UNIT V - COST EVALUATION

Cost Evaluation (Estimation) – Economic evaluation of petroleum reused and refineries.

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COST ESTIMATION
Although detailed discussions of various capital cost estimating methods are not part of the intended
scope of this work, some comments are pertinent. All capital cost estimates of industrial process plants can be
classified as one of four types:
1. Rule-of-thumb estimates
2. Cost-curve estimates
3. Major equipment factor estimates
4. Definitive Estimates
The capital cost data presented in this work are of the second type cost-curve estimates.
1. Rule-of-Thumb Estimates
The rule-of-thumb estimates are, in most cases, only an approximation of the order of magnitude of
cost. These estimates are simply a fixed cost per unit of feed or product. Some examples are
Complete coal-fired electric power plant: $3,250/kW
Complete synthetic ammonia plant: $260,000/TPD
Complete petroleum refinery: $33,000/BPD
These rule-of-thumb factors are useful for quick ballpark costs. Many assumptions are implicit in these
values, and the average deviation from actual practice can often be more than 50%.
2. Cost-Curve Estimates
The cost-curve method of estimating corrects for the major deficiency illustrated above by reflecting the
significant effect of size or capacity on cost. These curves indicate that costs of similar process units or plants
are related to capacity by an equation of the following form:

The relationship was reported by Lang, who suggested an average value of 0.6 for the exponent (X).
Other authors have further described this function. Cost curves of this type have been presented for petroleum
refinery costs in the past.
The curves presented herein have been adjusted to eliminate certain costs such as utilities, storage,
offsite facilities, and location cost differentials. Separate data are given for estimating the costs of these items.
The facilities included have been defined in an attempt to improve accuracy.
It is important to note that most of the cost plots have an exponent that differs somewhat from the 0.6
value. Some of the plots actually show a curvature in the log–log slope that indicates that the cost exponent for
these process units varies with capacity. Variations in the log–log slope (cost exponent) range from about 0.5
for small-capacity units up to almost 1.0 for very large units.
The cost-curve method of estimating, if carefully used and properly adjusted for local construction
conditions, can predict actual costs within 25%. Except in unusual circumstances, errors will probably not
exceed 50%.
3. Major Equipment Factor Estimates
Major equipment factor estimates are made by applying multipliers to the costs of all major equipment
required for the plant or process facility. Different factors are applicable to different types of equipment, such
as pumps, heat exchangers, and pressure vessels. Equipment size also has an effect on the factors.
 It is obvious that prices of major equipment must first be developed to use this method. This requires
that heat and material balances be completed in order to develop the size and basic specifications for the major
equipment.
This method of estimating, if carefully followed, can predict actual costs within 10 to 20%. A shortcut
modification of this method uses a single factor for all equipment. A commonly used factor for petroleum
refining facilities is 4.5. The accuracy of using this shortcut is, of course, lower than when using individual
factors.
4. Definitive Estimates
Definitive cost estimates are the most time-consuming and difficult to prepare but are also the most
accurate. These estimates require preparation of plot plans, detailed flow sheets, and preliminary construction
drawings. Scale models are sometimes used. All material and equipment are listed and priced.
The number of worker-hours for each construction activity is estimated. Indirect field costs, such as
crane rentals, costs of tools, and supervision, are also estimated. This type of estimate usually results in an
accuracy of ±5%.
5. Summary Form for Cost Estimates
The items to be considered when estimating investment from cost curves are
Process units
Storage facilities
Steam systems
Cooling water systems
Subtotal A
Offsites
Subtotal B
Special costs
Subtotal C
Location factor
Subtotal D
Contingency
Total
6. Storage Facilities
Storage facilities represent a significant item of investment costs in most refineries. Storage capacity for
crude oil and products varies widely at different refineries. In order to properly determine storage
requirements, the following must be considered:
i. The number and type of products
ii. Method of marketing
iii. Source of crude oil
iv. Location and size of the refinery.
Installed costs for “tank farms” vary from $50 to $130 per barrel of storage capacity. This includes
tanks, piping, transfer pumps, dikes, fire protection equipment, and tank-car or truck loading facilities. The
value is applicable to low vapor pressure products such as gasoline and heavier liquids. Installed costs for
butane storage ranges from $100 to $130 per barrel, depending on size. Costs for propane storage range from
$120 to $160 per barrel.
7. Land and Storage Requirements
Each refinery has its own land and storage requirements, depending on location with respect to markets
and crude supply, methods of transportation of the crude and products, and number and size of processing
units.
Availability of storage tanks for short-term leasing is also a factor, as the maximum amount of storage
required is usually based on shutdown of processing units for turnaround at 18- to 24-month intervals rather
than on day-to-day processing requirements.
 If sufficient rental tankage is available to cover turnaround periods, the total storage and land
requirements can be materially reduced, as the land area required for storage tanks is a major portion of
refinery land requirements. Three types of tankage are required:
i. Crude
ii. Intermediate
iii. Product
For a typical refinery that receives the majority of its crude by pipeline and distributes its products in the
same manner, about 13 days of crude storage and 25 days of product storage should be provided. The 25 days
of product storage is based on a 3-week shutdown of a major process unit. This generally occurs only every 18
months to 2 years, but sufficient storage is necessary to provide products to customers over this extended
period. A rule-of-thumb figure for total tankage, including intermediate storage, is approximately 50 barrels of
storage per BPD crude oil processed.
The trend to producing many types of gasolines and oxygenated components can increase blending and
product storage requirements by about 50%. Nelson indicates that in 1973, the average refinery had 69 days of
total storage capacity. In 2005, the range was about 25 to 90 days of total storage.
The land requirements are frequently dictated by considerations other than process or storage because of
the desire to provide increased security, to be isolated from neighboring buildings, and so on. If operational
matters are the prime consideration, the land necessary for operational and storage facilities is about 4 acres
per 1000 BPCD crude capacity.
Land provided for growth and expansion to other processes, such as petrochemicals, should not be
included in the investment costs, against which the return on investment is calculated. Land purchased for
future use should be charged against the operation for which it is intended against overall company operations.
8. Steam Systems
An investment cost of total steam generation capacity is used for preliminary estimates. This represents
the total installed costs for gas- or oil-fired, forced-draft boilers, operating at 250 to 300 psig, and all
appurtenant items such as water treating, deaerating, feed pumps, yard piping for steam, condensate, and stack
gas cleanup.
Total fuel requirements for steam generation can be assumed to be 1200 Btu (lower heating value, or
LHV) per pound of steam.
A contingency of 25% should be applied to preliminary estimates of steam requirements. Water makeup
to the boilers is usually 5 to 10% of the steam produced.
9. Cooling Water Systems
An investment cost of total water circulation is recommended for preliminary estimates. This represents
the total installed costs for a conventional induced-draft cooling tower, water pumps, water treating equipment,
and water piping. Special costs for water supply and blow down disposal are not included.
The daily power requirements (kWh/day) for cooling water pumps and fans is estimated by multiplying
the circulation rate in gpm by 0.6. This power requirement is usually a significant item in total plant power
load and should not be ignored.
The cooling tower makeup water is about 5% of the circulation. This is also a significant item and
should not be overlooked.
An “omission factor,” or contingency, of 15% should be applied to the cooling water circulation
requirements.
10. Other Utility Systems
Other utility systems required in a refinery are electric power distribution, instrument air, drinking
water, fire water, sewers, waste collection, and others. Because these are difficult to estimate without detailed
drawings, the cost is normally included in the offsite facilities.
i. Offsites
Offsites are the facilities required in a refinery that are not included in the costs of major facilities. A
typical list of offsites is shown below:
 a. Electric power distribution
b. Fuel oil and fuel gas facilities
c. Water supply, treatment, and disposal
d. Plant air systems
e. Fire protection systems
f. Flare, drain, and waste containment systems
g. Plant communication systems
h. Roads and walks
i. Railroads
j. Fences
k. Buildings
l. Vehicles
m. Product and additives blending facilities
n. Product loading facilities
Obviously, the offsite requirements vary widely between different refineries. The values shown below
can be considered as typical for grassroots refineries when estimated as outlined in this text.

Offsite costs for the addition of individual process units in an existing refinery can be assumed to be
about 20 to 25% of the process unit costs.
ii. Special Costs
Special costs include the following:
a. Land
b. Spare parts
c. Inspection
d. Project management
e. Chemicals
f. Miscellaneous supplies
g. Office and laboratory furniture
For preliminary estimates, these costs can be estimated as 4% of the cost of the process units, storage,
steam systems, cooling water systems, and offsites. Engineering costs and contractor fees are included in the
various individual cost items.
iii. Contingencies
Most professional cost estimators recommend that a contingency of at least 15% be applied to the final
total cost determined by cost-curve estimates of the type presented herein.
The term contingencies cover many loopholes in cost estimates of process plants. The major loopholes
include cost data inaccuracies when applied to specific cases and lack of complete definition of facilities
required.
iv. Escalation
All cost data presented in this book are based on U.S. Gulf Coast construction averages for the year
2005. This statement applies to the process unit cost curves, as well as values given for items such as cooling
water systems, steam plant system, storage facilities, and catalyst costs. Therefore, in any attempt to use the
data for current estimates, some form of escalation or inflation factor must be applied.
 Many cost index numbers are available from the federal government and from other published sources.
Of these, the Chemical Engineering Plant Cost Index and the Nelson-Farrar Refinery (Inflation) Index are the
most readily available and probably the most commonly used by estimators and engineers in the U.S. refining
industry.
The use of these indices is subject to errors inherent in any generalized estimating procedure, but some
such factor must obviously be incorporated in projecting costs from a previous time basis to a current period. It
should be noted that the contingencies discussed in the previous section are not intended to cover escalation.
Escalation or inflation of refinery investment costs is influenced by items that tend to increase costs as
well as by items that tend to decrease costs. Items that increase costs include obvious major factors, such as
a. Increased cost of steel, concrete, and other basic materials on a per-ton basis
b. Increased cost of construction labor and engineering on a per-hour basis
c. Increased costs of excessive safety standards and exaggerated pollution control regulations
d. Increase in the number of reports and amount of superfluous data necessary to obtain local, state, and
federal construction permits
Items that tend to decrease costs are basically all related to technological improvements. These include
e. Process improvements developed by the engineers in research, design, and operation
f. More efficient use of engineering and construction personnel
Examples of such process improvements include improvement of fractionator tray capacities, improved
catalysts that allow smaller reactors, and improved instrumentation, allowing for consistently higher plant feed
rates.
v. Plant Location
Plant location has a significant influence on plant costs. The main factors contributing to these
variations are climate and its effect on design requirements and construction conditions; local rules,
regulations, codes, and taxes; and availability and productivity of construction labor.
Relative hydrocarbon process plant costs on a 2005 basis at various locations are given below:

ECONOMIC EVALUATION
Economic evaluations are generally carried out to determine if a proposed investment meets the
profitability criteria of the company or to evaluate alternatives. There are a number of methods of evaluation,
and a good summary of the advantages and disadvantages.
Most companies do not rely upon one method alone but utilize several to obtain a more objective
viewpoint. Equations and certain basic information are required for economic evaluation calculations.
There is a certain amount of basic information needed to undertake the calculations for an economic
evaluation of a project.
1. Definitions
i. Depreciation
Depreciation arises from two causes: deterioration and obsolescence. These two causes do not
necessarily operate at the same rate, and the one having the faster rate determines the economic life of the
project.
 Depreciation is an expense, and there are several permissible ways of allocating it. For engineering
purposes, depreciation is usually calculated by the straight-line method for the economic life of the project.
Frequently, economic lives of 10 years or less are assumed for projects of less than $250,000.
ii. Working Capital (WC)
The working capital is the sum of feed and product inventories, cash for wages and materials, accounts
receivable, and spare parts for a 30 day period.
iii. Annual Cash Flow (ACF)
The annual cash flow is the sum of the earnings after taxes and the depreciation for a 1-year period.
iv. Sensitivity Analysis
Uncertainties in the cost of equipment, labor, operation, and raw materials as well as in future prices
received for products can have a major effect on the evaluation of investments.
It is important in appraising the risks involved to know how the outcome would be affected by errors in
estimation.
Sensitivity analysis is made to show the changes in the rate of return due to errors of estimation of
investment costs and raw material and product prices.
These depends on cost analysis performed (rough estimate or detailed analysis), stability of the raw
material and product markets, and the economic life of the project.
Each company will have its own bases for sensitivity analyses, but when investment costs are derived
from the installed-cost figures in this book, the following values are reasonable:

v. Product and Raw Material Cost Estimation

It is very important that price estimation and projections for raw materials and products be as realistic as
possible.
Current posted prices may not be representative of future conditions, or even of the present value to be
received from an addition to the quantities available on the market.
A more realistic method is to use the average of the published low over the past several months.
2. Return on Original Investment (ROI)
This method is also known as the engineer’s method, du Pont method, or the capitalized earning rate. It
does not take into account the time value of money but, because of this, offers a more realistic comparison of
returns during the latter years of the investment.
The return on original investment is defined as by following formula.

3. Payout Time
The payout time is also referred to as the cash recovery period or years to pay out. It is calculated by
the following formula and is expressed to the nearest one tenth year:

If the annual cash flow varies, the payout time can be calculated by adding the cash income after income
taxes for consecutive years until the sum is equal to the total investment.
The results can be reported to a fractional year by indicating at what point during the year the cash flow
will completely offset the depreciable investment.
4. Discounted Cash Flow Rate of Return (DCFROR)
The discounted cash flow rate of return method is also called the investors ‘return on investment,
internal rate of return, profitability index, and interest rate of return. A trial-and-error solution is necessary to
calculate the average rate of interest earned on the company’s outstanding investment in the project.
It can also be considered as the maximum interest rate at which funds could be borrowed for investment
in the project with the project breaking even at the end of its expected life.
The discounted cash flow is basically the ratio of the average annual profit during construction and
earning life to the sum of the average fixed investment, working capital, and interest charged on the fixed and
working capital that reflects the time value of money. This ratio is expressed as a percentage rather than a
fraction.
In order to compare investments having different lives or with variations in return during their operating
lives, it is necessary to convert rates of return to a common time basis for comparison. Although any time may
be taken for this comparison, the plant start-up time is usually taken as the most satisfactory.
Expenditures prior to start-up and income and expenditures after start-up are converted to their worth at
start-up are based upon the predicted start-up time being the basis of calculation.
i. Expenditures Prior to Start-Up
The expenditures prior to start-up can be placed in two categories:
a. Those that occur uniformly over the period of time before start-up and
b. Lump-sum payments that occur in an instant at some point before the start-up time.
Construction costs are generally assumed to be disbursed uniformly between the start of construction
and the start-up time, although equivalent results can be obtained if they are considered to be a lump-sum
disbursement taking place halfway between the start of construction and start-up.
The present worth of construction costs that are assumed to occur uniformly over a period of years, T,
prior to start-up, can be calculated using either continuous interest compounding or discrete (annual) interest
compounding.
Continuous interest compounding:

Discrete (annual) interest compounding:

Where,
P = Worth at start-up time
CC = Total construction cost
T = Length of construction period in years before start-up
I = Annual interest rate
The cost of the land is a lump-sum disbursement. In the equation given, it is assumed that the land
payment coincides with the start of construction. If the disbursement is made at some other time, then the
proper value should be substituted for T.
Continuous interest compounding:

Discrete (annual) interest compounding:

Where,
LC = Land cost
T = Years before start-up time that payment was made
I = Annual interest rate
ii. Expenditures at Start-Up
Any costs that occur at start-up time do not have to be factored, but have a present worth equal to their
cost. The major investment at this time is the working capital, but there also may be some costs involved with
the start-up of the plant that would be invested at this time.
iii. Income After Start-Up
The business income is normally spread throughout the year, and a realistic interpretation is that 1/365
of the annual earnings is being received at the end of each day.
The present-worth factors for this type of incremental income are essentially equal to the continuous-
income present-worth factors.
Even though the present worth of the income should be computed on a continuous-income basis, it is a
matter of individual policy as to whether continuous or discrete compounding of interest is used. The income
for each year can be converted to the reference point by the appropriate equation.
Continuous-income, continuous-interest:

Continuous-income, with interest compounded annually:

Where,
ACF = Annual cash flow for year N
n = Years after start-up
i = Annual interest rate
For the special case where the income occurs uniformly over the life of the project after start-up, the
calculations can be simplified.
Uniform continuous-income, continuous-interest:

Uniform continuous-income, with interest compounded annually:

There are certain costs that are assumed not to depreciate and which are recoverable at the end of the
normal service life of the project. Among these are the costs of land, working capital, and salvage value of
equipment. These recoverable values must be corrected to their present worth at the start-up time.
Continuous interest:

Interest compounded annually:

Where,
SV = Salvage value,
LC = Land cost,
WC = Working capital,
i = Annual interest rate, decimal/yr
n = Economic life, yr
 For many studies, the salvage value is assumed equal to dismantling costs and is not included in the
recoverable value of the project.
It is necessary to use a trial-and-error solution to calculate the discounted cash flow rate of return
because the interest rate must be determined that makes the present value at the start-up time of all earnings
equal to that of all investments. An example of a typical balance for continuous-income and continuous-
interest with uniform annual net income is

All of the values are known except i, the effective interest rate. An interest rate is assumed, and if the
results give a positive value, the trial rate of return is too high and the calculations should be repeated using a
lower value for i.
If the calculated value is negative, the trial rate is too low and a higher rate of return should be tested.
Continue the trial calculations until the rate of return is found that gives a value close to zero. The return on
investment should be reported only to two significant figures.
5. Case-Study Problem: Economic Evaluation
The estimated 2005 construction costs of the refinery process units and their utility requirements are
listed in Table 19.1.
The cooling water and steam systems and water makeup requirements were calculated.
The estimated refinery construction start is expected to be August 2006, and the process start-up date is
anticipated to be in August 2008. Inflation rates of 3% per year are used to bring the costs to their values in
2008.
The working capital is assumed to be equal to 10% of the construction costs. A review of the refinery
personnel requirements indicates that approximately 139 people will be required to operate the refinery,
exclusive of maintenance personnel.
The maintenance personnel are included in the 4.5% annual maintenance costs. An average annual
salary of $80,000, including fringe benefits, is used.
A 20-year life will be assumed for the refinery with a dismantling cost equal to salvage value. Straight-
line depreciation will be used.
The federal tax rate is 38%, and the state rate is 7%. Investment costs and utility requirements are
summarized in Table 19.1, operating costs in Table 19.2.
A summary of overall costs and realizations is given in Table 19.3, annual costs and revenues in Table
19.4, and total investment costs in Table 19.5, together with payout time and rates of return on investment.
6. Case-Study Problem: Economic Solution
i. Storage Costs
Based on 50 bbl of storage per BPCD crude oil processed, assume 21 days storage provided for n-
butane (n-butane: 5,260 BPD × 21 days = 110,460 bbl). Total storage (5,000,000 bbl) less spheroid storages
(110,460 bbl) yields 4,889,540 bbl general storage.

ii. Investment Cost

2005 investment cost = $2,393,695,000 (Table 19.3)
Inflation rate estimated at 3% per year
Completion data scheduled for August 2007
Estimated completed cost = ($2,393,695,000) (1.03)3 = $2,615,655,000
iii. Water Makeup Cost
1. Cooling tower (makeup = 5%)
Makeup = (0.05)(104,434 gpm) = 5,222 gpm
 2. To boiler (boiler makeup = 5%; total steam produced = 212,700 lb/hr)
Makeup = (212,700)(0.05) = 10,635 lb/hr = 21 gpm
3. Process water = 240 gpm
Total makeup water, then, is 5483 gpm.
Annual water makeup cost:
(5483 gpm/1000) (1440 min/day) (365 days/yr) ($0.32/kgal) = $922,197
iv. Chemical and Catalysts Costs

v. Power Costs
Power usage = 1,084,000 kWh/day at $0.08 per kWh
Annual cost = (1,084,000) (365) ($0.08) = $31,652,800
vi. Fuel
Fuel requirements = 2,689 MMBtu/hr
Fuel gas purchased = (2,689 MMBtu/hr) ($4.25/MMBtu) = $11,430/hr
Annual cost = ($11,430) (24) (365) = $100,126,800/yr
vii. Insurance Costs
Average of 0.5% of plant investment per year:
($2,615,655,000) (0.005) = $13,078,275
viii. Local Taxes
Average of 1% of plant investment per year:
($2,615,655,000) (0.01) = $26,156,550
ix. Maintenance Costs
Average of 4.5% of plant investment per year, including material and labor:
($2,615,655,000) (0.045) = $117,704,475
x. Miscellaneous Supplies Costs
Average of 0.15% of plant investment per year:
($2,615,655,000) (0.0015) = $3,923,483
From the above analysis, it is apparent that the estimated rate of return on the investment does not
warrant the risk involved. There will have to be a greater spread between the product prices and the raw
materials costs to make the building of a 100,000 BPCD refinery an investment worth making.
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 UNIVERSITY IMPORTANT QUESTIONS
Part-A
1. How can you increase the economy of the petroleum products? (May 2015)
2. How will you meet the demands of the petroleum products? ( Nov 2014)
3. Why secondary refining processes are necessary? (Nov 2014)
4. How to classify the capital cost estimates in an industrial process plants? (May 2013)
5. Define pay out time. (May/June 2019)
6. Write about the economy of the crude? (Nov 2013)
7. How will you treat the effluents of oil emulsion? (Nov 2013)
8. How cost analysis is done?
9. List the factors to be considered for the evaluation of a refinery? (May 2013)
10. What are direct and indirect costs? (May 2013)
11. Explain cost recovery with suitable example. (May 2012)
12. Give suitable example and explain value creation. (May 2012)
13. What do you mean by ad valorem tax?
14. What are the steps involved in the economic evaluation of reused petroleum products?
15. What is the cost comparison of singe stage regenerator system with that of the two stage system?
16. What is meant by cost analysis? (May/June 2019)
17. What are the developments involved in the separation technologies?
18. What are the future developments for the economy?
19. What are the various technologies are available for the recovery of oil?
20. What are the various options to upgrade product quality?
Part-B
1. Discuss in detail about the economic evaluation of petroleum products. (May 2015)
2. Explain the reusability of petroleum products and how the effluents can be treated in refineries.
(May2015)
3. What are the critical data required to arrive at a need for additional refining capacity? Write down the
Economy. (Nov 2014) (May/June 2019)
4. What is the petroleum reused products and their usage? (Nov 2014) (May/June 2019)
5. How the efficiency of the petroleum plant increases with respect to the waste product utilization?
6. Explain the Cost-Curve methods in detail.
7. Discuss the capital cost estimate procedures for a refining industry.
8. How the equipment costs are estimated by capacity ratio exponents?
9. Explain the economic study of an oil field development project. Give a suitable case study.
10. Briefly explain the discounted cash flow rate of return.
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