W4_TOM_FPSO Time Charter Commercial Bid Evaluation using Discounted Time Value of Money (WACC) Technique


1 – Problem Recognition, Definition and Evaluation

According to American Petroleum Institute, there are 9 (nine) types of Production Facilities which are:

  1. Deepwater Development Systems
  2. Fixed Platform (FP)
  3. Compliant Tower (CT) 
  4. Tension Leg Platform (TLP)
  5. Mini-Tension Leg Platform (Mini-TLP)
  6. SPAR Platform (SPAR) 
  7. Floating Production System (FPS) 
  8. Subsea System (SS) 
  9. Floating Production, Storage & Offloading System (FPSO)

Source: http://www.api.org/oil-and-natural-gas-overview/exploration-and-production/offshore/offshore-production-facilities

In an oil field Facility Development Project that I am working for now, FPSO is the chosen option for the production facility.


Picture 1 – Picture of an FPSO

Source: http://www.rigzone.com/training/insight.asp?insight_id=299&c_id=12

 

2 – Development of the Feasible Alternatives

Production facility is a massive capital investment therefore my company decided to lease the FPSO instead of purchase. In this blog I will not focus on “why lease not purchase?” but just to share that 69% believe that oil operators prefer to lease FPSOs rather than own and operate one.

Source:http://www.oilandgasiq.com/fpso-flng/white-papers/fpso-groundbreaking-fpsos-on-the-verge-of-somethin/?&shownewswindow=1&mac=OGIQ_Events_Title_Listing_2011&utm_source=OilGasIQ&utm_medium=PPC&utm_campaign=PPC&utm_content=PPC&utm_term=PPC&gclid=CNmhkaaW57kCFQvkpAodpREAkA

3 – Development of the Outcomes for Each Alternative

The contract strategy is to have a FPSO Time Charter Contract which the Contractors (Bidders) will be responsible to build the FPSO (based on the agreed specs) and providing the service of Operation and Maintenance (O&M). Each bidder will be coming up with a commercial bid covering total cost of the total time charter lease duration (covering the FPSO capital cost+profit margin and annual O&M without profit margin).

4 – Selection of a Criterion

Company is providing the table of rate and bidder is free to bid their daily rate per annum either using Front Loaded, End Loaded, or Averaged Rate.

This table below is to illustrate the comparison of the bidder daily rate proposal:


Table 1 – Commercial Bid received for FPSO Time Charter Daily Rate (US$/Day).

Note that the figures above are just an illustration.

5 – Analysis and Comparison of the Alternatives

I will use 2 (two) method to evaluate the bids which are:

  1. Using Anualized Daily rate = Daily rate x Days in Year (per year)
  2. Using Discounted Time Value of Money (Discounted Cash Flow) =


Source: http://www.investopedia.com/terms/d/dcf.asp

Following is the commercial evaluation from the proposed Bids comparing evaluation without discounted Time Value of Money and using Discounted Time Value of Money.


6 – Selection of the Preferred Alternative

  • Commercial bid evaluation without using Discounted Technique has come out with Bidder B as the lowest Bidder
  • Commercial bid evaluation by using Discounted Time Value of Money Technique has come out with Bidder C as the lowest Bidder.

The discounted technique is the preferred alternative because it gives realistic lowest value, give savings to the company at the end of the day, and keeping the bidder to bid in realistic cash inflows or cash outflows from the company side.

7 – Performance Monitoring and Post Evaluation of Results

It is a mandatory to use Discounted Factor Techniques by factoring the time value of money If we wanted to get realistic total estimate cost (cash outflow) of a long term OPEX project. A comprehensive study on determining the Discount rate or Weighted Average Cost of Capital (WACC) will result with a more accurate of total estimate cost of a long term project.

REFERENCES

  1. Sullivan, W. G., Wicks, E. M., & Koelling, C. P. (2012). Engineering economy (15th ed.). Chapter 5 Evaluating Single Project, The Present Worth Method (pp. 181-182), The Capitalized-Worth Method (pp. 187). Boston, MA: Prentice Hall.
  2. Amos, S.J. (2012). Skills & Knowledge of Cost Engineering, 5th Edition Revised. In G. Levin (Ed.), Chapter 27, Basic Engineering Economics, Discount Factors (pp. 27.4). Morgantown, WV: AACE International.
  3. Investovedia.com, Discounted Cash Flow.

    Retrieved on 26-Sep-2013 from: http://www.investopedia.com/terms/d/dcf.asp

  4. Api.org, Type of Offshore Production Facilities.

    Retrieved on 26-Sep-2013 from: http://www.api.org/oil-and-natural-gas-overview/exploration-and-production/offshore/offshore-production-facilities

  5. Rigzone.com, How Do FPSOs Work?.

    Retrieved on 26-Sep-2013 from:
    http://www.rigzone.com/training/insight.asp?insight_id=299&c_id=12

  6. Oilandgasiq.com, FPSO: Groundbreaking FPSOs, On the Verge of Something BIG.

    Retrieved on 26-Sep-2013 from:
    http://www.oilandgasiq.com/fpso-flng/white-papers/fpso-groundbreaking-fpsos-on-the-verge-of-somethin/?&shownewswindow=1&mac=OGIQ_Events_Title_Listing_2011&utm_source=OilGasIQ&utm_medium=PPC&utm_campaign=PPC&utm_content=PPC&utm_term=PPC&gclid=CNmhkaaW57kCFQvkpAodpREAkA


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1 Comment

Filed under Tommy Edward, Week 04

One response to “W4_TOM_FPSO Time Charter Commercial Bid Evaluation using Discounted Time Value of Money (WACC) Technique

  1. Really nice case study, Pak Tommy but you are not yet clear on the difference between WACC and MARR…..

    You need to review pages 180, 309-310, 453 and 526 – 533 and fully understand the difference between WACC and MARR.

    I seriously doubt that using WACC is appropriate for your analysis. Suggest you read over Ibu Lita’s paper to see what the appropriate WACC or MARR should be for an FSO project…….

    Then redo your calculations…..

    Bottom line- you have an excellent case study and your approach was well done, but your analysis was faulty only that I would challenge your use of WACC and not MARR.

    BR,
    Dr. PDG, Jakarta

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