W16_WW_Cost Analysis of Critical Spare Compressor

1. Problem Definition
Garuda Energy Company, a PSC Oil & Gas Company, conducted an assurance review for a gas field development project. From the review, the company found that there is no spare of gas compressor which is critical equipment. If the compressor fails, the plant shutdown. The reviewer suggested the project team to analyse the scenario to include spare when running compressor fails. To respond that finding, the Author will do exercise to analyse the benefit to include the critical equipment spare in the cost.

2. Development of Feasible Alternatives
To answer the challenge from the reviewer, we should analyse the benefit if we purchase the critical spare compressor which will be install if the running compressor fails. To do the analysis, we gather the equipment data from Operation Team as below:

3. Development of the Outcomes for Alternative
Based on above data, we need to conduct Life-Cycle Costing calculation.
Life-cycle costs (LCC) are associated with an asset and extend of the cost management information beyond the acquisition (creation) of the asset to the use and disposal of the asset.
The purpose of Life-cycle Cost (LCC) is to optimize the total costs of an asset while satisfying specific performance requirements over a defined period of operational time.
First we need to estimate the annual cost saving by installing the critical spare equipment.
The annual cost saving = Increase production due to higher plant availability – Annual maintenance of critical spare equipment
From Table 1 data above, we calculate:
Saving due to no shut down = 3 days/year x 420,000 USD/day = USD 1,260,000/year
The annual cost saving = USD 1,260,000 – USD 100,000 = USD 1,160,000.
Calculate LCC using present-worth (PW).
To calculate PW, we need to determine the appropriate discount rate. The appropriate discount rate to be used is taken from previous MARR calculation in Author’s W6 Blog (W6_WW_Field Development Project Hurdle Rate) = 14.84%
Calculation examples:
PW cash flow in Year 1 = Year 1 cash flow * (1/ (1+14.84%)^1)
= USD 1,160,000 * 0.8708
= USD 1,010,101
PW for 15 years periods are calculated as below:

4. Selection of the Acceptable Criteria
The higher total PW is the preferred alternative from an economic perspective.

5. Analysis and Comparison of the Alternatives
From Table 2, the total PW of the “with critical spare compressor” option is USD 1,635,808 and PW without critical spare compressor is negative USD 7,425,102. By installing the critical spare compressor will have higher PW than not installing it.

6. Selection of the Preferred Alternative
The estimating team can recommend to install critical spare compressor is the preferred option from an economic perspective, compare with not install the critical spare compressor, since by installing the critical spare compressor will give higher PW of total cash flow balance.

7. Performance Monitoring and Post-Evaluation of Results
When assessing the critical spare requirement, beside the technical analysis, it is important to conduct Life-cycle costs (LCC) analysis to justify how critical the spare requirement is, related to minimize the cost of loss production.

Reference:
1. Amos, S. J. (2012). Skills & Knowledge of Cost Engineering: A Continuing Project of the AACE International Education Board (5th ed.), Section 1. Morgantown, WV: AACE International.
2. (2009). Cost Estimating and Assessment Guide: Best Practices for Developing and Managing Capital Program Cost, GAO-09-3SP. Washington, D.C.: March 2009, Chapter 4, 32-45. Retrieved from http://www.gao.gov/new.items/d093sp.pdf
3. Giammalvo, P.D. (2015). Integrated Asset, Portfolio, Program & Project Management Course Material, PTMX/APMX
4. Irawan, H. (2015). W15_HI_ Cost Analysis for Requirement of Critical Spare Equipment. Retrieved from https://garudaaace2015.wordpress.com/2015/07/05/w15_hi_critical-spare-equipment/
5. Wijanarka, W. (2015). W6_WW_Field Development Project Hurdle Rate. Retrieved from https://garudaaace2015.wordpress.com/2015/04/09/w6_ww_field-development-project-hurdle-rate/