LNG Project Valuation with Financial Leasing Contracts

USAEE-IAEE WP 09-027

24 Pages Posted: 6 Dec 2009

See all articles by Petter Osmundsen

Petter Osmundsen

University of Stavanger; CESifo (Center for Economic Studies and Ifo Institute)

Kjell Løvås

Statoil

Magne Emhjellen-Stendal

Petoro A.S.

Date Written: December 2, 2009

Abstract

Financial leasing is prevalent in LNG projects. Actually, in many LNG infrastructure projects, leasing is the only option for oil companies. A common approach 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, which is applied on huge investments in LNG infrastructure, overstates project profitability and may lead to overinvestment. Since financial leasing payments are contractual and deterministic, a separate cash flow valuation is called for, with a lower discount rate for financial leasing costs. We present a correct method for calculating the net present value of projects when there are no investment alternatives, i.e., when leasing is the only option. Finally, we demonstrate through a real LNG project example, the magnitude in the project net present value error with the current valuation method.

Keywords: Project Valuation, Capital Budgeting, Financial leasing, Financial cost

JEL Classification: G31, G32

Suggested Citation

Osmundsen, Petter and Løvås, Kjell and Emhjellen-Stendal, Magne, LNG Project Valuation with Financial Leasing Contracts (December 2, 2009). USAEE-IAEE WP 09-027, Available at SSRN: https://ssrn.com/abstract=1517190 or http://dx.doi.org/10.2139/ssrn.1517190

Petter Osmundsen (Contact Author)

University of Stavanger ( email )

4036 Stavanger
Norway

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Kjell Løvås

Statoil

Forusbeen 50
N-4035 Stavanger
Norway

Magne Emhjellen-Stendal

Petoro A.S. ( email )

Norway

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