05 Jul WILDCAT OIL HAS RECENTLY DISCOVERED A NEW 500 MILLION BARREL CRUDE OIL RESERVOIR IN KASAKSTAN. RESERVOIR ENGINEERS PREDICT RECOVERY OF ABOUT 300 MILLION BARRELS
Wildcat Oil has recently discovered a new 500 million barrel crude oil reservoir in Kasakstan.
Reservoir engineers predict recovery of about 300 million barrels with current technology.
The firm needs a preliminary cost estimate for a feasibility study of a facility to produce the
oil and prepare it for pipeline transmission. Wildcat has paid the Kasakstan government
$400M in up-front lease costs. Additionally, the Kasakstan government will receive 10% of
the net revenues (value/barrel [bbl] minus operating costs minus transportation costs). After
100 million barrels have been produced, all facilities and the remaining oil will belong to the
Kasakstan government.
The feasibility study should optimize the trade-off between capital investment and
production capacity in barrels/day (bbl/day). Engineering on a generic 36,000 bbl/day facility
identified the major equipment items. Vendors have provided equipment costs for the five
classes of major equipment (see Table 3-1) for this size facility. The factor estimates shown
in Table 3-1 for all equipment, piping, and controls linked with each class of major
equipment have been compiled from Wildcatâۉ„¢s database based on past experience. For
example, the total cost linked with the turbines is 2.5 times the $33.2 million (including the
turbine cost).
Wildcat Oil uses a price of $19.50/bbl for oil of this quality delivered to the Kasakstan
tanker facility. Facility operating costs are estimated at $4.50/bbl, and transportation to the
tanker facility is estimated at $1.25/bbl. Production of all oil fields follows a decline curve; Cases in Engineering Economy 2nd by Peterson & Eschenbach
58
however, negotiations between the government and Wildcat Oil have sized the facility so that
production is basically constant through the period of Wildcatâۉ„¢s ownership of the facility.
For estimating the cost of different size facilities, the production facility can be classed as
a large refinery (with a power sizing or capacity exponent or Lang factor of .67).
Table 3-1 Cost Estimation Basis
Item Cost (Millions of $) Factor Estimates
Turbines 33.2 2.5
Compressors 24.8 2.8
Vessels & tanks 25.6 2.7
Valves 7.2 3.8
Switchgear 4.8 2.4
Suggestions for the Student:
1. What point of view should you take for analyzing this project?
2. How much should be budgeted for the 36,000 bbl/day production facility?
3. What additional costs and benefit(s), if any, are there to be derived from resizing
the facility to process an additional 5,000 bbl/day?
Options:
1. What is the present worth of this project with a 36,000-bbl/day facility? An
interest rate of 15% per year is appropriate for this type of investment.
2. Is the larger facility a wise investment?
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