating skills and databases. Detailed Engineering is a forte. And they build specialties (hydro dams, water treatment, etc). That expertise is best pooled for the common good.
You are using the word "Scope" in a confusing way. It is the scope of the finished product. Not the specific work assigned to an Engineering firm as part of an initial study. You would be better not to use it in that context, or else you will get confused. Use the term "engineering work" or Engineering Study".
So in your example... Coke is a market-driven organization. I would think that they would have a grip on the Revenue side of the analysis, yes. And no, the Engineering firm would not question that. Building the plant is a Cost matter, at which the EPCM would likely be expert.
This project would probably start out as a product initiative, where the marketing work would then take place. All Coke. NO EPCM involved yet. Next step is initial Product Planning. The first step of an Engineering Project is Alternatives Analysis. Similar. How do we supply the necessary product to meet projected Demand? It may not be obvious. There may be more than one way. I know in Industrial gases we would study 4 or 5 completely different scenarios. That company had a network of plants across the country. A particular customer need could be met any number of ways.
If we decide to build a new plant, now there is the Scope. You must assume a certain capacity or throughput. That is one of the basis of the design. No need to discuss EBITDA..
Actually your example is more complicated than that. It is unclear whether a manufacturing plant is intended to be a Cost Center or a Profit center. I worked for a time at an automotive company, and I know that all cost for a particular vehicle is collected back to the plant where it was manufactured. I am just not sure if the plant was intended to be profitable as it's own *entity*. The role of the EPCM would have to be defined.
Although I can understand where you are coming from, the scenario you have outlined would never happen. A FEL 1 Report, or a 3-day audit report, would likely be authored by the EPCM firm. The Owner would contribute, but at the end of the day, unless the EPCM agreed to the results, they would not put their name on it or allow themselves to be associated with it.
The basic assumptions are; the cost of feedstock (the market for plastic has not changed). We don't know here whether or not the site could supply feedstock or whether it had to be purchased on the open market. Makes a huge difference. Revenue per barrel is pretty easy to make assumptions about. What else is there? Throughput.
All engineering firms and some Professional Engineers carry Liability insurance. I know that this is for Safety. Not sure if a plant gets built and it is not profitable, who is at fault.
However, I would not expect that the EPCM would publish something totally outlandish like that Summary. The two parties together form a team, and all teams must be more or less on the same page. The loyalties of team members become indistinguishable. So no, they would not feel it necessary to duplicate the Coke marketing work. They would take it for what it is worth. But remember, we are talking about a plant. That is the Scope. A plant with a throughput, capacity, etc. Those kind of assumptions would be given to the EPCM. In that case, I don't think ROI would be applicable, for the same reason that it may or may not be applicable to an automotive company.
This Summary was authored by SAIC, not JBI. I don't remember it any other way. Any information in there would have to come from SAIC, unless they put some kind of disclaimer in it to protect themselves, but I have never seen such a thing.
You have said yourself that the economics of the process are so bad that it is impossible to make money on a per barrel basis. Well, that be the basis of the analysis by the consulting firm. I don't think it makes any difference what the throughput is.
The SAIC Summary is missing some key assumptions (plastic prices) that should be in that opening paragraphs. It is about 2 distinctly different things (a 3-day audit and a FEL 1). It does not state that any information came from JBI, indicating that it is all SAIC authored material.
It also uses accounting terms like EBITDA, not project terms like ROI. In order to calculate an EBITDA, they would have had to know all of the accounting data applicable, like R&D and SG&A applicable to the site. Those costs are not related to the project.
I would believe that someone may have combined some work that SAIC did with some accounting data to create that report. That is entirely possible, and makes a great marketing tool to the whales.
So the bottom line is that I am not entirely sure who lied or what is true and what not, but I would not give that SAIC Summary a bit of relevance in any investment decision regarding PTO.
The bottom line is that in order to produce a FEL 1, both parties (the Owner and the EPCM hired to do the consulting work) must bring to the table all of the information they need. What they need is a projection of all of the cash flows going forward, +ve and -ve, and the ability to use some simple math (NPV, ROI) to come up with an ROI for the project. That is then compared with the Cost of Capital and they decide whether to proceed or not. When I worked in the national E&C group of a Fortune 500 industrial gases company, the hurdle rate was around 20% for project approval, and the Cost of Capital was around 5%, I believe. In that case they outsourced one major Engineering discipline, they had a Technology Center to assist, everything else was done in-house. The reason they outsourced the one discipline was that they were no good at it, and it required data that was maintained by the consulting firm.
I also worked at a Mining company, where the entire engineering study was outsourced to a major EPCM. The reason was that they simply did not maintain that kind of expertise. They are too big to make it work, and just operate at a much higher level. They did have a fair grip on Commodities prices (Gold, Metals, etc).
fyi the projects I was working on had a Capital Cost over 1 Billion and were to happen over a 10-year span.
EPCMs typically bring to the table excellent estimating skills and databases. Detailed Engineering is a forte. And they build specialties (hydro dams, water treatment, etc). That expertise is best pooled for the common good.
You are using the word "Scope" in a confusing way. It is the scope of the finished product. Not the specific work assigned to an Engineering firm as part of an initial study. You would be better not to use it in that context, or else you will get confused. Use the term "engineering work" or Engineering Study".
So in your example... Coke is a market-driven organization. I would think that they would have a grip on the Revenue side of the analysis, yes. And no, the Engineering firm would not question that. Building the plant is a Cost matter, at which the EPCM would likely be expert.
This project would probably start out as a product initiative, where the marketing work would then take place. All Coke. NO EPCM involved yet. Next step is initial Product Planning. The first step of an Engineering Project is Alternatives Analysis. Similar. How do we supply the necessary product to meet projected Demand? It may not be obvious. There may be more than one way. I know in Industrial gases we would study 4 or 5 completely different scenarios. That company had a network of plants across the country. A particular customer need could be met any number of ways.
If we decide to build a new plant, now there is the Scope. You must assume a certain capacity or throughput. That is one of the basis of the design. No need to discuss EBITDA..
Actually your example is more complicated than that. It is unclear whether a manufacturing plant is intended to be a Cost Center or a Profit center. I worked for a time at an automotive company, and I know that all cost for a particular vehicle is collected back to the plant where it was manufactured. I am just not sure if the plant was intended to be profitable as it's own *entity*. The role of the EPCM would have to be defined.
Although I can understand where you are coming from, the scenario you have outlined would never happen. A FEL 1 Report, or a 3-day audit report, would likely be authored by the EPCM firm. The Owner would contribute, but at the end of the day, unless the EPCM agreed to the results, they would not put their name on it or allow themselves to be associated with it.
The basic assumptions are; the cost of feedstock (the market for plastic has not changed). We don't know here whether or not the site could supply feedstock or whether it had to be purchased on the open market. Makes a huge difference. Revenue per barrel is pretty easy to make assumptions about. What else is there? Throughput.
All engineering firms and some Professional Engineers carry Liability insurance. I know that this is for Safety. Not sure if a plant gets built and it is not profitable, who is at fault.
However, I would not expect that the EPCM would publish something totally outlandish like that Summary. The two parties together form a team, and all teams must be more or less on the same page. The loyalties of team members become indistinguishable. So no, they would not feel it necessary to duplicate the Coke marketing work. They would take it for what it is worth. But remember, we are talking about a plant. That is the Scope. A plant with a throughput, capacity, etc. Those kind of assumptions would be given to the EPCM. In that case, I don't think ROI would be applicable, for the same reason that it may or may not be applicable to an automotive company.
This Summary was authored by SAIC, not JBI. I don't remember it any other way. Any information in there would have to come from SAIC, unless they put some kind of disclaimer in it to protect themselves, but I have never seen such a thing.
You have said yourself that the economics of the process are so bad that it is impossible to make money on a per barrel basis. Well, that be the basis of the analysis by the consulting firm. I don't think it makes any difference what the throughput is.
The SAIC Summary is missing some key assumptions (plastic prices) that should be in that opening paragraphs. It is about 2 distinctly different things (a 3-day audit and a FEL 1). It does not state that any information came from JBI, indicating that it is all SAIC authored material.
It also uses accounting terms like EBITDA, not project terms like ROI. In order to calculate an EBITDA, they would have had to know all of the accounting data applicable, like R&D and SG&A applicable to the site. Those costs are not related to the project.
I would believe that someone may have combined some work that SAIC did with some accounting data to create that report. That is entirely possible, and makes a great marketing tool to the whales.
So the bottom line is that I am not entirely sure who lied or what is true and what not, but I would not give that SAIC Summary a bit of relevance in any investment decision regarding PTO.
