W3_MR_ Economical Evaluation for three Pipeline scenarios

Problem definition

Reference to the W2 Blog for the production expansion, and as part of the company expansion plan. The company has to study the means of transporting the mentioned crude by proposing the most optimum pipeline scenario from the selected area to the Central Processing facilities (CPF), which located 140Km from the proposed production areas. This economical evaluation should consider the cost of the required pipe diameter, the cost of requirements of an intermediate pump station, the CAPEX and OPEX cost of this pipeline, the out comes of the evaluation is to recommend the most optimum case of crude transportation.

Development of the feasible alternatives

The targeted areas are divided to two parts with respect of location and expected reservoir quantities, the facilities were proposed as following:

Case 1: Construct 12” Pipeline with intermediate Pump Station.

Case 2: Construct 12” Pipeline without intermediate Pump Station.

Case 3: Construct 14” Pipeline without intermediate Pump Station.

Analysis and comparison of the alternatives

The three transportation philosophies have been studied considering the following criteria:

• The economic indicators used for assessment NPV and IRR:

Ø      Net Present Value (NPV): The difference between the present value of cash inflows and the present value of cash outflows.  The alternative with the largest (positive) NPV should be selected.

Ø      Internal Rate of Return (IRR): The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. The higher an option’s internal rate of return, the more desirable it is to undertake the project.

• Contingency has been taken at 10% of the total direct cost plus indirect cost.

• The economic study is carried out with a life cycle of 20 years 

Alternatives Cases:

	Case1 (147Km)	Case 2 (147Km)	Case 3 (147Km)
Pipeline Size (in)	12”	12”	14”
Designed Flow Rate KBOPD	40 LC/HC	40 LC/HC	40 LC/HC
Intermediate Pump Station (IPS)	Yes	No	No

CAPEX:

	Case1 (147Km)	Case 2 (147Km)	Case 3 (147Km)
Total CAPEX	65,482.90	59,109.30	61,263.70

Revenue and OPEX:

	STD Barrel USD	Production Rate	Days/Year	Total-USD	Years	Grand Total-USD
Revenue	7	10,000	365	25,550,000	20	511,000,000
OEPX	1.2	10,000	365	4,380,000	20	87,600,000

Calculation by Excel for the first Case as an example, the two cases follow the same:

MARR	20%
Capital Investment	65,482,900
Market Value	30,000,000
Annual revenue	25,550,000
Annual Expenses	4,380,000
Study Period - Years	20
Discount Rate	6%
	Cash Flow
0	($65,482,900)	0	($65,482,900)
1	$21,170,000	1	$21,170,000
2	$21,170,000	2	$21,170,000
3	$21,170,000	3	$21,170,000
4	$21,170,000	4	$21,170,000
5	$21,170,000	5	$21,170,000
6	$21,170,000	6	$21,170,000
7	$21,170,000	7	$21,170,000
8	$21,170,000	8	$21,170,000
9	$21,170,000	9	$21,170,000
10	$21,170,000	10	$21,170,000
11	$21,170,000	11	$21,170,000
12	$21,170,000	12	$21,170,000
13	$21,170,000	13	$21,170,000
14	$21,170,000	14	$21,170,000
15	$21,170,000	15	$21,170,000
16	$21,170,000	16	$21,170,000
17	$21,170,000	17	$21,170,000
18	$21,170,000	18	$21,170,000
19	$21,170,000	19	$21,170,000
20	$21,170,000	20	$51,170,000
20	$30,000,000
		NPV	$186,159,994
		IRR	32%

Summary of NPV/IRR for the three cases:

	Case1 (147Km)	Case 2 (147Km)	Case 3 (147Km)
NPV	186,159,994.28	192,533,594.28	190,379,194.28
IRR	32%	36%	35%

 

Selection of the preferred alternatives

Case-2 (12” transit line without intermediate pumping station for batch transportation philosophy) shows the best economic indicators in term of NPV and IRR. The Case-3 demonstrates as well a good NPV close to the most opportune case. Therefore Case-2 (12” transit line without intermediate pumping station for batch transportation philosophy) is highly recommended.   

Performance monitoring and the post evaluation of results

More studies and economical methodologies will be applied for tuning and for the final result of the recommended.

Conclusion

Applying the IRR and NPV methods over the three options gives an indicator to which is more economical option, the second case was found as the most optimum choice and its added value over the two other cases. However more studies are needed to determine the said conclusion.

References

i. Sullivan, G. William, Wicks, ELIN M & KOELLING, C. Patrick (2012). Engineering Economic 15th Edition: Chapter 5 Evaluation a Single Project, pp. 194.

ii.  AACEI Kristal Team, W8_MR_Production Expansion

iii. Mahakam13, W2_MR_Production Expansion Project, http://aacemahakam.blogspot.com/