9_Equipment Price Trends

8/6/2019 9_Equipment Price Trends

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Equipment Price Trends andProcurement Duration Study

Isaac Brear


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CONFIDENTIAL - for use by IBC CEC 2008 Companies Only 2

ObjectiveMeasure, Compare, Improve

IPA continuously monitors changes in the capitalproject markets (price trends, price spikes andprocurement trends)

By evaluating recent equipment procurement againsthistorical data in IPAs Equipment Database, anEquipment Cost Index (ECI) is generated

IPA develops the ECI after controlling for equipmentspecifications and project practices

The ECI provides a relative measure of price escalation

against an industry database of major equipment

Using the ECI, IPA can accurately adjust andbenchmark the capital project industry


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Research Outline

Objective

Equipment Price Trends

Methodology

Database Statistics

Results

Conclusions

Procurement Durations

Methodology

Database Statistics

Results

Conclusions


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IPA Equipment Research Design Summary(Linking Drivers to Outcomes)

ProcurementSystem Practices

Design andSelection Practices

EquipmentSpecifications

ProjectFactors

MarketFactors

Equipment

Cost Index

EquipmentDelivery Schedule

Drivers Outcomes


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IPA: Equipment Cost Research Timeline

2005

ResearchCorrelates

Higher ECI withHigher

Project Costs

2003

ResearchinvestigatesSchedule Vs.ECI Trade-Off

Curves

Research showsECI is linked toProcurement

Practices

2002< 2002

IPA beginsresearch intoEquipment

Costs

2007-08

ECIVolatilityand PriceIncreaseUpdate


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Summary of Previous Research(2002-2007)

Initial equipment procurement research (CEC 2002) focusedentirely on linking procurement practices with outcomes

Follow-up work shifted to quantifying the increase inequipment prices starting around 2003

Major finding: Equipment prices have increased faster thanpublic indices of escalation (US BLS PPI)

Drivers of escalation and volatility in equipment costs arerelated to:

> Overall market situation (sellers market)

> Project practices

> Increase in base material prices (ferrous alloys, steel, etc.)

Also, IPA observed that procurement durations wereincreasing for many equipment types


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Research Outline

Objective


Methodology Database Statistics

Results

Conclusions


Methodology

Database Statistics

Results

Conclusions


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Collect data during project evaluations

Equipment for firm and budgetary equipment bids

> Shipping, freight, and other non-equipment costs are excluded

Design specifications

> Capacity, size, metallurgy, pressure, temperature, etc.

Estimate the cost of each equipment item using Icarus*

Study used January 2003 US dollars because prices wererelatively stable for many years prior

Convert purchase orders and vendor quotes to US dollars(if in another currency)

Account for known biases in Icarus

Research Methodology

* Icarus is a registered trademark of Aspen Technology, Inc.


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ECI Methodology

ECI =Nominal equipment price

Icarus estimated price*

* adjusted for project characteristics, practices and Icarus biases

Equipment price is industry average if ECI = 1.00- Industry average in 2003 was ECI = 1.00

Create an Equipment Cost Index (ECI) for each piece ofequipment


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Research Outline

Objective


MethodologyDatabase Statistics

Results

Conclusions


Methodology

Database Statistics

Results

Conclusions


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Number of Observations: 2005

396

101

26

15

Pieces of Equipment

Number of Projects

Companies

Country of Origin

Equipment ResearchDatabase Description (1)

2007

595

168

41

16

2008

827

263

43

20

* A total of 232 pieces have been added since 2007 CEC


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Equipment Research Database Description (2)Good Representation of Industry

Size of Dataset

Median Project Cost (2008 US$)

Average Authorization Date

827 pieces of equipment

$136.5 million

2005

Range of Project Costs (2008 US$) $0.372 million to $6.9 billion

Range of Authorization Dates 2000 to 2008

Median Equipment Item Cost (2008 US$)

Range of Equipment Costs (2008 US$)

$0.441 million

$0.003 million to $27 million


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Industry Sector

CommodityChemicals

Other*

Oil Refining

Project Type and Industry MixGood Mix of Project Types, Refining Projects Are Majority of

Database

Project Type

Expansion

Revamp

Greenfield /

ColocatedAdd-On

SpecialtyChemicals

20%

8%

16%

56%

25%12%

13%

50%

* Other includes Minerals, Pharmaceuticals, and

Consumer Products


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Equipment Types EvaluatedMix of Fabricated and Mechanical

Vessels (Fabricated)

- Columns, Towers, Tanks, Other Vessels 36%

Percentof Database

Heat Process (Fabricated)

- Heat Exchangers, Air Coolers, Furnaces,

Boilers, Cooling Towers

28%

Rotating (Mechanical)

- Pumps, Compressors, Fans, Blowers33%

Electrical- Switchgear Items, Motors, Transformers

1%

Other Items

- Filters, Separators, Mixers2%


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IPA Equipment Cost Database

IPA Equipment

Cost DatabaseN = 827

Heavy WalledReactors

N = 58

Delayed Coke

DrumsN = 34


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Delayed Coke Drums Specification Summary

Delayed CokeDrums

N = 34

Asia, EuropeProcurementLocation

$1.0 10.2 mmCost Range(Nominal $USD)

1998 2002ProcurementRange

11Companies

410 SSCladding

55 110 ftHeight (T-T)

18 30 ftDiameter (ID)

835 950 CDesign Temp.

55 - 145 psigDesign Pressure

Procurement Data

Design Data


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Heavy Walled Reactors Specification Summary

Heavy WalledReactors

N = 58

Asia, Europe,North America

ProcurementLocation

$.5 18.0 mmCost Range

(Nominal $USD)

2001 - 2008ProcurementRange

12Companies

1.25 Cr/1.0 Mo 2.25 Cr/1.0 Mo

Metallurgy

12.5 130 ftHeight (T-T)

7.5 22.5 ftDiameter (ID)

650 850 CDesign Temp.

380 2200 psigDesign Pressure

Procurement Data

Design Data


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Research Outline

Objective



Results

Conclusions


Methodology

Database Statistics

Results

Conclusions


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Equipment Index Growth Over TimeIncrease in Price Escalation and Volatility

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

2000-2003 2004-2006 2007-Present

Procurement Year

EquipmentCostInd

ex

+1 Std.

-1 Std.

MeanN = 213 N = 94 N = 305


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Equipment Index Growth Over TimePrice Volatility Driven by Larger Projects

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

< 2004 > 2004 < 2004 > 2004

Equipme

ntCostIn

dex

+1 Std.

-1 Std.

Mean

< $250 million* > $250 million*

N = 136 N = 162 N = 77 N = 237

* Project Cost adjusted to January 2007 $USD


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Summary of Findings

Equipment escalation has increased (along with thevolatility of prices) significantly in three time periods:

Pre-2003

2004-2006

2007- Present

Time and project size drive equipment prices

Pre-2004 equipment prices were comparable regardlessof project size

Post-2004 equipment prices have increased significantly,and have increased more significantly in larger projects

> Well defined procurement strategies lost for larger

projects?


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2008 Results (1)

IPAEquipmentCost Index

US Public Indices- BLS PPIs

The IPA ECI curve presented represents a line of bestfit for equipment procured on or after January 1, 2003

Comparative indices include:

United States Bureau of Labor Statistics (BLS) Producer PriceIndex for Mechanical and Fabricated Equipment

* BLS PPI is a composite of indices for mechanical and fabricated equipment released by the U.S. BLS

Equipment Escalation


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Equipment EscalationFabricatedFirm Quotes

0.75

1.25

1.75

2.25

2.75

2003 2004 2005 2006 2007 2008

PercentIncr

ease

IPA Fabricated ECI Regression India - Iron and Steel

Australia - Iron and Steel Thailand - Basic Iron, Steel & Ferro-alloys

Thailand - Structural metal products South Africa - Basic iron and steel

USA - Iron and steel EU - Mfg of Basic Iron, Steel & Ferro-alloys

* All indices are indexed to January 2003



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Equipment EscalationFabricatedFirm Quotes

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2003 2004 2005 2006 2007 2008

Percen

tIncrease

IPA Fabricated ECI Regression

Metal Tanks (BLS PPI)

Heat Exchangers & Condensors (BLS PPI)

Metal Tanks & Vessels, Custom (BLS PPI)



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0.0

2.0

4.0

6.0

8.0

10.0

FabricatedCostperPound(USDMOD/F

ab.

Wght.)

1992 1994 1996 1998 2000 2002 2004 2006 2008

Procurement Date

Cost by Date of Procurement

Fabricated Drum Cost ($ per Pound(Fab. Wght.))



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Equipment EscalationMechanicalFirm Quotes

0.75

1.00

1.25

1.50

1.75

2.00

2003 2004 2005 2006 2007 2008

Perce

ntIncrease

IPA Mechanical ECI Regression

Industrial Material Handling Equipment (BLS

PPI)Fans & Blowers (BLS PPI)

Chemical Industry Mach. (BLS PPI)

Crushing & Pulverizing Mach. (BLS PPI)

Industrial Pumps (BLS PPI)


Summary


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SummaryCurrent Overall Price Trends

Material prices alone are not driving all of equipmentescalation

Public indices are not keeping up with escalationseen in current equipment market

IPAs database contains more representative sample ofrefining and chemical industries than that of the BLS

IPA ECIs are a more accurate reflection of trueescalation seen in the equipment market

Other measures (outside of Icarus), such as a priceper pound comparison, show comparable priceincreases



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Equipment EscalationFabricatedFirm vs. Budgetary Quotes

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

2003 2004 2005 2006 2007 2008

Perce

ntIncrease

IPA Fabricated ECI Regression - Firm

IPA Fabricated ECI Regression - Budgetary




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Equipment EscalationMechanicalFirm vs. Budgetary Quotes

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

2003 2004 2005 2006 2007 2008

PercentIncrease

IPA Mechanical ECI Regression - Firm

IPA Mechanical ECI Regression - Budgetary


Summary


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SummaryFirm vs. Budgetary Quotes

Budgetary quotes tend to be significantly higher thanfirm quotes

IPA has observed that recent estimates are defaulting tothe highest qualified bid for equipment

In addition, equipment allowances are running 2 to 5percent above the budget quote

Equipment escalation does not differ by procurementlocation

US escalation is comparable to European and Asia-Pacificprices

Equipment market has moved to a global market

R h O tli


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Research Outline

Objective



Results

Conclusions Procurement Durations

Methodology

Database Statistics

Results

Conclusions

Concl sions


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Conclusions

The equipment market has continued to see anincrease in price and volatility

ECI increases as project size increases Is this correlated with project practices?

Public data continue to lag behind actual escalation

curves

Budgetary quotes are significantly higher than firmquotes

Are vendors padding estimates?

Price escalation has increased similarly for all regionsof the world

Research Outline


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Research Outline

Objective


Methodology

Database Statistics

Results

Conclusions


Methodology

Database Statistics

Results

Conclusions

P R h M h d l


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Collect data during project evaluations

Equipment Data is entered into Procurement

Workbook> Details regarding equipment cost, order date,

delivery date, procurement location

Develop database of all equipment observations

By observing procurement durations byequipment type, an average for a given timeperiod can be developed

Procurement Research Methodology


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Research Methodology (2)

Applying the Big Mac Index Methodology to EquipmentProcurement Trends

Evaluate a set of equipment which has remained fairlyconstant over time

Constant metallurgy

No appreciably changes in capacity and operating conditions

We present data for two examples

Fabricated Drums for Delayed Cokers

Heavy Walled Reactors Reactornomics

Research Outline


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Research Outline

Objective


Methodology

Database Statistics

Results

Conclusions


Methodology

Database Statistics Results

Conclusions

Procurement Research


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Number of Observations:

Pieces of Equipment

Number of Projects

Companies

Country of Origin

Database Description (1)

2008

721

288

69

30

* The Procurement Database is separate from the Equipment Database. While

there is overlap, there are also exclusive observations.

Research Outline


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Research Outline

Objective


Methodology

Database Statistics

Results

Conclusions


Methodology

Database Statistics

Results

Conclusions

Procurement Duration Over TimeV l P i d O $1 Milli (2008 USD)


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Vessels Priced Over $1 Million (2008 USD)

5

10

15

20

25

30

Pro

curementDurations(Months)

+1 Std.

-1 Std.

Mean

2000-2003 2004-2006 2007-Present

N = 11 N = 53 N = 25

Average Vessel

Price($USD 2008) $4.0 mm $7.4 mm $10.7 mm



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1.00

1.10

1.20

1.30

1.40

1.50

1.60

2003 2004 2005 2006 2007 2008

PercentIncrease

Vessels (Over $5 mm USD)

Pumps & Compressor


H W ll d R t D li T d


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10

20

30

40

DeliveryD

uration(months)

2001 2002 2003 2004 2005 2006 2007 2008Procurement Date

Delivery Duration by Date of Procurement

Heavy Walled Reactor Delivery Trends

P t D ti f F b i t d D l d C ki D


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6

12

18

2

4

30

36

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DeliveryD

uration(months)

1992 1994 1996 1998 2000 2002 2004 2006 2008Procurement Date (months)

Duration by Date of Procurement

Procurement Duration for Fabricated Delayed Coking Drums

SummaryVessel Procurement Times


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Vessel Procurement Times

Procurement durations have increased differently fordifferent types of equipment

Vessels priced over $1 million (2008 USD) have

increased significantly since 2006

> Some increase can be explained by vessel price

> As projects continue to reach world-scale capacity,vessel procurement times have continued to increase

> Durations for the largest vessels (over $5 mm USD 2008)have increased even more than smaller vessels

Mechanical equipment (pumps and compressors)durations have increased significantly over time

Research Outline


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Objective


Methodology

Database Statistics

Results

Conclusions


Methodology

Database Statistics

Results

Conclusions

Conclusions


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Conclusions

Prices and procurement durations for large, long-leadequipment has significantly increased

And, durations for certain types of equipment have

increased more than others

Durations do not vary by country

Some equipment has not increased as significantly induration since 2003

Tanks

Heat Exchangers Vessels (Under $1 million in 2008 USD)

Applying a Big Mac Index toReactors and Coker Drums


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Reactors and Coker Drums

Cost

Calculate $/Pound using fabricated weight and price

Assuming comparable metallurgy, does this control for differencesin size (larger capacity means heavier vessel)

> This metric should work for Fabricated Coke Drums

> Reactor data will require more modeling primarily to segregate Div 1 andDiv 2 vessels?

Schedule

Calculate procurement durations as period from purchase order tosite delivery (months)

Some variation due to size of order (single versus multiple items)and/or shipping proximity

Path Forward


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We continue our ongoing research effort

In addition to updating equipment prices from last

year, we have expanded procurement duration lengthsdatabase

We continue to monitor these market conditions

Future research will center on linking project practiceswith equipment prices and procurement durations

For IBC 2009, IPA will explore the correlation between

the Equipment Cost Index (as well as procurementdurations) and project practices

Documents

9_Equipment Price Trends