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Cost Optimization, the Contractor's Approach

IP.com Disclosure Number: IPCOM000217374D
Publication Date: 2012-May-07
Document File: 22 page(s) / 1M

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  The baseload LNG plant contractor is working in an industry which continues to grow more competitive asgas reserves are targeted for the same demand markets. Not only must LNG liquefaction projects compete against other LNG projects, but also against technologies such as gas-to-liquids conversion and pipelines. Increasing competition leads to renewed cost reduction efforts to minimize the delivered gas cost. At the same time plant owners must maximize return on investment. Responding to these goals has led to applications of new technology and continued study of further savings possibilities. The contractor, having successfi~llybid and built baseload plants on a lump sum basis, is in a unique position to help owners determine overall risks and returns, and optimize costs.


  A primary task during the early stages of project development is to define the overall economic goals. Generally the objective is to maximize the rate of return, or to minimize the plant life cycle cost, for the given project constraints ontotal cost, marketable product, or gas reserves. It is useful to create a model to better understand the effects of different economic trade-offs. This preliminary model does not have to be complex to provide useful information. The model should, however, take into account any impact on revenues by using a net present value (NPV), internal rate of return (IRR), or life cycle cost method.

  For example, Figure 1 is a graph based on a simple IRR model for a conceptual LNG plant. From this type of graph it is possible to state economic goals, such as:

- Spend up to $20 MM for each 1% increase in LNG production. Spend up to $6 MM for an additional day per year of plant availability. Spend up to $13 MM to reduce fuel consumption by 10%.

- -


1500 1600 1700 1800 1900 2000 2100 2200 2300 2400

Capital Cost (SMM)

Figure 1






% 20.0% e!

2 15.0%

g 10.0%



-A- 5 MMTF'A


- 5.0%

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  The converse is also true; if it is possible to cut $20 MM from the project cost while impacting LNG production by less than 1% then the cost cutting measure should be considered. These goals change from project to project, but performing this type of analysis during the early development of a project helps to clarify important variables and put cost cutting in proper perspective. Using such a model allows the contractor to optimize cost cutting measures by balancing capital costs against net revenues.

  However, even when considering impact on revenues reducing the capital cost of a plant is still important. For a plant life of 20 years, the capital depreciation is about 5% of capital expenditure (CAPEX) per year. Compare this figure against typical operating costs of 2-3% of CAPEX per year and annual fuel costs of 1-2% of CAPEX, and it is clear that reducing capital expen...