W2_Adi_The Gas Plant


Problem Statement

“X” Oil Company intends to acquire an old natural gas field at East Kalimantan, which has been previously operated by another company. Based on subsurface study, the reserve can be produced for another 15 years of 20 MMSCFD gas. Since the existing surface production facility has been obsolete, the “X” Oil Company needs to construct the one to replace the existing facilities. An assessment of the new production facility should be done prior to set Gas Sales Agreement (GSA) with the buyer. The board of management “X” Oil Company needs to know whether their investment is worth doing or not. They also expect the payout period should be less than 5 years.

Root Cause Analysis

  1. Availability of old gas field reserve that still can be produced
  2. Existing facility can provide gas content information and estimation basis for the new facility construction, means easier engineering process for the new surface production facility.
  3. National Electricity Company is demand more energy supply for local power needs.

Alternative Solution

Construct a new Surface Production Facility to process 20MMSCFD natural gas and deliver to the buyer. And assessment needs should be carried out to evaluate the economics of the project and determine which parameter that is sensitive to investment value, also to establish a firm gas sales price for GSA purpose. Since the market gas price is USD $4 –$5, per MMBTU. Four difference gas price scenarios will be analyzed to obtain best economic parameter, they are: USD $4, $4.25, $4.5, and $4.75.

Selection Criteria

  1. NPV
  2. MARR – 15%
  3. IRR

Analysis and Comparison of Alternatives

Preliminary data and estimation

Table 1. Project Information

 

Table 2. Baseline Cash flow calculation

 

 

 

Table 3. Sensitivity Analysis Calculation

 

 

 

 

 

 

 

 

From the table 3, we can plot Spider graph as follow:

Figure 1. Sensitivity Analysis

Based on sensitivity analysis, we figured out that the revenue by terms of price is governed here. Hence the economic optimization and evaluation will be based on parameter gas price.. Using formula in spread sheet ,we obtain the the following.

Table 4. Gas Sales Price Scenarios

 

Figure 2. Gas Price vs IRR

 

Selection of Preferred Alternative

From Table 4, we can conclude that best scenario is at Gas Price USD $4.75 per MMBTU, refer to criteria NPV, IRR and Payout time. Then the project is worth doing, with the gas price $4.75 per MMBTU resulting NPV>0, IRR>MARR, and Payout Time less than five years.

Performance Monitoring & Post Evaluation of Result

  1. Scope of work should be well defined prior to project execution to avoid unnecessary change order which increase the Capital Investment value.
  2. Conduct project monitoring and supervision to ensure actual project progress and cost inline with the plan.
  3. Operation and maintenance management should be applied to avoid excessive operation cost.

References

Sullivan, William G., Wicks, Elin M. & Koelling, C. Patrick (1942), “Engineering Economy15th Edition”, Singapore: Prentice Hall, Inc.

Widjajono, Partowidagdo (2009), “Oil, Gas, and Energy in Indonesia: Problems and Policy Analysis”, Bandung: Development Studies Foundation.

2 responses to “W2_Adi_The Gas Plant

  1. Awesome Adi!!!!

    Your usual excellent work!!!!

    I am really impressed how you are able to use what you are learning.

    What I would like to see you do now is move beyond the Engineering Economy and start to do the same thing you have been doing for EE 15th Edition but apply it to Humphrey’s.

    OR, start to get beyond the EE and move into the Recommended Practices….. http://www.aacei.org/resources/rp/

    I am especially keen to see you starting to do more work on applied Earned Value Management, which you will find on the CCC/E and EVP certifications. (Right now we only have ONE Indonesian EVP, Budi Prawira, CCE, EVP and I would like to see a few more)

    Bottom line- keep up the good work but I think you have mastered Engineering Economics enough and time to move to other subjects…..

    BR,
    Dr. PDG, Jakarta

  2. Adi,
    I just realized that you did not owe me/your team a W2 blog posting, as you joined the team in W3. So I gave you credit (“Earned Value”) for W9.

    But as noted, I think both you and Candra have a solid grasp on Engineering Economics, so what I recommend both of you to be doing is working out of Humphrey’s…….

    That will help prepare you for your exams on 12 November….

    BR,
    Dr. PDG, Jakarta

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