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Experiments on OpEx modelling – what is the optimum?

The ability to generate a financial picture of the oil and gas asset provides the RAM analyst an important tool to explain the benefits of performing RAM analysis. When discussing financial aspects, you don’t need to be a specialist in statistics or RAM analysis to base decisions on what is likely to be the most profitable scenario. This post includes a discussion on Capital expenditure, Operational expenditure and what techniques could be used to estimate operational costs of an asset (for some namely OpEx modelling).

OpEx modelling supports the decision making process

When discussing financial analysis with someone in the oil and gas industry, the first thing that comes to mind is the overall investment to construct a process plant – the Capital Expenditure (CapEx). Why is that? CapEx has indeed a significant contribution to the investment in an oil and gas asset and, since the investment is ordinarily made in the first few years, one could feel like this is the largest investment in the asset and should be given a deliberate thought.

However, the ongoing cost for running the asset – the Operating Expenditure or OpEx – could be potentially larger than CapEx. When calculating the running cost of a process plant, we should consider maintenance costs and utilities (power, water and gas) supply and so on. Now considering that we are calculating these expenses over the venture’s life and the life span of a process plant can be around 15-20 years, OpEx is often a much larger sum than CapEx.

CapEx is normally a known variable – the investment on purchasing equipment items, and constructing the facilities. The challenging area is estimating OpEx – this is variable as failures might require a number of spare parts as well as extensive manpower. Utilities such as power, gas and water supply will also depend on the system availability – if the system is not available, there will be interruption of gas supply, for example.

So, there are two techniques to estimate the OpEx throughout the life of an oil and gas asset:  the traditional approach using static calculation or dynamic simulation techniques – both of them present benefits.

Static calculations use constant consumption rates of maintenance resources (spares) and utilities to determine operating costs for an assets – it presents a simple solution which can be used as a starting point.

The use of dynamic simulation techniques allows estimates to take account of continuous changes in the state of the system over its expected life. Account is taken of equipment functionality, different component failure modes and consequences, logical events, operating and maintenance philosophies, availability of services and personnel, status of buffer storages. Clearly, any attempt to calculate the expenses with this degree of complexity by deterministic methods (i.e. static calculation) is virtually impossible.

Incorporation of all these factors in the analysis results in more realistic financial figures and improves confidence in the predicted values and, hence, in any derived recommendations. This is one of the major benefits of Reliability, Availability and Maintainability analysis aligned with simulation techniques over traditional methods – the ability to incorporate your understanding of the asset and the way it operates within your organisation.

Another noticeable advantage of using RAM simulators is that the analyst gets a true ‘feel’ for the system being simulated, and learns quickly about its pros and cons. These may relate to the design itself or its associated operations. Such insight helps the user to improve the system.

Other aspects that are important to account for when calculating the OpEx are listed below:

  • Annual Discount Rate: This will relate the worth in financial terms, of a future sum to its present value.
  • Maintenance Operating Expenditure: This factor consists of the cost in day rates of the resources used, as well as any mobilisation/de-mobilisation costs incurred from their use.
  • Product Price: Product pricing which represents the income.

Armed with all these parameters, the analyst could calculate the Net present Value (NPV). Net present Value is a financial figure that allows comparisons between different projects by using all the cash flows from the project and adjusting them to their present values by applying the appropriate discount factor. The projects then become directly comparable. Should the present value of the capital inflows exceed those of the outflows after the selected discount rate, the project is showing a positive cash flow return and the greater the value, the better. However, if the NPV is negative the returns from the project are less than the outflows and attempts should be made to minimise the NPV.

It is recognisable that sometimes it is difficult to get information around investment figures but, once that barrier is overcome, the analysis becomes richer in information and easier to explain the output.

F1F9 has putted together a really nice guidance on OpEx modelling  and CapEx modelling.

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