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SPE 87028 Developing A Model To Suit Life Cycle Costing Analysis For Assets In The

SPE 87028

SPE 87028 Developing A Model To Suit Life Cycle Costing Analysis For Assets In The Oil

Developing A Model To Suit Life Cycle Costing Analysis For Assets In The Oil and Gas Industry

Suparatchai Vorarat, Dhurakijpundit University, Bangkok, Thailand. ; Assem Al-Hajj, The Robert Gordon University, Aberdeen, UK

Copyright 2004, Society of Petroleum Engineers Inc.

This paper was prepared for presentation at the SPE Asia Pacific Conference on Integrated Modelling for Asset Management held in Kuala Lumpur, Malaysia, 29-30 March 2004.

This paper was selected for presentation by an SPE Program Committee following review of information contained in an abstract submitted by the author(s). Contents of the paper, as presented, have not been reviewed by the Society of Petroleum Engineers and are subject to correction by the author(s). The material, as presented, does not necessarily reflect any position of the Society of Petroleum Engineers, its officers, or members. Papers presented at SPE meetings are subject to publication review by Editorial Committees of the Society of Petroleum Engineers. Electronic reproduction, distribution, or storage of any part of this paper for commercial purposes without the written consent of the Society of Petroleum Engineers is prohibited. Permission to reproduce in print is restricted to an abstract of not more than 300 words; illustrations may not be copied. The abstract must contain conspicuous acknowledgment of where and by whom the paper was presented. Write Librarian, SPE, P.O. Box 833836, Richardson, TX 75083-3836 U.S.A., fax 01-972-952-9435.

Abstract This paper explores the application of LCC (Life Cycle Costing) concepts in the oil and gas industry. The paper details research into the development of a LCC model for using in SAP (System, Application and Products in Data Processing). Information held in the existing system in the oil and gas industry has been investigated in order to determine whether or not it is adequate to support LCC application for assets. The conceptual framework will develop the LCC technique as a tool to carry out costing analysis for new and existing systems. It will ensure that existing systems data are optimized for use in LCC applications and will investigate the feasibility of integrating the LCC model with existing systems. Based on this conceptual framework a LCC model will be developed. The proposed system model provides a structural breakdown of cost (SBC) that can be applied to any asset at any level, such as super system, system, sub-system and equipment level in its lifecycle. The purpose of this SBC is to act as an aide memoir, as the starting point for developing a project/asset specific SBC that is tailored to the needs of a particular LCC requirement. The overview of SBC is provided to identify the data requirement for estimated cost element and provides a definition for cost element. Consequently, if SAP-LCC is used for analysis at every, it is possible to identify the level that is the most significant in order to develop or reduce the cost in LCC at that level.

Introduction Life Cycle Costing (LCC) is an evaluation technique for choosing between alternative options taking into consideration all costs that emerge throughout the life of an asset, from initial investment costs to subsequent maintenance and operating costs through to abandonment. Dale (1) describes LCC as a mathematical method that is used to form or support

a decision and usually provides a framework for weighting

acquisition costs and whole life support cost, by quantifying and appraising all cost elements over time, and by determining the mix of cost elements which provides the best value for money. LCC has a broad range of applications. It has been applied during the conceptual, planning design, construction and operating stages of facilities or product. It has been used as a tool to assist in decision making, where the analysis of results is based solely on economic factors. For many years the oil and gas industry has assessed the financial viability of projects on the basis of minimum capital cost (CAPEX), whereas operating costs (OPEX) have played little part in the decision making process. This has ignored a potentially large cost and has resulted in higher than expected operating and support costs. This omission is now recognised by the industry. As the number of large new developments has declined, the emphasis has moved towards the maintenance and updating of existing assets which has focused more attention on operating costs. In addition, external pressures, such as a low and static oil price, have further added to the pressures to minimise cost (2). The difficulties in using LCC include the poor level of availability of data and the uncertainty of future prediction

factors which involves selection of discount rates, life of asset, and forecasting future operating and maintenance costs. In addition, it is difficult to test whole life cost models because typically at least ten years of records are required (3). Whilst it may be true that complete data on the maintenance process and technological obsolescence in the oil and gas industry are available, the problems still facing LCC analysts are two folds: i) the diversity of sources ii) the inconsistency in the manner in which the data is recorded. Perhaps more important is the fact that the analyst is faced with a plethora of information on operating and maintenance costs which may be accumulated over a long period of time, making the handling of this amount of data an extremely tedious and cumbersome exercise. It is of paramount importance, therefore, that techniques be devised to simplify the handling and analysis of this volume of data, without any substantial reduction or deviation in accuracy. Vast amounts

of information are gathered by a variety of means for different

purposes. LCC by its nature is imposing a new challenge regarding the gathering of new sets of data. To avoid the duplication of effort and of valuable resources it is important to search for and extract useful information from existing

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systems to use in LCC analysis. The main hurdles and difficulties confronting the application of LCC in the oil and gas industry are summarised as follows; (4).

The structure of available data does not readily lend itself to determining the optimum pay off between capital and through

The quality of decisions made is constrained by the quality of available information.

The knowledge on life cycle costing is very much limited to the theory. Improving knowledge and understanding and ultimately confidence in the applicability of the technique comes only after it is proven by implementations.

The information such as life expectancies, technological changes, inflation, interest rate and future operation are all important aspects of LCC and yet cannot be accurately predicted.

Forecasting is always difficult and may present one of the major difficulties when applying the technique. Accurately assessing the maintenance and operation costs of different components, process and systems cannot be easily achieved

Furthermore, there is the inconsistency in the manner in which information is collected and stored in the industry even within the one organisation. This inconsistency has hindered the exchange and use of valuable information in major companies. From the foregoing discussion it is evident that there is a need to use information collected in existing data collection systems available in the industry. In addition a LCC database should be designed in a way to facilitate this use of information SAP (System, Application and Products in Data Processing) is computer software that provides integrated support for a wide range of business function needs. SAP provide services in many areas including electronic commerce, customer relationship management, strategic enterprise management, business intelligence, supply chain management, and industry - specific templates, virtual training classes and professional services. For the forgoing services and activities information are collected and stored in the SAP business. LCC is a holistic approach in asset management and thus it covers almost every aspect of the business. Information collected for use in SAP applications will eventually be directly or indirectly used for LCC analysis

Methodology As stated earlier, one of the main obstacles facing LCC application is data whether in terms of availability or the format in which it is recorded and stored. Based on this fact, it was important to search into the industry's systems to paint a picture of what is made available to analysts. Various databases were sought and their relevance to the study was established.

It was concluded that databases available in the industry are limited to specific uses only and is not possible to relate the information to a complete asset for comparison purposes.

Information can help for example establishing the reliability of specific equipment and machinery but it would not be possible

to make comparisons of systems and or sub-systems within the

same organisation to measure performance and improve operability, maintainability and so forth. At this stage the study focused on the adequacy of information available in the companies system to fulfil requirements for proper LCC analysis. This is followed by establishing whether or not the data required for the LCC models is held in SAP and decide on sources for data that is not available. Having completed this, a model will be developed to provide a structural breakdown of costs (SBC) for use on SAP. Then model will then be tested to demonstrate that it can be used to support industry’s activities. Finally, the feasibility of integrating the LCC model with SAP will be carried out and conclusions from the study and the way forward will be stated.

Data Requirment for Life Cycle Costing The data required for whole life costing exercise will comprise

a vast mass of information. It is important not only to

understand the process from the initial data collection stage to the final output and decision-making point, but also to consider what types of data are needed and their sources. The usefulness of data should be evaluated in relation to their cost,

and their means of storage should also be considered. LCC analysis can only be as good as the input data, considerable thought must go into the design of the requisite information system. The data requirement to produce a LCC analysis is extensive, and will probably be an amalgam of information obtained both in-house, or principally from the operation of similar machines, and of performance forecasts provided by the supplier or manufacturer. A checklist of all aspects which potentially contribute to the cost-effectiveness of a particular capital asset, and cost-effective trade-offs, should be performed amongst the parameters. If all the required information is not available from the supplier or manufacture, other sources may need to be investigated such as trade associations or other users of the same equipment.

Structure Breakdown of Cost (SBC) of SAP-LCC System The SAP-LCC system is designed as a model by which LCC can be analysed within the SAP R/3 system using information available in Shell. This means that LCC can be managed through the SAP R/3 system. When accomplishing a life cycle cost analysis, the analyst must develop a structure breakdown of cost showing the numerous categories that are combined to provide the total cost. There is no set method for breaking down cost as long as the method used can be tailored to the specific application. The structure breakdown of cost should exhibit the following basic characteristics:

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1.All systems cost elements must be considered 2.Cost categories are generally identified with significant level of activity. 3.The cost structure and categories should be coded in such a manner as to allow for the analysis of certain specific areas of interest while virtually ignoring other areas. 4.When related to a specific programme, the cost structure should be compatible (coding) with the programme work breakdown structure (WBS) and with the management accounting procedures used in collecting costs. Certain costs are derived from accounting records and should be a direct input into the life cycle cost analysis. The major components of the SBC in the proposed SAP- LCC are presented in figure 1.

SAP - LCC C1 C2 C3 C4 CAPEX OPEX Deferment Disinvestment

Figure 1: Level 1 of SBC of SAP- LCC

The SAP-LCC requirements include CAPEX and OPEX, and this would be appropriate to all whole life cost evaluations. Deferment and Disinvestment are generally applicable at the field/platform level, but may be extended to the equipment level evaluation.

SAP-LCC Input-Output This section shows some of the developed features that can make the SAP-LCC model. The main menu of SAP - LCC is divide into two application input main menu. The first one is the menu for LCC existing system analysis (Fig. 2). The second one is LCC for new asset analysis.

(Fig. 2). The second one is LCC for new asset analysis. Figure 2: SAP-LCC Input for









The SAP-LCC Existing Asset Reporting The top of SAP-LCC analysis screen as shown in Figure 3 is similar to the cost analysis of SAP PM. This menu is used in every application of SAP-LCC reporting that include forward, back, execute, cancel and change drill-down, etc.

forward, back, execute, cancel and change drill-down, etc. Figure 3: The Top of SAP-LCC Analysis Screen

Figure 3: The Top of SAP-LCC Analysis Screen

When the function location or WBS and Period (by month to month) is put in the SAP-LCC report as shown in Figure 2 the first screen will appear as in Figure 4. The SAP-LCC reporting of each asset in Shell UK is referred by level of SBC of WBS or function location. The hierarchy of SBC of LCC will use the principle of cost analysis reporting in SAP PM. The change drill-down menu is used for selecting SBC including level and month. From Figure 4 NPV is not included in life cycle cost. This screen shows LCC SBC Level 1, WBS, Month to Month at the topic. The report demonstrates total plan cost, total actual cost, difference and percentage of difference of LCC Total, CAPEX, OPEX, Deferment and Disinvesment. When double clicking at the SBC of LCC like CAPEX, OPEX, Deferment or Disinvestment, the detail of each cost will appear. For example double clicking at OPEX the result will be as shown in Figure 5. With a further double click at Maintenance Cost in SBC of OPEX the detail result will appear.

Cost in SBC of OPEX the detail result will appear. Figure 4: SAP- LCC Analysis by

Figure 4: SAP- LCC Analysis by SBC of Level 1 Report.

Figure 4: SAP- LCC Analysis by SBC of Level 1 Report. Figure 5: SAP- LCC Analysis

Figure 5: SAP- LCC Analysis by SBC of OPEX in Level 2 Report.

This topic demonstrates the input and estimation of the information in the menu screen of the SAP-LCC for new asset analysis purpose system. A water injection pump 4240 is used as a case study for input the data that LCC need. Comparison for making a decision between repairing the existing equipment or buying the new equipment can be done. The information used for calculating LCC such as CAPEX, OPEX, deferment cost and disinvestment is needed. This information is divided by SBC of the asset that has already described in SAP-LCC Proposed System topic (Fig.1). Figure 6 shows the screen which you use for LCC analysis on the new asset. This screen is divided into 3 parts.

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In the first part, the information of Function location, model, life span of the asset, starting year and percentage of discount rate is wanted to add. Function Location is for the new equipment which you want to change or replace the existing equipment. Model is the type or series number of the new equipment. Life Span of the new asset is mean of the life or the period time that you want to use this equipment. Starting Year is the year which will first running in line processing and percentage of Discount Rate is Net Present Value (NPV).

and percentage of Discount Rate is Net Present Value (NPV). Figure 6: The First Menu of

Figure 6: The First Menu of SAP- L CC Analysis for New Asset

After putting in this information click button in the second part (SBC INPUT) such as CAPEX, Operating Cost, Maintenance Cost, Logistic Cost, Other Operating Cost, Deferment Cost and Disinvestment. It will show the SBC of each level for adding the cost information in each year of life span. For example when you add the information in Figure 6 completely then click the operating cost button in SBC INPUT section the result will appear in Figure 7. When you click the Manpower button the table of Internal and External Manpower for putting the cost of each year will appear.

In the third part of SAP-LCC Report (Fig.6) can calculate the total life cycle cost of the new asset by using the

following equation:

Total Life Cycle Cost = CAPEX



i =1




CAPEX is the acquisition cost of the asset. NL is the lifetime of the asset in years. OPEX is operating cost, maintenance cost, logistic cost, other operation cost and deferment cost. DISC is the disposal cost or disinvestment cost of the asset

DISC is the disposal cost or disinvestment cost of the asset Figure 7: SAP –LCC Input

Figure 7: SAP –LCC Input Data in Operating Cost

Conclusions Based on the research work that underpins this thesis, the following major conclusions can be drawn. The information extracted from SAP R/3 in Oil and gas industry is not enough for LCC Analysis and cannot calculate costs at all equipment levels. It is difficult to apply Life Cycle Costing on system and on equipment level by using SAP because

Whole WBS of the SAP system does not support costs on all sub system and equipment levels.

Work orders that are displayed on SAP Account Main Expenditure Reports cannot identify all systems, sub systems and equipment levels.

Some information that LCC needs is not collected on SAP, such as energy used, or operator costs at sub-system and equipment level.

Initial costs of equipment (10 years ago) are not available on existing system.

Deferment information has been collected in existing information system that is absolutely separate from SAP. The methods by which deferment costs are collected and stored mean that they cannot be immediately matched with SAP functional locations and therefore defined systems. The coding structure by which deferments are

recorded does however follow a logical construction. This code does not directly relate to a function location but it can be matched approximately to a system/ sub-system and equipment level.

From the application of using the SAP-LCC model on existing system in the oil and gas industry. It can be seen that the SAP-LCC model can carry out and investigate data collection of SBC at platform, system, sub-system and equipment level. If the SAP-LCC is run in SAP including deferment costs, it will be possible to analyse the SBC by referring function location in every level. This model can be used for many different types of interesting analysis, such as asset management analysis, cost prediction in the future, deferment analysis, maintenance management etc.

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1. Dale.: Introduction to life cycle costing, Life cycle costing for construction, edited by J.W. Bull, Blackie A&P, (1993) 1-22.

2. WLCJIP Oil and Gas Industry Whole Life Costing initiative, WLC Guidance Document, November (1995) JIP/FD/FD1/V.1.

3. Al-Hajj, A.: Simple Cost-Significant Models for Total Life - Cycle Costing in Buildings. PhD Thesis, Dundee University, UK.

4. Al-Hajj, A.: Assessing The Whole Life Costing of The Asset from Conception to Abandonment, IQPC Conference, Cradle to Grave: Whole Life Asset Management in Oil: Developing a consistent and whole life approach to optimising asset performance, (1998). 25-26