Decision & Risk Analysis

The Merrick Consultancy

Bart Carpenter
Justin Mao-Jones

Biofuels Journal Webinar

June 24, 2010

Engineering | Architecture | Design-Build | Surveying | GeoSpatial Solutions

 Merrick & Company

 Consulting/engineering/architecture firm founded in 1955

 500-person firm
 11 offices (US, Canada, Mexico)
 15 years in biofuels
 Cobalt
 Solix
 Range Fuels
 OPX Biotechnologies
 The National Renewable Energy Laboratory
Creative Problem Solving
 What is D&RA?

 Decision & Risk Analysis (D&RA) is a decision making tool

 D&RA recognizes there are very few things we know for certain
but we can be confident it will fall within a range
 D&RA has a variety of uses:
 Screen a variety of options
 Determine “expected” economics
 Quantify “soft” issues

 Use the assessments to:

 Add credibility to economic evaluations
 Guide downstream research and engineering efforts
 Highlight what’s important and what we don’t need to worry about
 D&RA Process

 Frame The Problem and Identify Issues

 Objectives, Major Constraints, Major Assumptions, Scenarios, Decision Criteria

 Quantify The Risks and Uncertainties

 Influence Diagram, Variables, Probabilities, Data Source, Reality Checks

 Generate Range of Outcomes

 Monte Carlo Simulation

 Generate Analysis Tools

 Tornado Diagrams, Cumulative Probability Curves

 Apply Decision Criteria

 The recommended scenario is….

 Develop Risk Reduction Strategies

 The feedstock cost risk can be reduced by….
 Example #1: Technology Selection / Plant Size

 Objective
 Determine the best front-end technology to integrate into an existing
asset and determine the optimal plant size to use as the basis for
the front end design package
 Major Constraints
 Feedstock supply and product demand
 Capital cost
 Waste output (environmental regulations)
 Decision Criteria
 Choose the technology and plant size that provides the highest
“expected” IRR that satisfies the model assumptions and major
constraints
 Example #1: Technology Selection / Plant Size (Contd.)

 Alternatives
 Existing Asset will require one of three viable pretreatment technologies

Technologies A, B, and C have different capital and

operating requirements to process Feedstock.

Product
Feedstock Technology Existing
A, B, or C Asset
Co-Product

Waste Processing Waste

A, B, or C

Processing waste from Technology A, B, or C will

have different capital and operating requirements.
 Example #1: Technology Selection / Plant Size (Contd.)

Influence Diagram
Intermediate Decision
Inputs
Calculation Criteria

Product
Market Share Demand
Feedstock
Composition

Product
Feedstock Production
Availability Feedstock
Throughput
Co-Product
Production Product
Pricing

Process Plant Size

Performance
Capital Costs Revenue

Waste
Generated 20yr IRR Co-Product Pricing
Regulations

Operating
Costs EBITDA

Waste Disposal Feedstock Electricity Natural Gas

Costs Pricing Pricing Pricing
 Example #1: Technology Selection / Plant Size (Contd.)

 Use P10/50/90 to define risks and ranges of uncertainty

 10% probability
 real value is less than P10 90%

 50% probability
 real value is less than P50
50%
 real value is more than P50

 90% probability
 real value is less than P90 10%

The P10/50/90 values are P10 0.24

based on data, experience, P50 0.29

and intuition P90 0.34

 Example #1: Technology Selection / Plant Size (Contd.)

Model Outputs

Technology: A B C
Expected 20yr IRR 13.7% 5.9% 7.8%

Technology A is the best pretreatment process to integrate with the

Existing Asset because it has the highest expected IRR
Example #1: Technology Selection / Plant Size (Contd.)

Tornado Diagram
 Example #2: Project Economics

 Objective
 Determine expected economics, decide if project is worth continuing
and develop path forward
 Major Constraints
 Plant size
 Feedstock supply
 Major Risks
 Diverse feedstock composition
 Decision Criteria
 Assess economics using NPV and IRR
Example #2: Project Economics (Contd.)

Low High
Default

Use the What If? Diagram to answer, “Are we comfortable with the
values and ranges assigned to each variable?”
Example #2: Project Economics (Contd.)

Expected = 18%

P90

 Futuredevelopment and conceptual engineering should focus

on better definition of the following:
 Product pricing
 Feedstock pricing and composition
 Pretreatment conversions and feed recovery
 Capital cost (this narrows as engineering advances)

The expected IRR is 18% and the range of outcomes

indicate that this is an attractive project
 D&RA Value

 Summary
 D&RA is a decision making tool that enables better decisions
 D&RA provides direction without extensive engineering studies
 The D&RA process encourages a more in-depth understanding of
business planning issues and the process model
 The D&RA process helps to focus on the important parameters and
discourage focus on the unimportant parameters
 The D&RA process helps to align the leadership team
 The D&RA process supports front end design efforts and helps
eliminate costly changes at the detailed design stage

“I would give my life for the simplicity on the other side of

complexity.”
– Oliver Wendell Holmes
 Contact Information

Bart Carpenter
Merrick & Company
303-353-3842
bart.carpenter@merrick.com

Justin Mao-Jones
Merrick & Company
303-353-3837
justin.maojones@merrick.com