**1. Problem Definition**

In this 8^{th} 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 = 0.126071696894463x^{3} – 752.157284401168000x^{2} + 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:
**

[1] *London Fix Historical gold – result.* (n.d.). Retrieved from http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx

[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.

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