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Investment Project Analysis on Oil Pipeline Replacement Project

Ali Idham, Achmad Herlanto Anggono

Abstract


One investment opportunity in one of Indonesia’s largest crude oil producers is the replacement of existing 10-inch pipeline, approximately 12.6 km lengths, to secure crude oil delivery for the next 20 years. Data on pipeline general conditions, inspection results, and Right of Way (RoW) conditions clearly indicate critical concerns regarding internal and external risks due to pipeline age that near to end of useful life, heavy metal loss, and population and community growth around pipeline RoW. The pipeline replacement will solve the current problems and establish new infrastructure with 20 years of design life to support Indonesia oil production. The replacement project will require high investment costs. Project economics will be valuable input to evaluate whether the investment of pipeline replacement is feasible or not. This study assesses the financial analysis using gross split scheme to understand the economics of the proposed investment project as considerations prior to final investment decision. Discounted cash flow (DCF) method and sensitivity analysis are used as financial tools with specific profitability measures using Internal Rate Return (IRR), Net Present Value (NPV), Profitability Index (PI), and Payback Period. This study also performs cost risk assessment using Monte Carlo simulation as one of modern solutions to obtain probabilistic capital investment cost that fully reflect the impact of uncertainty and risk.


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