W5_Adi Nugroho_Gas Pipeline

Problem Statement

An Oil Company intend to deliver gas to its buyer from the gas processing facility to the gas buyer tie in point. There are some existing facilities of 8” pipeline 30 km length from the previous operator. An engineering assesment to the existing pipeline resulting information that 60% of pipeline length need to be repaired in order to service gas flow from Oil company’s plant to the buyer.

Alternative Solution

There are two possible solutions available for company to deliver the gas using the pipeline.

Alternative 1: Use the existing 8” pipeline with the repairment on 18KM length of segment. Cost US$ 2,992,000. Expected lifetime of service 10 years.

Alternative 2: Construct new 8” pipeline for 30km length. Cost US$ 3,960,000. Expected lifetime of service 15 years.


The minimum attractive rate of returnnis 10% per year. Maintenance cost for Alternative 1 is 20% of Capital investment per year, while Alternative 2 only cost 10% of Capital investment per year for maintenance.

If a failure does occur it will cost US$ 500,000 to compensate the property damage.

Probability of failure for :

Alternative 1: 15%
Alternative 2: 10%

Selection Criteria

To choose alternative is best based on Equivalent Uniform Annual Cost

Analysis and Comparison of Alternatives

Capital Recovery Amount = Capital Investment x (A/P, 10%,10)…………………..for Alternative 1
CAR (Alt 1)= US$ 2,992,000(0.1627) =  US$ 486,798.40

Capital Recovery Amount = Capital Investment x (A/P, 10%,15)…………………..for Alternative 2
CAR (Alt 2)= US$ 3,960,000(0.1315) =  US$ 520,740.00

Annual Maintenance Expense = Capital Investment x (0.2) = US$ 2,992,000(0.2)= $598,400.00 (Alt 1)

Annual Maintenance Expense = Capital Investment x (0.1) = US$ 3,960,000(0.1) = $396,000.00 (Alt 2)

Expected Annual Cost of Failure = Damage compensation x Probability of failure
Expected Annual Cost of Failure(Alt 1)= US$ 500,000×0.15=$75,000.00
Expected Annual Cost of Failure(Alt 2)= US$ 500,000×0.15=$50,000.00


Capital Recovery Amount

Annual Maintenance Expense

Expected Annual Cost of Failure

Total Expected Equivalent Annual Cost











Selection of Preferred Alternative

The analysis shows that minimum expected equivalent annual cost will be achieved if the company construct a new 8” pipeline for 30km length, then the Alternative 2 would be the best option.


Performance Monitoring & Post Evaluation of Result

  • Close monitoring on Construction project of a new pipeline
  • Perform a pipeline integrity management
  • Conduct periodic inspection and maintenance as planned



Sullivan, William G., Wicks, Elin M. & Koelling, C. Patrick (1942), Engineering Economy15th Edition, Singapore: Prentice Hall, Inc.

This entry was posted in Adi Nugroho, Week #5, Weekly Submission. Bookmark the permalink.

2 Responses to W5_Adi Nugroho_Gas Pipeline

  1. DrPDG says:

    AWESOME, Mas Adi!!! Love it!!!

    Very real problem statement, nicely set up, documented and QUANTIFIED using the tools and techniques from your study materials.

    The only part I would urge you to consider (maybe a topic for a FUTURE posting?) would be from a risk analysis perspective, what happens if the selling price of gas were to change significantly either + or -?

    Another possible FUTURE TOPIC would be to conduct a sensitivity analysis (either spider graph or tornado diagram) on the variables which are most likely to IMPACT the decision (either favorably or unfavorably).

    Based on several business case analysis I have participated in for the oil and gas sector, the cost of the project is usually quite low in terms of making a decision. Explained another way, with oil selling at $110 a barrel, and wellhead costs of $5.00 a barrrel, does it really matter how much the project costs?

    Keep up the good work, Mas Adi!!! And PLEASE make it a point to mentor someone….. David, Pak Budhi, Erwin, Teguh and Tea are all lost in the wilderness (some more than others) and need some help.

    Dr. PDG, Jakarta

  2. Adi Nugroho says:

    Thanks for the input and comment, Dr.PDG. In these early weeks, I’m in learning process and familiarization of the tools and techniques in Eng-Econ Book. So I hope you understand if I put a simple problem in my blog which is less-sophisticated as per your expectation. But I hope in the future I will be better in terms of increasing the complexity of problems.

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