Case 1

Wildcat Oil in Kazakhstan

Wildcat Oil has recently discovered a new 500 million barrel crude oil reservoir in Kazakhstan.

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 Kazakhstan government $400M in up-front lease costs. Additionally, the Kazakhstan government will receive 10% of the net revenues (value/barrel [bbl]minusoperating costsminustransportation costs). After 100 million barrels have been produced, all facilities and the remaining oil will belong to the Kazakhstan 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 1 below) for this size facility. The factor estimates shown in Table 1 for all equipment, piping, and controls linked with each class of major equipment have been compiled from Wildcats 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 Kazakhstan 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; however, negotiations between the government and Wildcat Oil have seized the facility so that production is basically constant through the period of Wildcats 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 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

Answer the following questions from the cases given above:

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

2. 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?

3. 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.

4. Is the larger facility a wise investment?