A Value-Based Approach for the Evaluation of Investment Options in Oil & Gas Plants

It is widely known that the oil prices have gone down significantly in the past years: after the 60% drop in the second semester of 2014, the Brent price has not gone above US$60 since. The consequent reduction in revenues has led to increasing pressure on Capex / Investments throughout the sector. In addition, in some regions (e.g. in developed countries) the issue of asset ageing is emerging, to a point that Companies search for ways to increase asset life even beyond its original design life. Lastly, increasingly stringent regulations and best practices require continuous improvements in safety standards, energy efficiency and emission levels.

Therefore Oil & Gas Companies face now a choice regarding old assets: either complete decommissioning and shut down, or large investments into plant upgrade and/or revamping. In this complex context with limited resources, ageing assets and stringent standards, it is essential to adopt structured approaches and methodologies to support Management decision-making process in selecting and prioritizing investment options that will create value for companies in the future.

The paper will describe a value-based approach for the evaluation of investment options in downstream plants, based on a probabilistic method to determine the benefits associated to investments, to be prioritized according to costs. The approach is implemented in a leading multinational petrochemical and Oil&Gas Company, where an extensive SIL analysis program was developed, analyzing more than 5.000 SIF (Safety Instrumented Functions). The outcome of Arthur D. little’s approach is a structured investment project that tackles the opportunities emerging from safety assessments such as SIL (Safety Integrity Level) studies.

In fact, important investments are usually needed to fulfill SIL analysis requirements, especially when the methodology is applied on existing process plants. Hence, it is first necessary to understand what to change and how, which investments are needed, and what benefits the Company may reap from it. The introduction of the Cost/Benefit analysis on top of the SIL activities supports Management in selecting and prioritizing the most feasible improvement actions to improve the reliability of each instrumented function.

The approach is based on three steps: SIL Allocation, SIL Verification and SIL Optimisation. The goal of the first and second steps, based on the IEC 61511 and IEC 61508 standards, is to evaluate the existing plant “as-is”. The Allocation, performed with the Risk Graph methodology, results in the SIL that the interlock should have in order to maintain the risk under the acceptability threshold defined by the Company. The Verification measures, from the specifications of the installed equipment, the current reliability of the interlock. Whenever the Allocated SIL is higher than the Verified SIL, the risk is higher than the acceptable level.

The third step, SIL Optimisation, builds on the results of the SIL Allocation and SIL Verification studies. Its purpose is to investigate if and how the risk could be reduced down to the acceptability level, preferably strengthening the reliability or the effectiveness of other preventive measures or risk barriers. If that is not possible, other options include increasing the reliability of the installed SIF (for example, increasing the SIL from SIL1 to SIL2) or introducing additional risk control measures (i.e. additional IPL – Independent Protection Layers).

The proposed interventions, whether they involve an upgrade of the SIF equipment, an organizational change such as shorter maintenance intervals, or additional IPLs, are labelled improvement actions. Each improvement action has a risk-reducing benefit and an investment cost. The benefit is the difference between the current risk situation and the scenario with an acceptable risk. For each SIL level gap (e.g. Allocated SIL 3, Verified SIL 2, the gap is 1) the frequency is reduced by one order of magnitude, and so is the risk. The Cost/Benefit Ratio (CBR) helps the team understand which actions yield larger benefits with smaller investments.

The Cost Benefit Ratio methodology can be beneficial also in other industries where safety interlocks are installed, such as power generation, the food & beverage industry, or the pharmaceutical sector.

Furthermore, the Cost/Benefit analysis’ greatest strength lies in calculating whether implementation costs of a proposed modification is worth the benefit at production line, site and HQ levels, in a strategic outlook that takes into consideration oil prices, asset age and normative requirements. It can therefore help Management understand which actions to implement first, develop a long-term investment plan and measure quantitatively the effectiveness of plant modifications.