Engineering Economics - Michigan State University · Risk Valuation •Valuating strictly on...

Engineering Economics

Andy Dale

Perdido Financial

Representative

Shell Exploration & Production

Disclaimer

The information on the following presentation does not necessarily

represent the actions, opinions, or views of Shell.

The examples herein do not intend to show the full processes and methods used and

are presented for educational purposes.

Which designers face a greater challenge?

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Presentation Overview

• What does economics really mean?

• How do we make the right choices?

• Economics in practice

• Background on offshore production

• Example Project

• Closing Thoughts

• Question & Answer time

What does economics really mean?

• Study & application of value

• Not always based on money

• Method for choosing between alternatives

• The goal is to maximize the benefits received

• Something we can unconsciously do

How do we choose between projects?

• All businesses face a limitation on resources

• Competing and shifting priorities

• Two different types of projects:

• Risks – Health & Safety, Integrity of Assets

• Economics – Growth & Asset Reliability

• Every potential project evaluated both ways

Risk Valuation

• Valuating strictly on economics is dangerous

• Everyone should go home from work the way they came in

• Safe and legal operations allows for work to continue

• Importance varies by business

• Economic impacts of poor risk valuation

Example Risk Matrix

A B C D E

0 A0 B0 C0 D0 E0

1 A1 B1 C1 D1 E1

2 A2 B2 C2 D2 E2

3 A3 B3 C3 D3 E3

4 A4 B4 C4 D4 E4

5 A5 B5 C5 D5 E5

SE

VE

RIT

Y

LIKELIHOOD

The Time Value of Money

Would you prefer a dollar today or a year from now?

The Present Value of Money

• PV = FV / ( 1+i )n

• The value of future cash in today’s terms

• Factors in time & required rate of return

• The rate of return usually comes from either:

• A risk free government bond

• A company’s cost to borrow money

• An evaluation of a project’s risk

Economic Valuation

• A present value calculation is created for each cash flow

• Typically uses net cash in one year

• All of the present values are summed and it gives the Net Present Value of the project

• If the total is positive, it will add value

• If the total is zero, the project delivers the required rate of return

The art & science of choice

• How do choose the right ‘mix’ of projects?

• People & planet first

• Business impacts & options

• Long term strategy

• No single methodology is perfect

• Do the right projects and do them right

Background on Offshore Production

• Goal is to produce Oil & Gas reserves in areas submerged in water

• Most offshore facilities serve as both living and working facilities

• Oil & Gas is typically pumped to the platform, processed, and exported for sale

• The first platform was built in 5 feet of water

• Perdido’s deepest well is in 9,627 feet

Offshore Production Platform Types

• Early platforms were built into the seafloor

• Oil producers ventured into deeper water with even larger standing platforms (fixed leg)

• Eventually water depths grew so large that platforms needed to float on the sea surface

• Several types of floating platforms have been built to fit the conditions of the operating area

Fixed Leg Platform

Tension Leg Platform

Spar Platform

Floating Production Platform (FPSO)

Which design should we choose?

CostNumber of Well-bays

Handling Revenue

Transport

Expense

Tension Leg

Design

$1.5 bln

20$10 mln /year

$6 mln /year

Spar Design

$1.0 bln

15$5 mln /year

$4 mln /year

Floating Production Design

$.5 bln 10 $0 /year$40 mln /year

Economic Cases of Hull Designs

• All cases require a 10% return

• Each project would begin at the start of 2010

• Each project would last for 25 years

The Perdido Development

Silvertip Field

Tobago Field

Great White Field

Perdido Host

Platform

Project Completion

• Much deserved celebration!

• After action review conducted for all economically driven decisions

• Were our assumptions correct?

• What would we change next time?

Closing Thoughts

• Perform your technical skills while managing your business responsibilities

• Those with technical knowledge tend to make the best technical decisions

• Use strong supporting data to backup assumptions built into business cases

• Set realistic expectations

• Remember the Jaguar acquisition

• A race car has an engine and it has brakes

Question & Answer Time