W8_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. Then determines the “CPI (Consumer Price Index) Basket” to obtain the value of construction cost which comparable to the value of troy-ounce gold.

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 the gold price of constant value “CPI Basket” is 2.383 oz per USD 1000.

6. Selection of Preferred Alternative

We can estimate the cost of DSP in 2022:

USD 286.175 x 2.383 oz/USD1000 x USD 4421.93 = USD 3,015,271.71

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.

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3 Comments

Filed under Hari W, Week 08

3 responses to “W8_HWB_Forecast of Construction Cost with Gold Price

  1. Sorry Pak Hari, you made one FATAL error in your calculations……

    What you needed to do was DIVIDE the ACTUAL COST OF THE PROJECT in 2005/Price of Gold in 2005. $286,175/444.74 = 643.47 ounces of gold EQUIVALENCE. Then you multiply 643.47 ounces of gold by the projected 2022 price of gold. 643.47 X $4,421.93 = $2,845,361.

    Better go back and check your references again. Look at Hari Kumar’s paper- http://pmworldjournal.net/?article=exploring-gold-as-alternative-currency-for-future-cost-estimation-in-telecommunication-projects or Pak Trian’s paper….. http://pmworldjournal.net/article/exploring-gold-equivalency-for-forecasting-steel-prices-on-pipeline-projects/ to see how they did their calculations.

    The SPC chart you created was done correctly but it is only to show you that the purchasing power parity of gold is STABLE and that the process is NOT out of control.

    IF you want to get a best case, worst case and most likely projection then you need to do what Pak Trian did in Figure 13 on page 13 of his paper. Or see what Pak Hari did in figure 15 on page 14 of his paper.

    THAT is where you get your best case, worst case and most likely projections from……

    Great case study and it should only take you 15-20 minutes to find your mistake, fix it and repost as W8.1….

    BR,
    Dr. PDG, Jakarta

    • Dr Paul, how to link it with gold as CPI (oz per USD 1000) ? plis advis.

      HWB

      • Hari, why not ask your team members for some help? I am pretty sure that Pak Arif has mastered this topic… Why not ask him for help for if you look back a few weeks he had the same problems you are having understanding how to use gold as the baseline factor. What I think you are trying to do is use the DOLLAR as the basis and not the purchasing power of gold as the baseline… Talk to Pak Arif……

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