Title: Project valuation with financial leasing contracts

Authors: Magne Emhjellen, Kjell Lovas, Petter Osmundsen

Addresses: Petoro AS, P.O. Box 300, N-4002 Stavanger, Norway. ' Statoil ASA, Holbergsgate 20, N-4306 Sandnes, Norway. ' Department of Industrial Economics, University of Stavanger, 4036 Stavanger, Norway

Abstract: Financial leasing is prevalent in many projects in the oil and energy industries. Examples are tariff payments in existing pipelines, processing tariffs, leasing of rigs and leasing of LNG transportation ships. A common mistake among oil companies in such settings is to treat financial leasing costs as operating cost and discount with the firm|s weighted average cost of capital (WACC). This method overstates project profitability and may lead to overinvestment since financial leasing payments should be valued at the costs of debt. We present a practical method for calculating the net present value of projects when there are no investment alternatives, i.e., when leasing is the only option (the cost of investing is not known). Finally, we demonstrate through a real LNG project example, the potential magnitude in the project net present value error.

Keywords: project valuation; capital budgeting; financial leasing; financial costs; oil industry; over-investment; net present value; LNG projects; liquefied natural gas.

DOI: 10.1504/IJGEI.2010.036953

International Journal of Global Energy Issues, 2010 Vol.33 No.3/4, pp.139 - 153

Published online: 18 Nov 2010 *

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