# W8.1_HWB_Forecast of Construction Cost with Gold Price

1. Problem Definition

In this 8th blog I will try to calculate the construction price forecast for Drilling Site Preparation (DSP) for year 2022 with predictions based on the gold price increases. As we know the value of gold has relative purchasing power remains. The cost price that would be predicted is for budgeting POFD (Plan of Future Development) in onshore oil and gas field as part of the 30 years contract.

2. Development of Feasible Alternatives

The owner estimate of DSP jobs in 2005 was USD 286,175 where the site area of 90m x 90m with pareto job is earth works. The price of gold in 2022 is determined based on extrapolation of historical data from 1970. Before estimating the forecast cost, it will show of how to use control chart for gold price.

3. Development Outcomes for Alternative

Below are the historical data of the average price of gold per year from 1970 to 2012:[1]

 Year Gold USD per oz Year Gold USD per oz Year Gold USD per oz 1970 36.02 1986 368.00 2002 309.73 1971 40.62 1987 447.00 2003 363.38 1972 58.42 1988 437.00 2004 409.72 1973 97.39 1989 381.00 2005 444.74 1974 154.00 1990 383.51 2006 603.46 1975 160.86 1991 362.11 2007 695.39 1976 124.74 1992 343.82 2008 871.96 1977 147.84 1993 359.77 2009 972.35 1978 193.40 1994 384.00 2010 1224.53 1979 306.00 1995 383.79 2011 1571.52 1980 615.00 1996 387.81 2012 1668.98 1981 361.00 1997 331.02 1982 376.00 1998 294.24 1983 424.00 1999 278.98 1984 361.00 2000 279.11 1985 317.00 2001 271.04

Here is a picture that shows the value of gold price of constant value “CPI Basket” in oz per USD 1000. [2]

4. Selection of Criteria

From picture above, data capture oz per \$ 1,000 from year 1970 as follows:

 oz gold per 1000 USD Series 1 Series 2 Series 3 Series 4 Series 5 Series 6 5.09 1.42 2.08 0.62 2.98 0.69

5. Analysis of the Alternatives

The value of the average price of gold per year are plot into the charts and it extrapolate to year 2022 with trendline polinomial order 3 as below:

The formula given from extrapolation data is : y = 0.126071696894463x3 – 752.157284401168000x2 + 1,495,799.964160270000000x – 991,544,040.599164000000000

Where ‘y’ is gold price per oz and ‘x’ is year, so the predicted gold price per oz in year 2022 is USD 4421.93.

From the data gold as “CPI Basket”, will be find the ‘most likely’ value with P90 as below:

 min 0.620 max 5.090 avrg 2.147 mean 2.383 diff 4.470 sigma 0.745 var 0.555 z P90 1.300 UCL 5.288 5.288 5.288 5.288 5.288 5.288 sigma+2 4.320 4.320 4.320 4.320 4.320 4.320 sigma+1 3.351 3.351 3.351 3.351 3.351 3.351 mean 2.383 2.383 2.383 2.383 2.383 2.383 sigma-1 1.414 1.414 1.414 1.414 1.414 1.414 sigma-2 0.446 0.446 0.446 0.446 0.446 0.446 LCL -0.523 -0.523 -0.523 -0.523 -0.523 -0.523

So thus obtained control chart graph as below :

From control chart above, we can say that the data are not out of control since all the data are not one of the “out of control” criteria [3], so we can continue to calculating the formula.

6. Selection of Preferred Alternative

As we see that average gold price in 2005 is USD 444.74, so we can estimate the cost of DSP in 2022:

USD 286.175 / (USD 444.74/ oz) x (USD 4421.93/ oz) = USD 2,845,356.72

7. Performance Monitoring & Post Evaluation of Results

The estimation results of this forecast budget can be used as reference other than calculation by currency inflation predictions. The price of course can be updated with respect to current gold prices and displays various other types of trendline that comes closest historical chart pattern data.

References:

[2] Using History to Determine Gold’s Intrinsic Value [SPDR Gold Trust (ETF), iShares Gold Trust(ETF), ProShares Ultra Gold (ETF)] – Seeking Alpha. (n.d.). Retrieved from http://seekingalpha.com/article/262560-using-history-to-determine-golds-intrinsic-value

[3] Brassard, M., Ritter, D., & GOAL/QPC (2010). The memory jogger 2: Tools for continuous improvement and effective planning (p. 62). Salem, N.H: Goal/QPC.

1 Comment

Filed under Hari W, Week 08

### One response to “W8.1_HWB_Forecast of Construction Cost with Gold Price”

1. Ya Ampyun!!! Pak Hari, you need to look again at the references I gave from Hari and Trian’s paper…… Your chart under step #5 should contain THREE curves- a BEST case projection a WORST case scenario and a MOST LIKELY scenario…….

Once you’ve done that your whole Step 6 needs to be redone to show how you calculated the Best Case Worst Case and Most Likely scenarios and then how you calculated the P90 or P whatever Class 5 or Class 4 estimate you will give to your management. You would also be wise to look at the RANGE of a Class 5, Class 4 and Class 3 estimate to see if the SPC is capable of delivering that kind of accuracy. But that would make a great FOLLOW ON blog posting topic….. First get this one right then you can take it to the next step..

Don’t forget,….. Don’t you also have to cite the additional references…. Hari and Trian’s papers?

Take your time and this time, GET IT RIGHT……. If you don’t understand how to do it then email me and I will catch up with you tomorrow morning….

BR,
Dr. PDG, Jakarta