W2_Candra Nugraha_Life Cycle Cost


I have been going through PDG’s presentation of Total Cost which similarly but applied differently for piping design as per graph below:

 

Actually the graph is showing an economic balance which one particular pipe diameter gives the least total cost including the cost for pumping the liquid and fixed charges for the installed piping system. The pumping cost is increased with decreased size of pipe diameter because of frictional effects, while the fixed charges for the pipeline become lower when smaller pipe diameters are used because of the reduced of capital investment. The optimum economic diameter is located where the sum of pumping cost and fixed cost for the pipeline become a minimum (the least Total Cost) which represented by E.

This topic is also covered under Engineering Economy 15th edition, chapter 2.1.6 Life Cycle Cost as refer to a summation of all the cost related to a product, structure, system or service during its life span which can be divided into two general time periods: the acquisition phase and the operation phase.

Why use Life Cycle Costing?

The determination of costs is an integral part of the asset management process and is a common element of many of the asset manager’s tools, particularly Economic Appraisal, Financial Appraisal, Value Management, Risk Management and Demand Management. Both the capital and the ongoing operating and maintenance costs must be considered wherever asset management decisions involving costs are made. This is the Life Cycle Cost approach.

 How is The Life Cycle Costing Process?

 As refer to the New South Wales Treasury under the TAM04-10 on September 2004, the LCC process is typical what we have on the Project Life Cycle.

 

 All stages may be performed iteratively as needed. Assumptions made at each stage should be rigorously documented to facilitate such iterations and to aid in interpretation of the results of the analysis. LCC analysis is a multi-disciplinary activity. An analyst should be familiar with the philosophy, which underlies Life Cycle Costing (including typical cost elements, sources of cost data and financial principles), and should have a clear understanding of the methods of assessing the uncertainties associated with cost estimation.

 How do I use in Oil and Gas Business?

 This is going to be a critical point for government agency when doing the evaluation process of new discovery fields prior to come up with Plan of Development as GO or No GO decision. I have been searching and found that Norsok standard can be applied as references:

Standard O-CR-001, Common Requirement LCC for Systems and Equipment

Calculation Method are using:

  • Value of Money related to time
  • Capital Cost
  • Operating Cost, for costs that will be constant through the lifetime, multiply the annual cost with a discount factor f to get the cost over the lifetime:

 

  • Cost of Deferred Production as per formula:

 

Standard O-CR-002, Common Requirement LCC for Production Facility

 The LCC model for production facility can be used for:

  • Optimizing production facility.
  • System optimization during the engineering phase.
  • Modification projects and optimization during operations.

The cost elements to be included are:

Capital cost:

  • Design and administration cost.
  • Equipment and materials purchase cost.
  • Fabrication cost.
  • Installation cost.
  • Commissioning cost.
  • Insurance spares cost.
  • Reinvestment cost.

Operating cost:

  • Man-hour cost.
  • Spares and consumables consumption cost.
  • Logistic support cost.
  • Energy consumption cost.
  • Insurance cost.
  • Onshore support cost.

Cost of deferred production.

 References:

  1. Peters, Max S & Timmerhaus, Klaus D. (1991), Plant Design and Economics for Chemical Engineers 4th Edition, Singapore: McGraw-Hill, Inc.
  2. New South Wales Treasury (2004). Total Asset Management Life Cycle Costing Guideline. Retrieved from Web site:  http://www.treasury.nsw.gov.au/__data/assets/pdf_file/0005/5099/life_cycle_costings.pdf
  3. Norsok Standard (1996), Standard O-CR-001, Common Requirement LCC for Systems and Equipment. Retrieved from Web site: http://www.standard.no/PageFiles/1138/O-CR-001r1.pdf 
  4. Norsok Standard (1996), Standard O-CR-002, Common Requirement LCC for Production Facility. Retrieved from Web site: http://www.standard.no/PageFiles/1137/O-CR-002r1.pdf

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About Candra Nugraha

I'am living in jakarta, indonesia
This entry was posted in Candra Nugraha, Week #2, Weekly Submission. Bookmark the permalink.

One Response to W2_Candra Nugraha_Life Cycle Cost

  1. DrPDG says:

    Nicely researched, Pak Candra and very well written, but you missed two important steps in the analysis process- (see page 7, table 1-1 of your Engineering Economy)

    You didn’t make any recommendation as to which of the alternatives was best (and why) nor did you explain how you would monitor the results if management were to accept your recommendation.

    So I will accept this weeks posting, but for the future, I would like to see you following the template shown in Table 1-1 more closely. (I am happy with either problem or opportunity statement) But I am would encourage you to follow the full 7 step process.

    When it comes exam time, you will thank me for making you do this!!!

    BR,
    Dr. PDG, Jakarta

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