Case Study Assignment: Wildcat Oil in Kasakstan

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 $400 million 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) for this size facility. The factor estimates shown are additional costs for the equipment in order to provide all necessary ancillary equipment including piping and controls for each equipment class. These factor estimates have been compiled from the Wildcat Oil database based on past experience. As an example, the total cost associated with turbines is 2.5 times the $33.2 million (this includes the turbine cost as well).

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 the transportation to the tanker facility is estimated at $1.25/bbl. Productions of all oil fields follow a decline curve; however negotiations between the government and Wildcat Oil have seized the facility so that production is basically constant throughout the period of Wildcat Oils ownership of the facility. The price (per bbl) of oil is somewhat volatile but an initial estimate of $100/bbl is a good starting value for assessments. Like most industrial production facilities operations are assumed to occur on a basis of 350 days in a year.

For estimating the cost of different size facilities, the production facility can be classified as a large refinery (with a sizing or capacity exponent or Lang factor of 0.67). Wildcat Oil (based on the companys current financial capitalization position) uses a MARR rate of 16% for large, long-term projects.

Equipment Class Cost (in 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 2.42

Questions to consider and resolve:

How much should be budgeted for the 36,000bbl/day production facility?

What additional costs and benefit(s) (if any) are there to be derived from resizing the facility to process an additional 5,000bbl/day?

What is the present worth of this project with the 36,000bbl/day facility?

Is a larger facility a wise investment?