Selecting

Materials
for Wealth
Creation
A materials selction
philosophy based on
life cycle costs
D M E Paisley

Sunbury Report No. ESR.97.ER.005

dated January 1997

Main CD
Contents
 STANDARD DATA PAGE

REPORT NO. ESR.97.ER.005 SECURITY

CLASSIFICATION:
ISSUE DATE: JANUARY 10TH 1997 RESTRICTED
MAIN TITLE: SELECTING MATERIALS FOR WEALTH CREATION:- A Materials
Selection Philosophy Based On Life Cycle Costs

CLIENT: BPX PRODUCED WATER MTL

COMMISSIONED BY: Dr PAUL RUTTER

ISSUING DEPARTMENT/DIVISIONS:
MATERIALS & INSPECTION ENGINEERING
RESEARCH & ENGINEERING CENTRE
BP INTERNATIONAL LIMITED

PREPARED BY: APPROVED BY:

................................................... .....................................
D M E PAISLEY D RAY
MATERIALS & CORROSION TEAM LEADER
ENGINEER MATERIALS & INSPECTION
ENGINEERING

DISTRIBUTION: SEE SEPARATE LIST

KEYWORDS: MATERIALS SELECTION LIFE CYCLE COSTS NETT PRESENT

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 SELECTING MATERIALS FOR WEALTH CREATION
A Materials Selection Philosophy Based On Life Cycle Costs

Summary

Life cycle costing offers the best opportunity to ensure capital expenditure is well targeted
and achieves the highest rates of return on investment. In terms of materials selection, this
means choosing the optimum materials of construction to achieve a balance of minimum
capital expenditure with acceptable operating costs to maximise project value.

Life cycle costing rarely achieves these objectives for a variety of reasons. Firstly, most
published examples of life cycle costing have used inappropriate economic criteria, such as
cash neutrality. In brief, this method recommends investments if they achieve a greater
project value irrespective of the time taken to achieve the return on investment. In practice,
this criterion is rarely acceptable to projects as capital is never unlimited and it must therefore
be targeted at areas that will achieve the greatest rate of return. However, life cycle costing
can be carried out using more appropriate economic criteria in order to meet the overall aims
of the project.

A common difficulty encountered when carrying out life cycle costing at the project stage is
the lack of suitable cost data with which to compare the various materials options. Typically
rules of thumb are used, often generated many years ago and not valid today. Recent cost
data are included in this report that were generated for major projects in BPX.

Another difficulty is assigning accurate operating costs to the various materials options. This
is often the most important economic driver for items such as flowlines. Typical cost data
are included for chemicals and inspection. Also included is a summary of recent operating
costs from BPX assets in Europe and North America.

In summary, the various methods of life cycle costing are reviewed with respect to materials
selection. The most suitable methods for use by BP at the project stage are explained in
detail and input data are presented based on recent project and operating experience. The
recommended techniques have been used in the materials selection for flowlines and facilities
in BPX's recent developments in Colombia.

A LLC spreadsheet is to be produced during 1997, incorporating the CAPEX and OPEX
cost data along with the recommended LCC models.

Important Notice: The appendices to this document contain cost information that is
confidential to BP and therefore should not be revealed to third parties. The report
should therefore be treated as CONFIDENTIAL. Copies of the main report can be
obtained from the author for use by contractors and other third parties.

2
 CONTENTS

1. INTRODUCTION...................................................................................................... 6

2. TECHNIQUES FOR COMPARING LIFE CYCLE COSTS ..................................... 7

2.1. Is Life Cycle Costing Necessary ? ......................................................................... 7
2.2. What Criteria and Assumptions Should be Used ? ................................................. 8
2.3. Net Present Value Technique ................................................................................ 9
2.4. Internal Rate of Return Technique........................................................................ 11
2.5. Profitability Index Technique................................................................................ 12
2.6. Expected Value Technique.................................................................................. 13
2.7. Summary of Life Cycle Costing Techniques ......................................................... 16

3. A METHODOLOGY FOR MATERIALS SELECTION BASED ON LIFE

CYCLE COSTS ........................................................................................................... 17
3.1. Internal Rate of Return Technique........................................................................ 17
3.2. Expected Value Technique.................................................................................. 22
3.2.1. Costs of Failure............................................................................................ 24
3.2.2. Probability of Failure.................................................................................... 24
3.2.3. Expected Value Calculations ........................................................................ 25
3.3. Summary of Life Cycle Costing Methodology...................................................... 28

-------------------------------------------------------------------

APPENDIX 1

Major Capital Costs That Impact On Materials Selection................................................ 30

1. Downhole Tubulars and Casings............................................................................. 30
2. Linepipe................................................................................................................. 30
2.1. Materials Costs............................................................................................... 30
2.2. Installation Costs............................................................................................. 31
3. Process Pipework.................................................................................................. 33
4. Vessels .................................................................................................................. 34
5. Valves ................................................................................................................... 35
6. Cathodic Protection, Paint And Protective Coatings................................................ 37

APPENDIX 2

Major Operating Costs That Impact On Materials Selection............................................ 39

1. Preventative Measures ........................................................................................... 39
2. BPX's Historical Costs Due to Corrosion ............................................................... 41
3. Inspection Costs .................................................................................................... 44
3.1. Topsides, Subsea and Downhole..................................................................... 44
3.2. Pipelines - A Special Case .............................................................................. 45

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 4. Lost Production ..................................................................................................... 46
5. Tailoring OPEX Costs............................................................................................ 47

APPENDIX 3

Materials Selection for Weight Reduction and Cost Savings Offshore.............................. 48

A C K N O W L E D G E M E N T S........................................................................... 50

R E F E R E N C E S .................................................................................................... 50

D I S T R I B U T I O N................................................................................................ 53

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 SELECTING MATERIALS FOR WEALTH CREATION
A Materials Selection Philosophy Based On Life Cycle Costs

1. INTRODUCTION

Life cycle costing (LCC) or whole life costing as it is sometimes known is frequently
portrayed as the best approach for materials selection. However, a great deal of the support
for this approach comes from materials suppliers who have a vested interest in ensuring
expensive corrosion resistant materials are selected. In practice, such materials are often
rejected by projects due to the increase in capital costs (CAPEX) despite studies showing
that the more expensive option may result in lower costs over the life of the development
(CAPEX and OPEX).

Typically in LCC studies, costs are compared in terms of money of the day (or Net Present
Value - NPV) and if a corrosion resistant material is shown to be cheaper over the design
life this is used to justify its selection. However, project economics do not work on such
lines and BP would not develop a prospect with a 20 year life that took 19 years and 11
months to become cash neutral. Projects typically demand far greater rates of return on
investment, with assets becoming cash positive after 5 or so years. When this criterion is
applied to materials selection it becomes clear why life cycle costing has not been widely
adopted by the industry. However, this is not a fault with life cycle costing per se but with
the criteria and techniques commonly used. This report looks at the various techniques
available and their suitability for use at the project stage of major developments.

Another major problem with life cycle costings is the lack of suitable data for analyses. Data
are required for capital costs (materials, fabrication, installation) and operating costs
(chemicals, monitoring, inspection, repair, replacement etc.). These are often handled by
rules of thumb and unsuitable costs generated for totally different developments. BPX is in a
far better position than Contractors to determine typical operating costs and studies have
been carried out in BPX from 1990 to 1995. This report provides cost data for some of the
major items governing both capital costs and operating costs.

In this report, the emphasis is placed on making the correct economic selection between
carbon steel and an alternative corrosion resistant material. However, in some instances the
selection does not require an economic analysis. This can be either because carbon steel is
known to perform well in similar applications or because experience has shown that only a
corrosion resistant material will give safe and reliable service. However, for many
applications the decision is not clear cut and the optimum solution requires a thorough
consideration of costs involved with both options. This report aims to provide guidance for
such applications.

Note 1
In the text, reference is made to carbon steel and corrosion resistant alloys (CRAs). CRAs
is used as a generic term, meaning a material that is resistant to the service environment and
does not require continual maintenance in order to maintain its condition. In this context non-

5
metallics such as polymers and ceramics can also be considered as corrosion resistant. It is
not the aim of this report to recommend particular materials for a given application. There
are several BP Materials Selection Guidelines available that deal with this.

Note 3
Some applications of CRAs do incur operating costs. Examples include the duplex stainless
steel flowlines at Endicott and the duplex stainless steel separators on Gyda. However, this
is more a reflection of unforeseen operating conditions than inherent problems with CRAs.
In general, correctly selected and operated CRA equipment will require minimal inspection
and repair effort.

2. TECHNIQUES FOR COMPARING LIFE CYCLE COSTS

2.1. Is Life Cycle Costing Necessary ?

The materials selection process traditionally consists of two stages. Firstly, the whole range
of engineering materials are considered and technically unacceptable ones are rejected. The
technically acceptable materials are then reviewed on a cost basis and the cheapest suitable
material selected. The limitation with this approach is that the lowest cost materials are not
always the most economic over the field life - small savings at the project stage can lead to
high costs during the operational stage. Life cycle costing adds a third stage to the process
which includes the prediction of the cost of operating each material and the addition of this to
the purchase price - see Figure 1.

Compile data on
all candidate materials

Technical Selection Process Reject technically

unacceptable
Review all candidate materials materials

Capital Cost Selection Process Select materials based

on lowest capex
Review technically acceptable materials

Life Cycle Cost Selection Process Select materials based

on balance of capex, risk
Determine technically acceptable material with lowest overall cost and life cycle costs

Figure 1: The materials selection process

6
LCC is a tool to aid in materials selection IF economics are the deciding factor in the
materials selection process. It is a tool for selecting between two or more acceptable
engineering solutions; it is not a method for justifying unsafe or unreliable designs. It is
therefore important to decide if all options under consideration are practical.

Example
It is decided that it will be cheaper on a life cycle cost basis to install a carbon steel airfin
cooler in to a wet gas compression train and plan to replace it after 10 years due to
corrosion. However, the criticality of such a cooler would be high and monitoring its
condition would be difficult and therefore the probability of an unexpected failure may be
unacceptable.

In such instances, safety and reliability should outweigh the potential cost benefits of marginal
engineering designs. Assuming there are two or more suitable engineering solutions, each
with a different balance of capital and operating costs, life cycle costing will enable the most
appropriate choice to be made.

2.2. What Criteria and Assumptions Should be Used ?

All projects use slightly different financial criteria. Terms such as low CAPEX, capital
constrained and added value are widely used to describe projects and their approach to
investments. Some projects such as the recent Colombian developments have tended to
reduce CAPEX to a minimum while accepting relatively high operating costs and there are
many good reasons for this. These projects have therefore required a high rate of return of
circa 20% on investments in CRAs before the increase in CAPEX will be considered. Other
projects, such as the ETAP development are aiming for lower life cycle costs through cost
effectively minimising operating costs. ETAP therefore require a lower rate of return of 7%
on investments in CRAs. Both approaches are valid and reflect the broader aims of the
projects. It is important that the materials selection matches the aims of the projects through
the use of appropriate financial criteria. There may be a wide disparity between projects,
based on many factors such as the projected life of the asset and the terms under which the
license was awarded, and it is therefore not possible to make broad recommendations here.

All LCC studies require some financial assumptions to be made and the BP Group Financial
Outlook (GFO) defines economic parameters to be used in project work. Table 1 shows
the figures for 1996.

Table 1: Financial assumptions from the BP 1996 GFO

Variable BP Figure
Oil Price US$16 per barrel
US$/GBP 1.50
Discount rate 7%

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The discount rate is also known as the 'cost of capital'. These figures are used later in case
studies using the rate of return and expected value methods. Both studies are based on
Colombian projects and therefore the target rate of return is 20%.

There are several techniques for comparing life cycle costs to capital costs. However, all
techniques use the same inputs of capital costs and annual operating costs with exceptional
items. Also, all techniques deal with future expenditure in present day values to account for
the 'time value of money.' This is achieved by discounting all future costs to present day
values, using a consistent discount rate. BP currently use an annual rate of 7%. This gives
rise to the term 'net present value', meaning the sum of future incomes or expenses
discounted to money of the day.

The various methods of comparing life cycle costs to current costs will be discussed in brief.

2.3. Net Present Value Technique

The Net Present Value (NPV) technique is the most straight forward method of expressing
life cycle costs. It simply adds the capital cost to the various operating costs over field life
with the operating costs 'discounted back' to present day values.

This can be expressed as follows (1,2,3,4):

N
OC
LCC = AC + IC + ∑
n =1 (1 + i )
n

where:
LLC = life cycle cost
AC = Initial acquisition cost of materials (CAPEX)
IC = Initial installation (fabrication) costs (CAPEX)
OC = Operating and maintenance costs
i = Discount rate
N = Desired life (years)
n = Year of the event

In this case, OPEX costs relate to regular costs such as inspection, maintenance and
chemicals. These can be itemised on an annual basis e.g. for continual costs such as
chemicals or at other intervals e.g. inspection costs associated with shutdowns or repairs.

The technique can be expanded to include lost production costs:

N N
OC LP
LCC = AC + IC + ∑ +∑
n =1 (1 + i ) n =1 (1 + i )
n n

where:
LP = Lost production costs during downtime

8
It can also be used to reflect replacement costs where the original equipment is not expected
to survive the field life. If materials will have residual or scrap value, this can be deducted:

N
OC N
LP N
( RC − SC)
LCC = AC + IC + ∑ +∑ +∑
n =1 (1 + i ) n =1 (1 + i ) (1 + i ) n
n n
n =1

Where:
RC = Replacement materials costs
SC = Residual value of replacement materials

These variations on the basic formula all use the same approach of actualising the value of
future expenditure to its present value. There are various software programmes available
that allow such calculations to be carried out easily (5). All spreadsheet programmes such as
Microsoft's Excel can also carry out an NPV calculation. In Excel the function is:

= NPV(Discount rate, Cell n: Cell n+x )

For example, =NPV(7%,A1:A22) will calculate the net present value of the sums in cells A1
to A22 inclusive, using a discount rate of 7%. This function assumes that the cells represent
regular time intervals. The time interval is defined by the discount rate i.e. if an annual
discount rate is used such as 7%, the function will calculate the net present value as if all
costs (cells) are separated by one year. If a weekly discount rate is used (e.g. 0.1%), the
costs will effectively be separated by 1 week.
2

1.5
Savings due to
CRA option
1

0.5

NPV
0
US$ m
0 2 4 6 8 10 12 14 16 18 20

-0.5

Overall
Cashflow
-1

-1.5

-2

Time (Years)

Figure 2: The concept of NPV calculations shown as cumulative cash flows.

Figure 2 shows the concept of NPV. The use of discounted cash flow removes the effects
of inflation and investment so in Figure 2 US$1 in Year 15 is of equal value to US$1 in Year
1.

In this example, the initial cash flow associated with a CRA option (increase in CAPEX) is
shown as negative cash flow over the first few years i.e. during the construction and
commissioning phases. After commissioning at Year 3, the OPEX cost savings start to be

9
realised at a rate of US$100,000 per annum and begin to pay back the investment.
However, cash flow is still negative and the investment is not paid back until Year 20 when
the asset is abandoned. In this example, the overall costs and savings are cash neutral.

On this basis, or if the CRA option led to savings of US$1 in Year 20 the NPV approach to
life cycle costings would endorse the investment in CRAs. However, looked at from the
basis of return on investment, this would have been an unwise choice. The company invests
heavily in Years 1, 2 and 3 with a maximum exposure of US$1.6 million and has to wait a
further 16 years for that money to be repaid. That US$1.6 million could have been better
invested in a project giving faster rates of return or simply placed in the bank.

The NPV approach would be valid if infinite capital was available as it would result in the
lowest development and operating costs over field life. However, where capital expenditure
is limited and has to produce high rates of return, the NPV approach is a poor approach as
financial and other constraints on BP mean that positive NPV projects cannot all be
supported.

2.4. Internal Rate of Return Technique

The Internal Rate of Return technique (IRR) is closely related to NPV. However, it
expresses the information in a manner more suitable for economic comparisons during a
project.

The IRR is defined as the discount rate that would have to be applied to a series of
expenditures and incomes for the NPV to equal zero. In this case, CAPEX and OPEX are
expenditures while savings associated with a particular material can be treated as incomes.
This is best described using an example:

Example
A subsea production flowline is to be built. It can be constructed from either carbon steel or
a CRA. The question is whether the increase in capital cost associated with a CRA pipeline
is justified in terms of reduced operating costs over the field life. (It is the difference between
the cost of the CRA pipeline and the carbon steel that should be considered, not the whole
cost of the CRA line). BP's North Sea experience indicates that OPEX costs of 20
cents/barrel are typical for carbon steel flowlines.

In terms of expenditure and incomes, the increased CAPEX can be considered an

expenditure in Year 1 as it is an additional cost associated with the proposed change in
metallurgy. In the same way, the savings made due to the lack of corrosion inhibitor
deployment, corrosion monitoring and inspection can be considered incomes.

IRR is a way of describing how cost effective the change of metallurgy would be in reducing
future OPEX costs. Again, spreadsheets such as Excel allow calculations such as this to be
carried out quickly. The Excel function is:

=IRR(Cell n:Cell n+x)

10
For example, =IRR(A1:A22) will define the rate of return for a series of expenditures
(negative costs) and incomes (positive costs) in cells A1 to A22 inclusive.

The greater the IRR, the more attractive the Project, with IRR targets of greater than 20 or
25% being typical. This equates to a rate of return of circa 13 to 18% in money of the day
as capital costs circa 7%.
4

Savings due to
CRA option
2

NPV
1
US$ m Return on investment

0
0 2 4 6 8 10 12 14 16 18 20

Overall
-1 Cashflow

-2

Time (Years)

Figure 3: A similar example to Figure 2 but showing a wiser investment.

Figure 3 shows a similar example to Figure 2. However, in this case the investment in CRAs
was more justified. The investment is the same with a maximum exposure in Year 3 of
US$1.6 million but the savings are greater at US$250,000 per annum, leading to a positive
cash flow after Year 10. By the end of the life of the asset in Year 20, US$2.25 million has
been saved. Again, all figures are discounted back to give money of the day.

The important question is whether is was worth investing US$1.6 million over Years 1, 2 and
3 in order to save US$2.25 by Year 20. The answer is probably NO as the rate of return
on the investment is only 4% in money of the day. Again, BP could earn higher rates of
return elsewhere by working the capital harder.

On this basis investments in CRAs must lead to significant savings in operating costs in order
to justify the increased expenditure. The IRR method allows all options to be compared in
straight forward economic terms.

2.5. Profitability Index Technique

One other widely used economic criterion is the Profitability Index (PI). This is defined as:

Profitability Index = net present value (NPV)

net present cost (NPC)

11
The output is the ratio between investment and income and may typically fall between 1.5
and 2.5 for oilfield projects. BP tends to use a slightly modified version:

PIe = NPV
-NPCe

NPCe is the exposure related Net Present Cost. It equals the Present Cost of the maximum
cumulative call on BP Group funds from the project. It is defined as the Present Cost of the
initial investment cash flows net of tax and any early planned revenue, up to the point at
which total project flows become positive - GIAAPS.

In other words, in calculating NPCe, rather than consider all costs over the life of the project
only the cumulative cost of the project is considered up until the time at which the project
starts to generate positive cash flow. Naturally, these figures are discounted to Day 1.

It is relatively easy to use PIs for the purposes of materials selection. The capital and
operating costs associated with a specific materials selection are required, as they are for any
LCC exercise. However, it involves calculating two sets of data (NPVs and NPCs) and is
therefore less convenient than IRRs.

2.6. Expected Value Technique

All of the previous methods for determining and comparing life cycle costs ignore the inherent
risks in materials selection. By doing so, they presume that the costs used and the lifetimes
predicted are true and take no account of possible failures and inaccuracies. The Expected
Value (EV) technique includes the costs of making the wrong decision at the design stage in
the decision making process by balancing risks and rewards. In financial terms, the wrong
decision can be either selecting a material that fails prematurely or selecting a material with
excessive corrosion resistance. Both scenarios will lead to higher than necessary life cycle
costs (6).

The EV technique allows such decisions to be made on a financial basis. It does this by
considering the probability and consequence of a failure. Probabilities range from 0 to 1.0 (0
to 100%) while consequences represent the LCC of the range of possible outcomes, as
follows:

Example
Materials costs for a production tubular comprise 5% of the completion cost if carbon steel
is used and 15% if CRAs are used. Similar wells in the same field indicate that the
probability of failure of carbon steel is 60% within 10 years, the required life of the well.
Workover costs related to replacing the tubular and the lost oil production will together
amount to 4 times the original completion cost (i.e. 80 times the materials cost) if carbon
steel fails.

Based on these figures, only an eternal optimist would select carbon steel for this duty.
However, often the answer is not so clear cut. The EV technique offers a structured

12
approach to making such decisions and clearly illustrates the relative importance of materials
and installation costs. The EV technique is therefore a method for assessing risks and uses
money to describe all risks.

In general terms, CRAs should be selected more frequently where installation costs are high
as materials costs become less significant. Examples include subsea flowlines, well
completions and flowline crossings of major roads or rivers. The following table shows the
general trend in cost of materials with respect to total installation cost based on location and
the qualitative approach that should be taken to materials selection:

Table 2: Categories of equipment, classified by the proportion of materials cost to total installation
cost.

Location / Equipment Type Materials Cost as Material Selection

% of Whole
Subsea wells < 3% Most conservative
Land wells / Subsea flowlines ~ 10%
Flowline road / river crossings ~25%
Buried land lines ~ 30%
Surface running land lines > 30% Least conservative

CRAs should also be selected more frequently where the criticality of the equipment is
particularly high in terms of HSE. HSE consequences can be converted in to a financial cost
and used in life cycle cost analyses. An obvious example of equipment with a high
consequence of failure, based on safety, is an airfin cooler handling high pressure
hydrocarbon gas on an offshore platform. A produced water storage tank on a remote land
location occupies the other end of the scale and generally materials selection reflects these
differences. However, this is often done on an ad-hoc or “gut feel” basis.

If no failure occurs, the costs (consequences) will be limited to:

1. The initial installation cost.
2. Inspection and maintenance costs.

If a failure occurs, the consequences will include:

1. The initial installation cost.
2. Inspection and maintenance costs.
3. Repair or replacement costs.
4. Environmental and/or personnel damage.
5. Loss of company reputation, with potential impact on the Licence To Operate.
6. Lost production.

By quantifying both the probability and consequences of failure, the EV technique determines
the decision (in this case, the material of construction) with the lowest expected life cycle
cost.

13
Example of EV Technique
The NPV cost associated with the failure of a carbon steel subsea flowline is placed at US$
20 million. Should the Project Team adopt a CRA flowline?

The probability of failure of the carbon steel line is studied and is placed at 15%. There is
therefore a 15% probability that the NPV of US$20 million will be incurred. The expected
cost due to failure of the carbon steel flowline is therefore US$3 million (0.15 x US$20
million).

The Project Team determine that a CRA flowline will increase CAPEX costs by US$2.5
million. On this basis, the CRA flowline is expected to lead to the lowest cost over the life of
the field and should therefore be adopted.

In this context, the expected cost or expected value is that which is predicted based on
probabilities. In the case of an individual flowline, clearly either it can fail or not fail and
therefore the cost due to failure will either by the full cost or zero. It is often easier to
consider the probabilities of failure applied to a large population of items, such as flowlines.
In a population of 100 flowlines with a probability of failure of 15% over a certain period, 15
would be expected to fail while the remaining 85 would not. However, the use of
probabilities is equally applicable to single items as it is to large populations.

However, this approach is simplistic and is highly sensitive to the probabilities assigned to
each option. There are some refinements to the EV technique which make it more
appropriate for use during projects to overcome the limitations with the basic technique.

Firstly, the EV technique deals with costs in terms of NPVs. While this allows future
operating costs to be compared directly with capital costs, it does lead to decisions being
made on the basis of cash neutrality as discussed in Section 2.1. In the above example, up
to US$2,999,999 CAPEX could have been spent on a CRA flowline while still maintaining
the lower the life cycle cost over the carbon steel option. Would spending up to
US$2,999,999 on a CRA flowline be the best use of BP’s funds?

In the example, no mention is made of the timing of a failure although costs are quoted in
NPVs. If the pipeline failure were to occur immediately, it would be worth spending up to
US$3 million to avoid the probability of such a failure. However, if it was known that the
failure would not occur for say, 10 years, better use could be made of the US$3 million.
NPVs require investments of this type to repay themselves at the discount rate used, such as
7% while projects typically demand returns of 20% or higher. It is therefore important that
the EV technique is used in conjunction with rates of return rather than NPVs.

The second limitation with the EV technique is the need to quantify the time to failure. The
timing of a failure will have a strong influence on the outcome of the study as it determines
when the costs of a potential failure will have to be paid. The EV technique should therefore
examine the sensitivities of the outcome to a range of times to failure

14
The third limitation with the EV technique is that quantifying the probability of failure is
always difficult. As this is a major input and largely determines the outcome, it is important
that this figure is as accurate as possible. The EV technique should therefore examine the
sensitivities of the outcome to a range of probabilities of failure.

Fortunately, the probability of failure of equipment due to corrosion and the time to such a
failure are closely related. The probability of failure increases with time, from zero on Day
One to a higher value at the end of field life. It is therefore not normally necessary to
investigate the outcome of the EV technique to the sensitivities of both probability and timing
of failure. Instead, one sensitivity should be selected and investigated over a wide range
while the other is kept constant.

It is normally more straight forward and more realistic to vary the probability of failure at a
specific date rather that investigating changes in the date of failure for a fixed probability.
The outcome in expected value can then be plotted against probability of failure and an
engineering judgement made as to where the actual probability lies. Corrosion rate
prediction models and previous operating experience can help in this.

2.7. Summary of Life Cycle Costing Techniques

Four techniques have been discussed for determining the optimum balance between capital
and operating costs, NPV, IRR, PI and EV. It should be remembered that all techniques
have a lot in common and use similar input data. The most appropriate technique will
depend on the requirements of the project; but it is envisaged that either the IRR or the EV
methodologies will be the most appropriate for BP projects. Both of these techniques are
covered in detail in the following sections using case studies from recent BPX projects.

The argument for using rates of return rather than net present values is made above.
However, it should not be forgotten that the two techniques are extremely similar while
neither technique fully describes project economics. After all, IRR is defined as the discount
rate that would give an NPV of zero. In other words, if a series of cash flows has an IRR of
20%, the NPV using a cost of capital of 20% would be zero.

The benefit of NPVs is that they clearly show how much benefit there is for a given
investment in dollar terms. However, NPVs do not show how much has to be invested to
achieve the benefit. An NPV of US$1 million may be attractive for an investment of US$2.0
but not very attractive for an investment of US$100 million. Unfortunately, NPVs do not
express the benefit in terms of the capital invested.

Rates of return conversely do not clearly show the benefit in terms of currency but do show
the rate at which capital is repaid - how hard the money is made to work. Where there are
several projects competing for the same capital, IRR is a better way of showing which is the
most attractive.

The PI (or PIe) is a useful measure of economic performance as it clearly relates how
powerfully the capital is being made to work - the size of the “bang for the buck”. It shares

15
this benefit with the IRR function; PIs describe the size of the “bang” as a ratio while IRRs
describe it as a % rate of return. Neither technique describes the size of the prize in terms of
dollars and only NPVs do this conveniently. However, as discussed earlier, the size of the
prize must always be put in the context of the outlay required to achieve the prize, which
NPVs fail to do. As IRRs are easier to calculate and more easily understood by the majority
of people than PIs, it is this technique that is recommended for the majority of materials
selection studies.

The benefit of using EVs is that this is the only method that incorporates risk in to the
materials selection process. This complicates the process significantly and for many
applications the information on probability of failure will be lacking. However, when such
information can be generated, EVs offer the most complete approach to materials selection.

For a full financial picture, more than one economic criterion may be required. For example,
it is of little use achieving rates of return of 20% per annum, if the field is to be
decommissioned in 2 years time. However, in most cases the projected lifes of projects will
be circa 20 years, leaving plenty of time for wise investments to pay for themselves.

3. A METHODOLOGY FOR MATERIALS SELECTION BASED ON

LIFE CYCLE COSTS

3.1. Internal Rate of Return Technique

The basis of this technique is discussed in some detail in Section 2.2. In brief, it is a useful
tool as it allows the economic performance of any investment to be readily determined and
compared with other options as well as with the overall aims of a project. The IRR
technique is suitable for use on all projects and only rarely will the EV technique offer
advantages - see Section 3.2.

As with all life cycle costing exercises, significant amounts of cost data (OPEX and CAPEX)
are required and the appendices to this report will help. These do not cover all the costs but
they aim to cover the major ones i.e. the ones likely to impact on the outcome of such
exercises.

Project Data
An oil processing facility is to be constructed with a design life of 20 years - see Figure 4.
The produced fluids are corrosive to carbon steel and the corrosion rate varies throughout
the plant corresponding to changes in pressure and temperature. Corrosion rates can be
controlled to some degree by the use of chemical inhibitors but this carries an annual
operating cost. A maximum corrosion allowance of 8 mm has been adopted. Inhibited
corrosion rates are shown in the Figure along side each stream. Even with inhibitor
deployment, some sections of the plant are estimated to fail after 10 years if carbon steel is
used.

16
 Wet Gas

6 Cooler Compressor
7
0.8 mm/year
0.4 mm/year

Stabilised oil
Oil Inlet to tankage

MP Separator LP Separator
1 2 3 0.01mm/year

0.8 mm/year
0.8 mm/year 4 0.8 mm/year 5 0.4 mm/year

Produced Water

Figure 4: The Oil Processing Facility

The materials selection concentrates on pipework carrying the seven process streams and
these are summarised in Table 3.

Table 3: Summary of Stream Types and Corrosion Rates

Stream Description Inhibited Corrosion

Rate
1 Unstabilised oil 0.8 mm/yr.*
2 MP to LP separator oil 0.8 mm/yr.*
3 Stabilised oil product 0.01 mm/yr.
4 MP produced water 0.8 mm/yr.*
5 LP produced water 0.4 mm/yr.
6 MP wet gas 0.8 mm/yr.
7 LP wet gas 0.4 mm/yr.

It can be seen that for streams marked *, either CRA pipework will be required or a
replacement carbon steel system will be required after 10 years and will therefore have to be
considered in the economic analysis.

For the purposes of this example, these facilities will process unstabilised crude oil at a
constant rate of 100,000 bopd for 20 years. The gas oil ratio is 2,000 scf/bbl giving a gas
rate of 200 MMscf/d. The water cut is 10%, giving 10,000 bwpd. In real cases, the
production profile and estimated gas and water rates should be used to produce annual

17
operating cost profiles for each stream. For example, the production profile in Figure 5
relates to one of BPX's recent developments:
1800

1600

1400

1200
Daily
Gas
Production 1000
Rate Water
(mbd & 800
mmscf) Oil
600

400

200

0
1997 2000 2003 2006 2009 2012 2015

Year

Figure 5: The predicted production profile for oil, water and gas for a recent BPX development.
Inhibitor costs will follow similar profiles for each stream.

As inhibition costs are related to throughput, it is important that life cycle costings include
changing production profiles in their evaluations.

Operating Costs for Carbon Steel Equipment

The unstabilised crude oil is pre-treated with corrosion inhibitor at the wellheads and
therefore there is no additional OPEX associated with inhibited crude oil in the facilities.
However, the wet gas and produced water streams will both require inhibitor injection at the
outlets of the MP and LP separators. Process simulation has indicated that 90% of the gas
and 66% of the water will come off at the MP separator with the remainder coming off at the
LP separator. Dose rates of 0.5 pints/MMscf and 25 ppm are required to inhibit the wet
gas and produced water streams respectively. At an inhibitor cost of US$8 per gallon, it is
therefore possible to estimate the annual costs of the inhibitor programme - Table 4:

Table 4: Summary of flow rates and annual corrosion inhibitor costs for each stream.

Stream No. Flow Rate Annual Corrosion

Inhibitor Cost
1 100,000 bopd No extra cost
2 100,000 bopd No extra cost
3 100,000 bopd No extra cost
4 6,600 bwpd US$20,235
5 3,400 bwpd US$10,425
6 180 MMscf US$32,850
7 20 MMscf US$3,650
Note: 1 barrel = 42 gallons.

Also required as OPEX costs are the planned replacement of pipework for streams 1, 2, 4
and 6 in Year 10.

18
In this simplified example, no additional OPEX costs have been included for the following:

• Increased inspection and maintenance associated with carbon steel equipment.

• Lost production due to either the planned replacement of pipework in Year 10 or
unexpected failures

However, the mechanism of life cycle costing is identical irrespective of how many categories
of costs are included.

Capital Costs for CRA Equipment

The CRA alternative for all streams is duplex stainless steel. The fully installed cost of duplex
systems is estimated at 4 times that of carbon steel including valves, fittings and fabrication.
This takes in to account savings made by not having to purchase the corrosion monitoring
and control equipment for a carbon steel system.

However, if constructed from carbon steel streams 1 2, 4 and 6 will require replacement
systems after 10 years incurring a repeat capital cost. The actual costs for the two materials
options are summarised in Table 5.

Table 5: Summary of CAPEX costs for the two materials options

Stream Cost of a Carbon Cost of a Duplex Delta CAPEX for

No. Steel System SS System Duplex SS
1 US$ 0.25 m US$ 0.75 m US$ 0.50 m
2 US$ 0.125 m US$ 0.375 m US$ 0.25 m
3 US$ 0.125 m US$ 0.375 m US$ 0.25 m
4 US$ 0.10 m US$ 0.30 m US$ 0.20 m
5 US$ 0.05 m US$ 0.15 m US$ 0.10 m
6 US$ 40,000 US$ 0.16 m US$ 0.12 m
7 US$ 5,000 US$ 20,000 US$ 15,000

Life Cycle Costing

Using this information, it is possible to carry out a life cycle costing using the IRR technique.
In the IRR technique, investments are given negative terms and avoided operating costs are
considered incomes (positive values). In this example, the investment would be the
difference in cost between the two materials options, or Delta CAPEX. Incomes would be
the savings in annual OPEX as no corrosion inhibitor would be required and no replacement
of the carbon steel pipework in Year 10 for streams 1, 2, 4 and 6. This shows up as annual
incomes dependent on the costs of inhibitor for each stream and a cost during Year 10 for
equipment replacement.

The calculation is best handled using a spreadsheet as follows:

19
 A B C D E F G H
1 Stream Numbers
2 Year 1 2 3 4 5 6 7
3 1 -500,000 -250,000 -250,000 -200,000 -100,000 -120,000 -15,000
4 2 0 0 0 20,235 10,425 32,850 36,500
5 3 0 0 0 20,235 10,425 32,850 36,500
6 4 0 0 0 20,235 10,425 32,850 36,500
7 5 0 0 0 20,235 10,425 32,850 36,500
8 6 0 0 0 20,235 10,425 32,850 36,500
9 7 0 0 0 20,235 10,425 32,850 36,500
10 8 0 0 0 20,235 10,425 32,850 36,500
11 9 0 0 0 20,235 10,425 32,850 36,500
12 10 250,000 125,000 0 120,235 10,425 72,850 36,500
13 11 0 0 0 20,235 10,425 32,850 36,500
14 12 0 0 0 20,235 10,425 32,850 36,500
15 13 0 0 0 20,235 10,425 32,850 36,500
16 14 0 0 0 20,235 10,425 32,850 36,500
17 15 0 0 0 20,235 10,425 32,850 36,500
18 16 0 0 0 20,235 10,425 32,850 36,500
19 17 0 0 0 20,235 10,425 32,850 36,500
20 18 0 0 0 20,235 10,425 32,850 36,500
21 19 0 0 0 20,235 10,425 32,850 36,500
22 20 0 0 0 20,235 10,425 32,850 36,500
23 Rate of -7% -7% #NUM! 11% 8% 28% 24%
Return

The Delta CAPEX values are inserted against Year 1 and the annual savings into each
subsequent year. Savings or incomes do not have to be constant and in real studies, the
different annual operating costs corresponding to the predicted production profiles for oil,
water and gas should be used and the corresponding operating (inhibitor) costs entered in to
each line.

The calculation is performed in Microsoft Excel using the following command for values in
Column B, cells 3 to 22.:
=IRR(B3:B22)

If #NUM! appears in the cell, it may indicate that Excel did not find a IRR value within its set
number of iterations. In such cases, it is possible to help the programme find the answer by
adding a seed value (a 'guess' in spreadsheet language). To do so, modify the command to
the following form:
=IRR(B3:B22,5%)

The seed value, (5% in this example) is not normally required as Excel will determine the rate
of return without assistance. The value of the guess appears almost irrelevant and any
number between -50% and + 50% will often trigger the correct answer.

20
Note: Units are not important to rate of return calculations as long as they are consistent. In
the above example, the figures could have been entered as thousands or millions of dollars
and the IRR would have been identical.

In the above example, #NUM! appeared for Stream 3. This is because there is no saving
(income) associated with the CRA option for this stream, either in the form of chemicals or
replacement pipework. Therefore there is no rate of return on the investment.

A negative value of IRR indicates that the initial investment is not repaid while a positive
value indicates that the investment did more than break even.

Using the criterion of a IRR > 7%, pipework for streams 4, 5, 6 and 7 would be constructed
in CRAs. An IRR of 7% is equivalent to an NPV of zero, using BP’s discount rate of 7%.
Using this criterion, the materials selection is not expected to make money but it is not
expected to lose money either.

Using the criterion of a IRR > 20%, however, only streams 6 and 7 justify the investment in
CRAs. Using an IRR > 25% leaves only stream 6 justifying the investment. Using these
criteria require the selection of a corrosion resistant material to pay for itself at a rapid rate of
13 to 18% per year in real terms (20%-7% and 25%-7% respectively).

3.2. Expected Value Technique

This approach was used to select the optimum material for flowlines crossings of major rivers
in Colombia and that analysis is used here as a case study.

As described in Section 2.4, the EV technique allows the inherent risks in materials selection
to be considered as part of the economics. All risks incur potential costs and incorrect
materials selection can lead to significant costs through replacements, lost production,
increased maintenance or, if CRAs were unnecessarily chosen, redundant corrosion
resistance. The EV technique aims to put costs against these risks and thereby allow
materials selection to be carried out using a risk-based approach.

Case Study - Flowline River Crossings

The economics considered for the general flowline network rule out widespread use of CRA
materials. However, high criticality locations such as river crossings may justify the
investment in corrosion resistant materials due to the increased probability and consequences
of such a failure at these locations. The Southern Sector of the Piedemonte Phase 1 flowline
network includes one 10" spurline and one 20" production trunkline river crossings while the
Tablona Reserve Sector includes one 20" trunkline crossing. All these lines cross the Rio
Cravo Sur adjacent to the CPF which runs down to Yopal and is currently a water source
for local communities. In the future the Cravo Sur will become backup supply to the
proposed water intake located within the Tablona Reserve.

21
The increased consequences of a failure at a river crossing over and above those of other
sections of production flowlines can be summarised as follows:

1. There is no potential for 'patch repairs' to the flowline, so downtime will be

correspondingly longer leading to higher lost production costs.
2. Repair or replacement costs will be greater.
3. Direct costs due to environmental damage will be significantly greater, particularly if
water sources for local communities are affected.
4. The impact on BP's reputation due to an oil leak into a river would be expected to be
greater than a similar leak into ground.

The increased probability of failure stems from the topography and flow regimes present at
river crossings. A river crossing is a low point and therefore water will tend to accumulate
leading to subsequent corrosion. Liquids accumulation can also lead to the formation of
slugs at the crossing and this highly turbulent flow regime can lead to accelerated corrosion at
downstream bends.

To enable a reasoned decision to be made regarding the benefit of CRAs at river crossings,
the probability and consequences of failure (i.e. the criticality of the river crossing) need to be
defined in monetary terms. The economic arguments for a specific case such as river
crossing are best examined using the 'Expected Value' (EV) technique. It is most easily
described diagramatically using the costs for a 10" river crossing as an example:

No Failure
99% NPV Cost = $1.0
Install CRA EV
EVfor
forCRA
CRA
river crossing $1.31
$1.31million
million
(0.99
(0.99xx1)1)++(0.01
(0.01xx25.23)
25.23)
Failure
1% NPV Cost = $1.0+$0.48+$23.75
= $25.23

Which river crossing material ? Choose lowest EV

i.e. CRA river crossing

No Failure
80% NPV Cost = $0.6
EV
EVfor
forC-steel
C-steel
Install C-Steel
$5.85
$5.85million
million
river crossing (0.8
(0.8xx0.6)
0.6)++(0.2
(0.2xx24.64)
24.64)
Failure
20%
NPV Cost = $0.6+$0.29+$23.75
= $24.64

Figure 6: Decision tree summarising the process of choosing the optimum material for the 10"
flowline river crossing.

22
This type of analysis considers both possible outcomes from a decision (in this case, failure
or no failure) and determines the costs of both. By assigning probabilities for each outcome,
the most likely overall cost can be determined - the Expected Value. In Figure 6, all
possible outcomes for a 1km wide by 10" diameter flowline river crossing are considered
and assigned probabilities of occurring. These are:

1. A carbon steel river crossing is installed and does not fail - 80%
2. A carbon steel river crossing is installed and fails - 20%
3. A CRA river crossing is installed and does not fail - 99%
4. A CRA river crossing is installed and fails -1%

The probabilities of failure above are examples and are considered in more detail later on.
Each outcome has a cost associated with it:

3.2.1. Costs of Failure

Costs if no failure occurs

If no failure occurs, the cost is restricted to the installation cost, in this case US$0.6 million
for a 1km carbon steel crossing and US$1.0 million for an equivalent crossing in CRA
materials. This is based on a 10" flowline with either an 8 mm corrosion allowance or bi-
metal CRA linepipe .

Costs if failure occurs

If a failure occurs, there will be a repeat cost of the installation and a cost associated with
environmental damage, lost production and loss of reputation. To give these events real
monetary values the timing and cost of the events must be estimated. This will enable the
costs to be converted in to money of the day, or NPV. Based on corrosion rate prediction
modelling, the most likely time to failure for the 10" flowline river crossing is 11 years.

Repair costs will be equal to the original installation costs, discounted from Year 11 to Year
1. Using BPX's discount rate of 7% the NPV of US$0.6 million in Year 11 is US$0.29
million while the NPV of US$1.0 million in Year 11 is US$0.48 million.

The costs associated with a hydrocarbon leak in to a water source are harder to predict but
will certainly include lost production, environmental damage and loss of reputation. Such
costs have been estimated in Colombia to be in the range US$10 - 100 million with US$50
million being the most likely cost. The NPV of US$50 million in Year 11 is US$23.75
million. Such costs are the same for the failure of either a carbon steel or a CRA crossing; it
is the probability that differs.

3.2.2. Probability of Failure

In Figure 6, the probability of failure of the CRA crossing was shown as 1% while that for
carbon steel was 20%. The figure of 1% for the CRA crossing is robust but there is

23
significant uncertainty associated with the probability of failure of the carbon steel crossing.
Corrosion rate modelling indicates that the probability of failure in the first 11 years is circa
50% with a range of uncertainty from 10% to 90%. This has a significant impact on the
outcome of the expected value calculations and therefore the whole range should be
considered to show the sensitivity of the EV method to the presumed probability.

3.2.3. Expected Value Calculations

Using the NPV figures and probabilities shown in Figure 9, the calculation for the CRA
crossing is as follows:

The EV cost for the CRA river crossing:

0.01(1.0 + 0.48 + 23.75) + 0.99 (1.0) = $1.24 million

The calculation for the carbon steel crossing, using a probability of failure of 20% is as
follows:

The EV cost for the carbon steel river crossing:

0.20(0.6 + 0.29 + 23.75) + 0.80 (0.6) = $5.41 million

Table 6 summarises the EVs for the two materials options for the 10" pipeline over the range
probabilities of failure :

Table 6: Range Of Expected Values For Two Alternative River Crossing Materials.

Materials Probability of EV
Option Failure (millions)
CRA 1% US$1.24
Carbon steel 10% US$3.00
Carbon steel 20% US$5.41
Carbon steel 30% US$7.81
Carbon steel 50% US$12.62

Table 4 shows that within the predicted range of probabilities of failure for the 10" carbon
steel crossing, the CRA river crossing will offer the lowest cost solution. Only at
probabilities of failure below 2.7% does the carbon steel river crossing become cost
effective, which is outside the expected range. Figure 10 displays this information
graphically.

24
 14

12

10

Expected8 CRA River

Value
US$ m 6
Crossing

Corrosion rate modelling

4 indicates probability of
Carbon Steel failure is circa 50% at
Year 11
2 River Crossing

0
0 5 10 15 20 25 30 35 40 45 50
Probability of Failure - %

Figure 7: The relationship between the probability of failure and expected value for the 10” river
crossing.

Similar analyses have been carried out for the two 20" river crossings. Their predicted times
to failure are significantly longer than the 10" crossing at 18 years (Tablona Reserve Sector)
and 30 years (Southern Sector) and therefore the economics are significantly different.
Table 7 summarises the economic data used in the EV calculations.

Table 7: Summary Of Economic Data Used For EV Calculations

Flowline River Time to Cost of Cost of NPV Cost

Size Crossing Failure Steel Xing CRA Xing of Repair
10" Southern Sector 11 years US$0.6 US$0.1 US$24.6
20" Southern Sector 30 years US$1.4 US$2.1 US$8.15
20" Tablona Reserve Sector 18 years US$1.4 US$2.1 US$16.6

Using these data, similar curves to those in Figure 7 can be developed for the two 20" river
crossings - see Figure 9.

25
 14

10" crossing,
12
fails in Year 11

10

Expected8
Value
US$ m 6 20" crossing,
fails in Year 18

2 20" crossing,
fails in Year 30

0
0 5 10 15 20 25 30 35 40 45 50
Probability of Failure - %

Figure 8: The relationship between the probability of failure and expected value for all river crossings.

Figure 9 displays similar data, expressed as the expected rate of return on investment.

0.6
10" crossing,
0.5 fails in Year 11

0.4
20" crossing,
fails in Year 18
0.3
Rate of 20%
Return0.2
%
0.1 7%

0
0 10 20 30 40 50 60 70 80 90 100
-0.1
20" crossing,
-0.2 fails in Year 30

Probability of Failure of Carbon Steel River Crossing - %

Figure 9: The relationship between the probability of failure and the rate of return on investment in a
CRA river crossing.

Rates of Return enable the economic justification for a given material to be seen more
clearly. In this case, the additional CAPEX for CRA materials is compared with the EV of
the carbon steel crossing over the range of probabilities of failure.

26
There are two key rates of return on investment for Colombian projects. An investment that
exceeds 7% will have paid for itself in real terms as 7% is the 'cost of capital' or discount
rate used by BPX. On this basis, all river crossings should be constructed in CRAs as all
three crossings exceed 7% rate of return for all probabilities within the predicted range of 10
to 90%.

However, BPX Colombia normally requires greater rates of return than 7% for capital
expenditure with 20% being a typical target value. On this basis, the 10" spurline crossing
from the Southern Sector and the 20" trunkline crossing from the Tablona Reserve Sector
should be constructed in CRA materials as they exceed 20% rate of return at probabilities of
failure of 5% and 35% respectively. This is in contrast to the predicted probability of failure
of 50%.

The 20" trunkline crossing in the Southern Sector is not expected to achieve a 20% rate of
return on an investment in a CRA river crossing. However, it is questionable whether
investments in equipment integrity should be required to exceed a target rate of return,
particularly where there are serious HSE consequences if integrity is not assured. It is
therefore recommended that the 7% rate of return is used as the economic criterion used to
justify investments in river crossings.

Based on corrosion rate prediction modelling and BPX's experience in similar fields,
the probability of failure of a carbon steel crossing is certainly in excess of 10% and
therefore the investment in CRA materials is justified for all three river crossings.
CRA river crossings should therefore be constructed for the 10" and two 20"
production flowlines crossing the Rio Cravo Sur. This recommendation was accepted
by the Project.

3.3. Summary of Life Cycle Costing Methodology

Life cycle costing is a useful tool to help in the selection of the most appropriate materials,
where economic factors govern that selection. It is important that suitable economic criteria
are used, in line with the overall aims of the project. LCC studies require a great deal of
capital and operating cost data. Suppliers are useful sources of capital cost data and
Appendix 1 provides some useful data. Operating cost data only resides with Operators
who tend to be poor at quantifying these costs. BPX is fortunate in that the costs due to
corrosion have been studied in the North Sea for several years and these costs are the best
source of operating costs relating to materials selection.

The following flow diagram shows the various stages that need to be considered during a life
cycle costing exercise.

27
 Decision Tree Showing the Items to be Considered During a Life Cycle Costing Exercise

Select
Selectcarbon
carbon
Metal loss > CA in Does the predicted corrosion rate warrant CRAs ? NO
steel
steel
field life eg 8 mm? YES

Uninhibited metal Can the predicted corrosion rate be NO

loss < CA x10 in field life ?
Delta capex for lowest
cost CRA for required
duty?
accommodated with corrosion inhibitors ?
How many replacements
are required and when ?
What is the capital cost difference of a CRA option and
a carbon steel system with chemical injection and
monitoring facilities ?

Determine ratio of topside Can a CRA option lead to weight savings offshore ? YES Calculate weight and
wt. to structure wt. cost savings

Based on bbl/day, location What is the probable annual opex difference between a
and corrosivity CRA and a carbon steel option ? Include replacement costs.

Perform ROR or EV At what rate of return is an investment in CRAs repaid by

calculation over field life a reduction in annual operating costs ?

Does the rate of return equal or exceed overall NO

What is the project
project targets ?
target, 7, 20, 25% ? Can lost production be estimated
and included in opex ?
YES NO YES

Select NO
Selectcorrosion
corrosion Select
Selectcarbon
carbon
resistant
resistantmaterial
material steel
steel

28
 APPENDIX 1

Major Capital Costs That Impact On Materials Selection

This appendix aims to bring together capital cost data generated in 1995/6. Where possible, fabrication
and installation costs have been included. More information is available in the BP Capital Equipment Cost
Database, available from Phil Greenwood, Sunbury x3634. The items included in this Appendix are:

1. Downhole tubulars and casings.

2. Linepipe.
3. Process pipework.
4. Vessels.
5. Valves.
6. Cathodic protection, paint and protective coatings.

1. Downhole Tubulars and Casings

Supply contracts for downhole tubulars and casings are generally awarded on a long term basis (circa 5
years) with the costs being largely fixed within this period. Supply contracts for XEU have been awarded
to TISL (carbon steel), Nissho Iwai (13%Cr), Kawasaki (Hyper 13%Cr) and Sumitomo (duplex stainless
steel) and will run until at least 1999. The details are confidential to BP but for more information contact
John Sleeman, Aberdeen x3569.

For comparison purposes only, in 1993 one major steel supplier believed the 'natural' market prices of
various materials options with respect to seamless L-80 carbon steel to be as shown in Table 1. In
general, the CRA materials do not achieve the cost multiples shown, particularly when covered by long
term supply agreements but in times of short supply or for small orders on the open market, these cost
multiples may apply.

Table 1: Relative Materials Costs for Various Downhole Materials

Material Option Cost wrt Carbon steel

L-80 Carbon steel 1.00
ERW 0.95
95 ksi sour grade 1.05
110 ksi sour grade 1.25
13%Cr 3.00
Super 13%Cr 5.00
Duplex stainless steel 10.00

2. Linepipe

2.1. Materials Costs

Figure 1 shows the cost for various linepipe materials including carbon steel and duplex stainless steel.
Also included are various 'low cost' corrosion resistant linepipe materials. The 13%Cr prices refer to
seamless product, developed for welded construction. There are several WTs for the majority of sizes.

29
 APPENDIX 1
Cost data on flexible pipe of the Coflexip type are more difficult to determine; they certainly do not lend
themselves to cost/tonne calculations. However, a reasonable rule of thumb is US$90/metre/in I.D. plus
connector costs of US$20/metre (7).

2500.0

2000.0

Cost 1500.0 C-steel

US$
13%Cr
per
metre 1000.0
13%Cr lined

500.0 316L lined

Duplex

316Llined
Duplex
0.0 13%Crlined

13%Cr

C-steel

Nominal Linepipe Size - Inches

Figure 1: Cost comparisons for carbon steel, duplex stainless steel and various 'low cost' corrosion resistant linepipe
materials.

Notes for Figure 1:

• Carbon steel costs are based on US$780 per tonne (typical ex works cost in 1995)
• Duplex stainless steel costs are based on quotations received during 1995 for Grade 2205. They
equate to circa US$6,500 per tonne for sizes up to and including 12.75", 8mm WT, US$8,130 per
tonne for sizes 12.75" 9.63mm WT to 26" inclusive, US$7,800 per tonne for 28" and US$7,400 per
tonne for 30" linepipe.
• Weldable 13%Cr is a seamless product, limited to sizes of 14" and below.
• All linepipe meets X-65 mechanical properties with the exception of seamless 13%Cr which tends to be
manufactured to X-80 properties.

2.2. Installation Costs

Fully installed costs include many additional factors in addition to linepipe such as welding, coating, NDT,
trenching and backfilling. As many of these costs are similar for carbon steels and corrosion resistant
materials the installed costs are much closer than the raw materials costs. The following data were
gathered for flowline construction at Cusiana in 1995/6. This is an onshore development in hilly terrain and
therefore these costs will not be directly applicable for offshore pipe laying or onshore developments in
easier terrain.

30
 APPENDIX 1

35.00

Duplex SS
30.00
Carbon
Carbon steel + 8mm ca, steel
25.00 intl coat + mech connector non-metallic
(Jetair <16", Merlin >16" lining
Cost Bi-metal
20.00
per 13Cr liner
5 Km
15.00
($mill)
13%Cr
10.00

5.00

Carbon steel 8mm ca Carbon steel, no ca

0.00

6 8 10 12 14 16 18 20 22 24 26 28 30

Nominal Flowline Diameter - Inches

Figure 2: Installed costs calculated for various flowline materials and construction techniques based on flowline
construction in Colombia.

Notes: CA = corrosion allowance. All corrosion resistant options, including the non-metallic lined pipe have zero
corrosion allowance.
All prices are based on welded construction apart from the curve labelled 'Carbon steel + 8 mm ca, intl coat +
mech connector". These data relate to the use of 'snap connectors' such as the Jetair and Merlin.

Offshore installation costs can be estimated with a knowledge of the day rates of lay barges and the lay
rate. The following are order of magnitude costs for various materials, installation methods and barge
types. Times for loading and mobilisation are also given, based on a 10 km flowline (7).

Table 2: Laying rates and costs for various materials and offshore flowline construction methods.

Material Carbon steel Duplex SS Flexible C-steel + C-steel +

eg Coflexip 316L liner PE liner
Laybarge type Reel lay - Reel lay - Flexible lay Conventiona Reel lay -
Apache Apache - Northern l - Semac Apache
Installer
Laybarge hire 155,000 155,000 93,000 195,000 155,000
($/day)
Lay rate 1,000 400 5,000 300 1,000
(m/day)
Load/prep 6 6 6 6 6
(Days)
Duration of 10 25 2 33 10
lay (Days)
Demob. 6 6 6 6 6
(Days)
Fabrication cost $0.40 mil $0.56 mil $0.0 mil $0.80 mil $0.80 mil
incl. Welding

31
 APPENDIX 1
3. Process Pipework

Table 3 details comparative materials and fabrication costs for carbon steel, stainless steel (6Mo) and
titanium. It includes costs when using cold formed techniques for bends etc. to reduce the number of
fittings and welds. The data were generated for an offshore sea water piping system (8). Component
costs factors will be valid for onshore developments. However fabrication costs will be greater than for
most onshore developments, with the possible exception of Alaska.

Table 3: Comparative costs for carbon steel process piping and two corrosion resistant alternatives.

Carbon Steel SS 6Mo Titanium

Element Trad Cold F. Trad Cold F. Trad Cold F.
Components 0.3 0.3 2.0 1.8 2.8 2.0
Fabrication 0.7 0.6 0.9 0.6 0.9 0.6
TOTAL 1.0 0.9 2.9 2.4 3.7 2.6

A different reference gives more detailed figures relating to specific fittings and a wider range of materials
(9), this time with costs relative to 316L - see Table 4.

Table 4: Costs of piping components relative to 316L.

Carbon 316L Duplex Super SS Ti. GRP

steel SS Duplex 6Mo
4" sch 10S 0.5 1.0 1.9 2.7 3.0 5.1 1.0
pipe
6" sch 10S 0.3 1.0 1.2 - 1.7 2.8 0.5
pipe
90o bend - 1.0 1.5 2.0 2.0 5.7 0
4" sch 10S
4" 150 lb 0.3 1.0 1.0 - 3.3 6.9 2.2
flange
10" 150 lb 0.7 1.0 1.2 - 2.2 4.6 -
flange

Relative prices are useful for ranking materials options. However, when it comes to costings, absolute
prices are necessary to enable firm conclusions to be drawn. The prices in Table 5 relate to seamless
stainless steel tube (6" OD, schedule 40, 168 mm , 7.11 mm WT) and allow some of the relative cost
indices quoted above to be converted to actual costs.

Table 5: Indicative costs for various stainless steels in tube form.

Alloy type US$/metre US$/tonne

S31603 205 7,130
S31254 527 18,363
S32654 738 25,706
S32304 237 8,252
S31803 237 8,252
S32750 512 17,985
S32760 543 18,879

32
 APPENDIX 1
Another option is to use a carbon steel raw material price of US$1,000 per tonne. Alternatively, a figure
of US$3,875 per tonne can be used to estimate the fully installed cost of carbon steel. This is an average
figure based on fabrication for offshore installations in Northern and Southern Europe and the Far East (9).

These methods will all allow these comparative cost factors to be converted in to approximate prices once
an MTO is built up for a specific application. A 'typical' MTO for such a system is shown in Table 6 (8).

Table 6: 'Typical' number of fittings for an offshore sea water system.

Component Number off

DN 80 pipe 100
DN 100 pipe 100
DN 150 pipe 100
DN 80 equal tee 3
DN 100 equal tee 3
DN 150 equal tee 3
DN 80 90o elbow 20
DN 100 90o elbow 20
DN 150 90o elbow 20
Reducer 100*50 5
Weldolet 80*25 10
DN 80 welding flange 10
DN 100 welding flange 10
DN 150 welding flange 10
DN 80 butt weld 75
DN 100 butt weld 75
DN 150 butt weld 75

4. Vessels

The following costs come from BP's Capital Equipment Cost Database. The price/tonne costs in Column
2 allow absolute costs to be estimated for all other options.

Table 7: Costs for fabricated pressure vessels, relative to a vertical carbon steel vessel.

Material C-steel C- Killed Killed Cr Mo SS clad SS

steel C-steel C-steel Steel
Orientation Vert Hori Vert Hori Both Both Both
Weight US$/tonne
1 12,800 0.9 2.0 1.0 1.7 2.1 1.5
2 10,300 1.0 1.7 1.1 1.7 2.0 1.7
5 7,800 1.1 1.5 1.1 1.8 2.0 1.9
10 6,300 1.2 1.3 1.2 1.8 2.0 2.0
25 4,700 1.3 1.1 1.3 1.9 1.9 2.3
50 3,800 1.5 1.0 1.4 1.9 1.9 2.5
75 3,400 1.5 0.9 1.4 1.9 1.9 2.6
100 3,100 1.6 0.8 1.4 1.9 1.9 2.7
200 2,500 1.7 0.7 1.5 2.0 1.8 2.9

Note: SS includes 304, 304L, 316, 316L and 321 grades. Price differences between the grades are lost
in the scatter of the data.

33
 APPENDIX 1

The same source also shows the dependence of the cost on the country of origin. Costs varied by a factor
of two between the most expensive and the cheapest countries for killed carbon steel vessels as follows:

Table 8: The influence of the country of origin on the cost of killed carbon steel pressure vessels.

Country Relative Expense

Venezuela 2
UK 1.8
France & Italy 1.4
USA 1

A similar story exists for plain carbon steel pressure vessels:

Table 9: The influence of the country of origin on the cost of plain carbon steel pressure vessels.

Country Relative Expense

USA 2
Netherlands 1.9
South Korea & UK 1.2
Singapore 1

These general cost factors come from data relating to the whole range of vessel sizes from 1 to 200 tonnes.
BP’s Capital Equipment Cost Database includes more detailed breakdowns of the costs, including the
sensitivity to size. The factors quoted above become inaccurate for small vessels as the scatter in costs
increases.

5. Valves

When calculating the incremental cost for a corrosion resistant option, such as a pipework system, rules of
thumb are often used to multiply the carbon steel cost. These factors are often based on raw material costs
and hence factors of seven are typically used when considering duplex stainless steel alternatives. The
following prices for valves show the folly in this approach. Corrosion resistant options tend to be more
economic in components that require a high degree of work such as forging or machining as a large
proportion of the component price reflects that work and not the raw material costs. Often, CRA valves
are only twice the cost of carbon steel alternatives and this should be considered when estimating the costs
of CRA options for piping systems containing a large number of valves.

The following cost factors have been gathered for ball valves (end entry, trunnion mounted)

34
 APPENDIX 1
Table 10: Relative materials costs for ball valves

Material Option 12" Class 900 16" Class 900

Carbon steel 1.00 1.00
CS + ENP on all internal surfaces 1.11 1.08
CS + Inconel clad valve 1.63 1.9
pockets
CS + Inconel clad wetted surfaces incl. 2.6 2.94
Ball
23% Duplex, including ball 2.45 2.90

Similar information has been gathered for wafer check valves

Table 11: Relative materials costs for wafer check valves

Material Option 12" Class 900 16" Class 900

Carbon steel body + SS trim 1.00 1.00
CS + ENP coating + SS trim 1.12 1.06
CS + CS + Inconel clad + SS trim 2.00 1.87
Duplex body + trim 2.14 2.10

To allow actual costs to be estimated, the following costs were gathered from quotations supplied for the
Cusiana Phase II facilities development. Costs are 1995 prices.

Notes:
# in all legends indicates to the Class rating of the valve.
CS indicates carbon steel.
SS indicates duplex stainless steel.

80000

70000

60000
CS#150
50000
CS#300
Cost
40000
US$
CS#600
30000
SS#300
20000

10000

0
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36

Nominal Valve Size - Inches

Figure 3: Costs for a range of carbon steel and duplex stainless steel ball valves.

35
 APPENDIX 1

8000

7000
CS#150 Globe
6000
CS#300 Globe
5000
CS#300 Gate
Cost
4000
US$
CS#1500 Gate
3000
SS#150 Globe
2000
SS#300 Globe
1000

0
2 4 6 8 10 12 14

Nominal Valve Size - Inches

Figure 4: Costs for a range of carbon steel and duplex stainless steel gate and globe valves - small sizes only for
clarity. See Figure 5 for all sizes.

90000

80000
CS#150 Globe
70000

60000 CS#300 Globe

CS#300 Gate
C o s t 50000
U S $ 40000
CS#1500 Gate

30000 SS#150 Globe

20000
SS#300 Globe

10000

0
2 4 6 8 10 12 14 16 18 20 22 24

Nominal Valve Size - Inches

Figure 5: As Figure 4 but with larger sizes also shown.

6. Cathodic Protection, Paint And Protective Coatings

Whatever material is selected, there will normally be a requirement to protect it from either the internal or
external environment, or both. This can be achieved by painting, the use of a thick film coating system
containing reinforcement or using thermally sprayed aluminium. All types of coating can be augmented with
sacrificial anodes to provide cathodic protection if the equipment is submersed (external corrosion) or
contains a conductive media (internal corrosion). However, thick film coatings for the inside of vessels may

36
 APPENDIX 1
not require anodes. Therefore the higher costs for the coating system should be offset by the savings made
by eliminating the anodes.

The following prices give an indication of relative costs for various systems.

Table 12: Order of magnitude costs for anodes and various protective coating systems

Component Cost Example from...

Anodes US$3,100/tonne General
Aluminium metal spraying US$39 - 161/m2 Small component upwards
Thin film coatings e.g. US$29 - 44/m2 Internal coating of linepipe
FBE (cheapest) or nylon
Thick film coatings e.g. US$100 - 340/m2 Internal coating of vessels
flake glass vinyl ester

Note: Costs for the application of coatings are heavily dependent on local labour rates and perceived
competitive pressures.

37
 APPENDIX 2
Major Operating Costs That Impact On Materials Selection

Operating costs associated with corrosion can be considered in the following categories:

1. Preventative measures, such as corrosion inhibitor deployment.

2. Inspection activities to measure the success, or otherwise of corrosion control and mitigation activities.
3. Lost production. This can either be planned lost production such as during shut downs, the frequency
of which will be driven by 1 and 2, or unplanned when 1 and 2 have been unsuccessful.
4. Replacement or repair costs.

The major cost drivers for categories 1 to 3 will be summarised in this appendix. Replacement or repair
costs are basically repeated capital costs and therefore the cost data in Appendix 1 can be used.

The important factor to consider when contemplating CRAs is the reduction in operating costs that will be
achieved. In most cases, CRAs will have negligible operating costs associated with them and it will be
reasonable to assume all the operating costs associated with carbon steel will be saved. This is not always
the case and there are several examples in BP of where CRAs have suffered expensive failures or required
repairs. This is generally due to either the selection of an inappropriate material that is not resistant to the
whole range of operating conditions (for example. downhole screens that are resistant to production fluids
but fail when acidising solutions are used) or unforeseen operating conditions (such as the high chloride
concentrations present on the outside of the duplex separators on Gyda, leading to cracking of the
separator). However, if a CRA is correctly selected with due consideration to the whole range of potential
operating conditions, degradation should not be an issue.

Note
The most likely examples of CRAs suffering general metal loss in oil producing environments are:
• 13%Cr steel tubulars at elevated temperatures.
• CRA tubulars where unsuitable acid stimulations are used.
• Any CRA in highly erosive conditions.

In non-erosive conditions, careful selection and operation of the CRA will eliminate metal loss corrosion
completely.

1. Preventative Measures

Operating measures for preventing corrosion include corrosion inhibitor deployment (internal corrosion),
fluids treatment (sea water injection systems) and cathodic protection (internal or external corrosion).
However, of these only corrosion inhibitor deployment can realistically be avoided by the selection of
CRAs. The injection of raw sea water is being developed, using expensive materials but is not currently
used in BPX. Cathodic protection is used extensively to protect against external corrosion of buried and
subsea equipment but is required whatever the material and so its costs can be ignored. CP for internal
corrosion protection tends to be via sacrificial anodes and is therefore largely a capital cost and as such is
covered in Appendix 1. This section will therefore concentrate on the costs of corrosion inhibitor
deployment.

Flowlines carry untreated fluids while export pipelines carry partially or fully stabilised product. Fully
stabilised product lines rarely deploy corrosion inhibitor in to the crude oil and corrosion resistant materials

38
 APPENDIX 2
would not be considered for such an application. However, the fluids in flowlines and partially stabilised
lines are corrosive and therefore often incur treatment costs. Dose rates for corrosion inhibitors vary
considerably but in general the more corrosive the fluid in terms of temperature and CO2 partial pressure,
the greater the dose rate of chemical required. Flowlines therefore require higher concentrations of
inhibitor than do export pipelines.

Inhibitors are used less frequently to protect process pipework in water, unstabilised crude oil or wet gas
duty. The required dose rates are similar to those used to protect pipelines and hence chemical inhibition is
less economically attractive for process pipework: similar amounts of chemical are used to protect
pipework several metres in length and pipelines many kilometres long. Economically and logistically it is
often better to use CRAs for pipework and inhibitors for pipelines.

The costs associated with the treatments are driven by the volume of chemical used per annum and the unit
chemical cost. There may be some incidental costs associated with the provision and maintenance of
injection equipment but increasingly this is being handled by the chemical suppliers and is therefore covered
by the chemical cost.

Table 1: Dose rates of corrosion inhibitors into several North Sea export pipelines, based on total fluid volumes

Field Dose Rate

Beatrice 40 ppm
Brae 10 ppm
Bruce * 46 ppm
Forties Pipeline * 26 ppm
Magnus 20 ppm
Miller * 35 ppm
Nelson Enterprise * 17 ppm
Scott Amerada Hess * 9 ppm
AVERAGE 25 ppm
Note * - These fields deploy concentrated corrosion inhibitors to improve logistics offshore. The quoted
dose rates correspond to the standard product, manufactured by the same supplier.

At Prudhoe Bay the field wide average corrosion inhibitor injection rate for the Western Operating Area is
110 ppm, with maximum rates of 250 ppm in certain flowlines, based on water production. These rates
reflect the rapid corrosion experienced in some PBU flowlines in recent years.

Inhibitor injection rates into wet gas systems and wet gas transportation lines vary enormously within the
range 0.05 to 2 pints/MMscf. This method of quoting concentration is not ideal. A more accurate method
is to estimate the quantities of condensed water produced at each stage of processing and use the
concentrations in Table 1 to estimate likely treatment rates. Again, highly corrosive duties associated with
large volumes of condensed water and high temperatures or CO2 partial pressures will tend to require dose
rates towards the upper end of this scale.

Chemical costs vary from supplier to supplier and may be tied in with the provision of other services such
as corrosion monitoring. However, for the purposes of LCC a chemical cost of US$8 per US gallon is
reasonable. On this basis, corrosion inhibitor costs 0.84 cents to 8.4 cents per barrel at inhibitor dose
rates of 25 to 250 ppm.

39
 APPENDIX 2
2. BPX's Historical Costs Due to Corrosion

Chemical treatment costs are relatively easy to predict but can be a relatively insignificant part of the
overall costs due to corrosion - see Figures 1 and 2.

It is difficult to quantify the costs of corrosion for existing assets but this offers the best opportunity
for accurately predicting costs for future assets. Such costs will clearly vary with the relative
maturity of the field, starting low in the early years and rising with time until abandonment. During
the same period, production rates will plateau before reducing and so the costs of corrosion per
barrel will become increasingly more important with time. Also, water rates tend to increase and
treatment costs therefore increase.

Figure 1 shows the relationship between the age of an asset and its cost of corrosion. The curves
show the expected trend with costs increasing as the asset ages. This is due partly to the ageing
equipment and partly to the reduced productivity meaning that the fixed costs, such as inspection,
are absorbed by less production. There are some unexpectedly high costs in Years 7 and 10 for the
assets in the data set. Both these costs relate to expensive failures for particular assets.
Cost Of Corrosion Per BOE (US$)
1.5

1.2

0.9

0.6

0.3

0
0 5 10 15 20
Age Of Asset (Years)
Including Lost Production Excluding Lost production

Figure 1: The relationship between the age of the asset and the cost of corrosion.

The size of the development is also important. Large developments such as Prudhoe Bay enjoy
economies of scale where chemical costs can be tied into long term agreements and costs driven
down. This is not as feasible for smaller developments. However, the relationship between asset
size and cost is not particularly strong, as shown in Figure 2. Certainly, some of the highest costs of
corrosion are experienced by the smaller assets but there is a wide scatter and several smaller assets
have similar costs per barrel to large assets. This is probably due to the fact that many assets operate
in the same market place and therefore, all North Sea assets, for example, enjoy the economies of
scale of the region, irrespective of their size.

40
 APPENDIX 2

1.2

1
Cost of Corrosion (US$)

0.8

0.6

0.4

0.2

0
0 10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 60,000,000
Average Annual Production (BOE)
Figure 2: The affect of asset size on the costs due to corrosion.

Geographical location will also play a role. The obvious criterion is whether the development is onshore or
offshore. Costs for most activities will be greater for offshore developments, unless the onshore
development is in a particularly remote and/or hostile region, such as Alaska or the Middle Eastern deserts.
In such areas, costs can be similar to those offshore.

Bearing this uncertainty in mind, it is possible to draw broad conclusions by looking at historical costs for
BP's assets in the North Sea and Prudhoe Bay. The costs of corrosion have been logged by assets for
several years. These assets represent a varied group in terms of location, size, relative maturity and the
investment made in terms of corrosion resistant materials at the construction stage. Where possible, these
costs are averaged over the 4 years 1991 to 1994 to remove the affect of shutdowns and other periodic
costs.

Table 2: Overall costs of corrosion for several BPX assets.

Asset
Cost/boe Cost/boe
without lost oil incl. lost oil
Prudhoe Bay US$0.17 US$0.19
Beatrice US$0.75 US$1.19
Bruce US$0.09 US$0.10
Buchan US$0.20 US$0.33
Clyde US$0.19 US$0.33
Forties * US$0.37 US$0.46
Magnus US$0.18 US$0.29
Miller US$0.05 US$0.05
POV Seillean US$0.34 US$0.34
Thistle US$0.81 US$1.17
Villages ** US$0.05 US$0.05
West Sole *** US$0.16 US$0.16
Average US$0.29 US$0.41
* Includes FPS ** Includes Dimlington *** Includes Hyde and Easington Terminal

41
 APPENDIX 2

It should be noted that investment in corrosion resistant materials does not reduce these costs to zero.
Inspection and repair are still required, albeit at a reduced frequency. Also, no facility will be constructed
entirely from CRAs and therefore corrosion of carbon steel will apply in every case. Miller is an example
of a modern asset with a high capital expenditure on CRAs and a low lifting cost per barrel due to
corrosion. However, Miller is relatively young and it is difficult to draw conclusions about the future costs
Miller or similar developments will face.

The following two figures allow the above costs to be assigned to separate sections of a production facility.
Figure 3 includes lost production while Figure 4 excludes it. The figures are based on data gathered over
the 5 years from 1990 to 1994 for Beatrice, Bruce, Buchan, Clyde, Forties (including FPS), Magnus,
Miller, Thistle, Villages (including Dimlington) and West Sole (including Hyde and Easington).

Downhole
Lost Production
11%
16%
Personnel
1%

Topsides
19%

Subsea
Chemicals
50%
3%

Figure 3: Breakdown of costs due to corrosion in ten BPX assets including lost production.

Personnel
Downhole
1%
Topsides 13%
23%

Chemicals
4%

Subsea
59%

Figure 4: Breakdown of costs due to corrosion in ten BPX assets excluding lost production.

42
 APPENDIX 2

From this it is possible to say, for example that circa 50% of the costs of corrosion can be eliminated if an
investment is made in corrosion resistant materials subsea. For an 'average' asset, this would equate to 15
cents per barrel, or 20 cents per barrel including lost production costs.

3. Inspection Costs

3.1. Topsides, Subsea and Downhole

Inspection costs can be a significant proportion of the overall costs due to corrosion, listed in Table 2.
Topsides in particular account for a large proportion of the overall inspection costs - see Figure 5.

Downhole
5% Subsea
14%

Topsides
81%

Figure 5: Proportion of total inspection costs spent in each area.

In the case of topsides, these data relate only to pipework and vessels (not structures) as this is the area
where materials selection would impact on inspection costs. Structures are unlikely to be built from
anything other than carbon steel and therefore these costs can be ignored for the purposes of this
document.

These costs can be related to the lifting costs due to corrosion listed in Table 2. Comparing the spend on
inspection with the overall spend in each section (downhole, subsea, topsides) shows that inspection
accounts for 31.4% of the overall spend, excluding lost production - see Figure 6.

43
 APPENDIX 2

30.0%
26.8%
25.0%

P r o p o r t i o n o f 20.0% Inspection Accounts for 31.4%

Overall
of the Total Cost of Corrosion
Cost of
15.0%
Corrosion
Due to
Inspection 10.0%

2.9%
5.0%
1.7%
0.0%
Downhole Subsea Topsides

Figure 6: The proportion of the total cost due to corrosion accounted for by inspection in each area- excluding lost
production, chemicals and personnel.

The figures in Table 2 show that the 'average' asset spends US$0.29 per barrel on corrosion, excluding
lost production. The sectors downhole, subsea and topsides account for 95% of this spend (US$0.276)
while personnel and chemicals account for 5% - see Figure 4. Inspection overall accounts for 31.4% of
this US$0.276 or 8.7 cents per barrel of lifting costs.

Comparing this with the data presented in Figure 5, the lifting costs due to inspection in each area are
shown in Table 3.

Table 3: Lifting Costs Due to Inspection, by Area

Area Cost per Barrel

Downhole 0.47 cents
Subsea 1.22 cents
Topsides 7.1 cents
Total 8.7 cents

As stated, inspection costs will not decrease to zero if CRA pipework and vessels are selected so these full
amounts cannot be used in life cycle costings to justify CRA materials. However, it is reasonable to
assume that inspection costs will at least halve if CRAs are chosen.

3.2. Pipelines - A Special Case

The subsea inspection costs detailed above include the costs of running intelligence or 'smart' pigs in
flowlines and pipelines. However, this 'average' cost may not be applicable if particularly simple or
complex flowline networks are constructed. In such cases, inspection costs may be significantly lower or
higher. The following formula allows an estimate to be made of the cost of an inspection (10) based on the

44
 APPENDIX 2
design of the flowline network. The frequency of inspection will have to be estimated based on similar
experience elsewhere, the corrosivity of the fluids and the criticality of the pipeline.

Note:
If there are no operational requirements to pig the line e.g. for control of wax, choosing a corrosion
resistant material for the pipeline may allow the pig launcher and receiver facilities to be eliminated leading
to substantial CAPEX savings.

 no. ofdiameters 
0. 6

Mobilisation = $200,000 
 3 

Includes pig preparation, set up and transportation.

 distance( km) 
0 .6

Inspections = $35,000 
 6 
Includes gauging, pig run, interpretation and reporting.

Pipeline cleaning prior to inspection adds 10% to these costs onshore and 20% offshore. These costs are
independent of diameter and are accurate to ± 15% for multiple short runs (typical of flowlines) and a
single long run in a transmission line. They are based on 1995 British Gas costs for the Alaskan North
Slope and show good agreement with North Sea costs (FPS, Magnus, Don). For more information
contact Will McDonald, Sunbury x4014.

Example
Inspect 2 off 24" 20 km flowlines and a 16" 6 km line, onshore:

 2
0. 6

Mobilisation = 200,000 x 
 3
Mobilisation = $157,000
 20
0 .6
 6
0. 6

Inspections = 2 x 35x   + 1x 35x  

 6  6
Inspections = $179,000

Cleaning@10% = $33, 600

TOTAL = $370,000

4. Lost Production

Lost production accounts for 16% of the overall lifting cost due to corrosion - Figure 3. However,
including the value of lost production in life cycle costing exercises is difficult. There is little consensus on
the true value of lost oil. Estimates range from the current market price of US$15-25 per barrel down to
US$2 or less. Part of this discrepancy is due to the fact that 'lost' production may not be lost but deferred.
If the shutdown of a flowline is short term, the well may come back on stream at a higher rate allowing

45
 APPENDIX 2
some or all of the oil to be recovered in a short time. Even if the well cannot produce at a higher rate, the
oil remains in the ground to be recovered later in the field's life.

However, there are two instances where the oil may be genuinely lost. Firstly, an expensive corrosion
related failure on a marginal or mature well or facility may lead to the well of facility being shut in or
abandoned. In this case, all oil remaining in the ground is lost. Secondly, in areas such as Colombia where
the operating licences are awarded for a fixed period, there may be no opportunity to make up for lost
production and the oil will therefore remain in the ground when the asset is relinquished by BPX. Again,
the oil is lost as far as BPX is concerned.

Another major difficulty in including lost production costs into life cycle costing exercises is the difficulty in
predicting the timing and quantities of the loss.

For these reasons, it is preferable to carry out parallel costing exercises using figures with and without lost
production. The value of 16% of the overall cost due to corrosion, or 6.6 cents/bbl is reasonable for the
North Sea. However, Prudhoe Bay use a figure of 2 cents/bbl, largely due to the use of a low deferred oil
value of US$2/bbl. If the economic outcome is the same in both cases, lost production can be quietly
ignored. However, if lost production swings a borderline economic argument in favour of CRAs more
thought should be given to the basis of lost production calculations, in terms of both the timing and the
magnitude of the costs. Ideally, a 'similar' asset should be identified and their costs investigated.

5. Tailoring OPEX Costs

Table 2 shows the wide variation in the costs of corrosion in BPX. Many factors influence this cost
including the size, location and age of the asset as well as the level of investment in CRAs. The average
figures gathered over 5 years give a sound indication of the costs involved. However, each asset is unique
and for materials selection for major projects it may be worthwhile investigating the costs experienced by a
'similar' asset in more detail. In this context, 'similar' relates to the geographical location (hostile/developed,
onshore/offshore), size, field life and fluid type (corrosive/benign). The best source for this data is
reference 11.

46
 APPENDIX 3
Materials Selection for Weight Reduction and Cost Savings Offshore

All other sections of this report are equally applicable to onshore and offshore developments. However,
materials selection for offshore developments must consider one factor which is of little or no interest for
onshore developments - weight of the various materials.

Selecting the optimum materials for a given application can lead to weight reductions by one or more of the
following mechanisms.

1. Selecting a low density material, such as titanium or aluminium alloys or GRP where the weight per unit
volume is reduced. Even if the strength to weight ratio is similar to steel (as is the case with aluminium
alloys), weight savings can be achieved if stiffness rather than strength is the limiting factor.
2. Selecting high strength materials such as Super Duplex stainless steels where the total volume and
therefore weight of material can be reduced.
3. Selecting a corrosion resistant material in place of carbon steel to avoid the requirement for a corrosion
allowance. This can easily halve the weight of pipework or vessels in corrosive duty where a corrosion
allowance of 8 mm can account for half the wall thickness.

Materials costs have been estimated at circa 14% of a typical 10,000 tonne topside (9). From this it
appears that the scope for major cost reductions through weight saving are small. However, topside
weight also requires additional supporting weight in terms of structure.

For fixed structures, each 10 tonnes of topside equipment requires approximately 8 tonnes of topside
structure. This 18 tonnes in turn requires 5 tonnes of jacket and piling and therefore a 10 tonne reduction
in the weight of a piping system can lead to an overall weight saving of 23 tonnes. For floating structures,
the situation is similar: for tension leg platforms 10 tonnes of topside equipment requires 10 to 15 tonnes of
supporting structures. At a typical cost for steel fabrication of US$3,875 per tonne, weight reduction can
easily lead to large incremental cost reductions.

Example
A pipework system has been specified in carbon steel with a 6 mm corrosion allowance, 12 mm
total WT and will weigh 10 tonnes. It is estimated to cost US$40,000. The alternative under
consideration is duplex stainless steel where the cost of installed materials are four times greater at
US$16,000 per tonne. The strengths of the two materials are similar and therefore no reduction in
pressure containing wall thickness is possible. However, the lack of a corrosion allowance allows
the wall thickness of the duplex SS alternative to be halved resulting in a installed cost double that
for carbon steel at US$80,000.

The reduction in wall thickness results in a weight saving for the piping system of 5 tonnes. This in
turn leads to a reduction in weight of the steel topside structure of 4 tonnes and 2 ½ tonnes is
saved on the jacket and piling. There are therefore 11 ½ tonnes of steel fabrication costs, or
US$44,500 at US$3,875 per tonne to offset against the increase in materials costs for the piping
system. On this basis the duplex SS piping system is the most cost effective.

The above example takes no account of the savings that will be made over the field life by the reduced
operating costs of the corrosion resistant piping system, or the weight and cost savings of maintenance
equipment such as inhibitor injection pumps for a carbon steel system. When these are taken in to account,
the corrosion resistant material would be even more attractive.

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 APPENDIX 3

These incremental savings can also lead to step changes in costs if they allow a change in installation
procedure from barge launch to crane lift. Barge launched structures require additional steel work to
support the structure during loadout and transportation and to provide buoyancy during upending. This
steel is redundant after installation. (9)

It has been estimated that a lift installed jacket in 125 m of water weighing 9,300 tonnes is 25% lighter than
its barge launched equivalent. This results in materials and fabrication savings of circa US$10m. As lifting
limits are approximately 8,500 tonnes for jackets and 10,000 tonnes for decks, it can be seen how
important weight saving can be if it allows structures to come in under these limits. (9).

Clearly, weight reduction via materials selection must be considered at the early project stage if such
savings are to be realised. Late changes to materials specifications will not allow time for a re-design of the
structure and therefore will not result in the incremental savings elsewhere. More details are given in
reference 9.

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 ACKNOWLEDGEMENTS

Thanks go to those who helped compile the cost data in the appendices, including
Bijan Kermani, Dave Fairhurst, Edwin Smith, Graham Chaney, John Driscoll, John Pattinson, John
Sleeman, Leonore Pilkington, Phil Greenwood, Richard Woollam, Simon Webster, Steve Groves, Tim
Evans and Will McDonald.

Thanks also go to those who read the draft document and made constructive comments including David
Ray, Don Harrop, Richard Horner and Richard Woollam.

REFERENCES

1. “Economic Considerations in Selecting Materials” L M Smith, M Celant

2. “Life Cycle Costing -Are Duplex Stainless Steels the Cost-effective Choice?” L M Smith, M Celant.
Paper OTC 7789, 27th Annual OTC, Houston, Texas 1-5th May 1995.

3. “What is the Real Cost of Carbon Steel in Comparison with Corrosion Resistant Alloys?” L M Smith,
M Celant, A Taylor. UK Corrosion 1993, London.

4. “Economic Comparisons Between Carbon Steel and High Nickel Alloy Clad Pipes for Offshore
Applications” M Celant, L M Smith. 10th European Corrosion Congress, Barcelona 5-8th July 1993.

5. “NiDI Life Cycle Costing” Software programme distributed by the Nickel Development Institute.

6. “The Importance of Risk Analysis in Life Cycle Cost Evaluation of Carbon Steel and CRA pipelines”
B D Craig, R S Thompson Corrosion Management August/September 1995 pp14-17.

7. Life cycle costing software developed during 1996 by Offshore Technology Management Ltd.

8. “Selection of Materials for Njord Seawater Piping” Corrosion and Materials - Offshore Conference,
9-10th May 1996, Oslo.

9. “Choosing Offshore Construction Materials - A Practical Guide to Cutting Construction and Operating
Costs” S Coleman Financial Times Energy Publishing.

10.Pigging Cost Estimation Formula - W McDonald, BP Sunbury x4014.

11.“BP Exploration Costs of Corrosion Presentation” LR Integrity Management November 1995.

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