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
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 WildcatÃƒ¢Ã¢‚¬Ã¢„¢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
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
however, negotiations between the government and Wildcat Oil have sized the facility so that
production is basically constant through the period of WildcatÃƒ¢Ã¢‚¬Ã¢„¢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?
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?