W12_AAA_Sizing Model and Economies of Scale (Gas Processing Facilities)


1. Problem Definition
A Gas Field Development Plan already approved by Local Government and it is expected to start the production (onstream) in the begining of year 2017 and there is only 2 years left to build gas facilities (cap. 70 MMSCFD). The company will use direct selection method to build these facilities. There are 2 well known contractors who has a good performance of works and good quality of products, the company will choose the contractor who has the lowest cost average (MMUS$/MMSCFD) and also estimate the price of 70 MMSCFD gas facilities (MMUS$).

2. Identify the Possible Alternative
Here is 2 (two) seller Gas Facilities (GF) with their price history:
Picture2The product’s quality of both sellers are same, but the price per mmscfd is different. By using these data, the company will calculate and choose the lowest price of 70 mmscfd gas facilities.

3. Development of the Outcome for Alternative
Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs. If we buy a large quantity (capacity) then the average costs will be lower.
Picture3Increasing output from Q2 to Q1, we see a decrease in long run average costs (ac)
Based on philosophy above, there is a formula of “sizing model” that shows the relation between the price and the capacity of gas facilities.
Picture1
From the both data and formula above, here is the analysis and calculation results:
Picture1
4. Selection Criteria
The Company will choose the seller who has the lowest average cost (MMUS$/MMSCFD) and the lowest estimated price (MMUS$).

5. Analysis and Comparison of Alternative
Picture4As seen from fig. 2, Seller B has lower average cost (0.85 MMUS$/MMSCFD) and lower price (59.30 MMUS$) compare to seller A (0.94 MMUS$/MMSCFD, 71.13 MMUS$).

6. Selection of the Preferred Alternative
Based on the analysis above, seller B is choosen because it has lower average cost (0.85 MMUS$/MMSCFD) and cheaper price of gas facilities (59.30 MMUS$) compare to seller A (71.13MMUS$).

7. Performance Monitoring and the Post Evaluation of Result
The Sizing Model and Economies of Scale above is a good way to estimate the price of gas facilities and this method can be applied not only in gas project (facilities), but also in oil project (facilities).

Reference:
1. Sullivan, William G., Wicks, Elin M. &Koelling, C. Patrick. (2012). Engineering Economy 15th Edition, Singapore: Prentice Hall, Inc.
2. Mian.M.A. ((2011). Project Economics and Decision Analysis Vol. I: Deterministic Models, Oklahoma: Penn Well Corp.
3. economicshelp.org. “Definition of Economies of Scale” retrieved from http://www.economicshelp.org/microessays/costs/economies-scale/
4. investopesdia.com. “economies of scale” retrieved from http://www.investopedia.com/terms/e/economiesofscale.asp

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About Ahmad Abdul Aziz

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3 Responses to W12_AAA_Sizing Model and Economies of Scale (Gas Processing Facilities)

  1. drpdg says:

    AWESOME Pak Ahmad!!!!

    I really loved your case study on this one and this is the first time I had seen the Power-Sizing formula used in this particular way.

    Very impressive and thanks for sharing….

    BR,
    Dr. PDG, Jakarta

    Like

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