Liquefied Natural Gas - Essay Example

Liquefied Natural Gas (LNG) Insert Insert Capital Costs (Dhari) Fall semester For purposes of the capital cost, it refers to the one-time costs that are incurred to start the production. They are the costs required to bring the plant to a condition that it can be operated. These costs are not incurred every year; therefore, we expect the values of the capital costs to vary for the two semesters. The costs depend on the requirement of the plant and the changes that will need to be made to the already existing machines. The capital costs incurred in the LNG plant will be mostly in terms of the various machines required to start its operations. The machines that add most to the capital cost include the pumps, compressors, furnace, heat exchangers, vessels, towers and trays. All these are required to begin the operation of the plant; therefore, they contributed to the fixed costs of the fall semester. Capital Costs Machine costs For easier analysis, the capital costs are divided into the various machines that are required. The first division is on the pumps and compressors. The pump purchased was needed to increase the pressure of butane to the specifications of the pipes. The total cost for the pump was $1,165, 217.29. A total of eleven compressors were required, each one having a particular role to perform. The total cost of all the compressors was $159,473,108.70. There was also a turbine needed for power generation from one of the vessels when the pressure is decreased. The cost for the turbine was $600,086.96. The three components had a total cost of $ 161,273,369.57. The other facility that contributes to the capital cost is the furnaces. In total, ten furnaces are necessary to begin the operation of the plant. The total cost for the furnaces was $ 1,003,645.43. The cost of the furnaces in 2017 is also available considering an inflation rate of 3%. The next equipment purchased was the heat exchangers that contributed a total cost of $ 619,589.79. Two heat exchangers were acquired in the fall semester, while the rest of the exchangers, we acquired later. During the semester, thirteen vessels were also obtained. The total cost of all these vessels was $ 865,260.46. Towers and trays were also purchased during the period, contributing a total of $ 714,891.09. Five trays were purchased to begin the operation. There were also some miscellaneous costs for the acquisition of the sulfur plant and the tankers. The sulfur plant costs $ 1,232,960.00, which includes $ 100,000 for the plant plus the operating costs. Four tankers were also required, with each tanker costing $ 185 million. The total cost of the tankers was, therefore, $ 740 million. Other costs In addition to the expense of the machines, there are also other expenses such as the start-up cost and the working capital. A start-up cost of the plant was estimated to be 552.338 million dollars. The working capital was found to be 974.71 million dollars. The construction period for the plant is expected to be three years. The first year is supposed to contribute about 34% of the total capital cost while the second and third year should each contribute 33%. All these costs mentioned formed the capital costs for the fall semester. Problems Since the plant was running for the first time and was expected to run at full capacity, there would be numerous, expected problems. Most of the costs that we used are the current market prices, which keep varying and require review with time. The major challenge was the estimation of the sizes and nature of machines to purchase. The plant being an LNG plant requires the calculation of the pressures of the fluids in the pipes to have a high degree of precision. The level of accuracy will determine the power required for the machines to be purchased. Since the data is not previously available, the operating conditions should be calculated which is challenging. The other challenge lies in the raw materials to be used. The machines used are required to operate with specific raw materials. However, the raw materials are prone to change since the plant is still at its initial stages. Changing the raw materials means that some of the machines will have to be purchased again. Buying new machines and equipment will raise the capital cost, which means additional funds will require to be sourced. Another problem that we faced was determining the life of the machines. The expected life of the plant is twenty years. Any machinery that has a life of less than twenty years will require to be replaced before the expiry of the expected life of the plant. For this purpose, the selection of the machines has to be done with a lot of care to avoid replacing them soon. Spring semester The plant requires construction to be completed in three years. For this purpose, all the machines cannot be purchased at the same time. In the second phase of the construction, which is the spring semester, more machines were purchased to continue the implementation as of the earlier progress. However, the capital cost was affected by a few changes made. For this reason, the values of the machines purchased for this semester will differ from those of the first semester. Initially, we were using wellhead gas. For the spring semester, we changed to pipeline gas. The change will affect the capital cost. Pipeline gas has the advantage of having all the sulfur removed. Since the gas does not contain sulfur, we will no longer need the costly sulfur plant or acid gas unit. We will still, however, need a dehydrator unit yet still achieve a reduction in the capital cost for this purpose. Pipeline gas will also give a pure product as compared to wellhead gas. However, pipeline gas also has its disadvantage. To detect leaks, a certain odorant, mercaptan, will need to be used. Removing the odorant from the gas before it is liquefied will increase the cost of operating the plant. We purchased tankers during the fall semester for the purpose of transportation of the products. In this semester, we made a very critical decision to stop using our tankers. Instead, we chose to use contractors who will transport our products on our behalf. The decision saved on the cost of purchasing more tankers and this reduced the capital cost. However, contracting increases the fixed costs since a certain amount of money will require to be paid every year to the contracting company. The quality of service to the customer will also not be assured since we do not have any control over it. Another very vital decision that will substantially change the capital cost was on the raw materials. Originally, the plant was to be constructed using carbon steel. We decided to use stainless steel instead due to the superior advantages that stainless steel has over carbon steel. Stainless steel will perform better under cold conditions as compared to carbon steel. Stainless steel, however, has a higher cost than carbon steel. Due to this, the capital cost will increase to enable the purchase of the material. Capital cost Equipment costs Just like in the fall semester, new machines will be purchased as part of the second phase of the plant. Due to the changes in the decisions mentioned earlier, some of the machines will have to be modified to suit the new requirements. The price of the pump decreased to $ 52,434.78, a difference that can be attributed to the use of pipeline gas. The prices of the compressors also changed for the spring semester. The value for the compressors changed from $ 159,473,108.70 to $ 444,858,152.17. We did not buy any turbines during the spring semester. There was, however, a need for valves that cost a total of $ 1,747.83. The shift from using wellhead gas to pipeline gas brought these changes. Making this change will alter the pressures that are required and the compressors will have to be replaced. Valves will also be required to relieve the pressures. For the furnace, there is an increase in the capital cost to $ 1,309,689.78. The changes in the expense of these machines can only be attributed to the inflation rate that is estimated at 3%. For any economic set-up, there has to be some rate of inflation. The total cost of the countercurrent heat exchangers also increased to $ 1,155,167.39. For the spring semester, the capital cost of the vessels was $ 1,887,508.59, which is a significant shift from the value obtained in the fall semester. The change is also attributed to the change from wellhead gas to pipeline gas. As stated earlier, the change has the cost implications of the odorant, which are reflected in the vessels. There is also a shift in the expense of the towers and trays. The towers and trays are made from steel. Initially, we were using carbon steel as the raw material. During this semester, we changed to stainless steel, which has a higher cost compared to carbon steel. The cost of the towers and trays, therefore, increased to $ 1,560,638.65. Other costs Despite all these changes in the process from the fall semester, the start-up cost still reduced to $ 283,071,085 million dollars. The working capital also reduced to $ 499.54 million dollars. The change is positive, showing that the decisions made were of great help to the company. Problems The introduction of the pipeline gas introduced some difficulties in the system. Many new installations needed to be made to accommodate the improvement. The installation requires a lot of labor and more qualified personnel. The pipes are joined when delivering gas in a long distance hence prone to inefficiency in joining which leads to leakages. Therefore, more safety measures have to be put in place. Some of the safety measures that were put into place included the introduction of pressure relieve valves to ensure that the pressure did not exceed. Read More