Assessment of contingency CAPEX for construction of oil and gas facilities depending on their stage and complexity: theory and practice

UDK: 622.276:658.011.4
DOI: 10.24887/0028-2448-2020-6-82-86
Key words: contingency capital expenditure (CAPEX), oil and gas facilities construction, front-end engineering design (FEED), pre-FEED cost evaluation, capital expenditures, cost-building models, cost databases
Authors: S.V. Chizhikov (Ingenix Group LLC, RF, Moscow), E.A. Dubovitskaya (Ingenix Group LLC, RF, Moscow), R.N. Akhmetov (Ingenix Group LLC, RF, Moscow), N.O. Pushkina (Ingenix Group LLC, RF, Moscow)

Oil and gas facilities construction is usually affected by numerous risks which could alter initial plans of investors in terms of schedule and budget. At any stage of preparedness of such a project it is important to provide for the most reasonable cost estimate including contingency expenditures. The Russian methodology of cost estimation of oil and gas infrastructure facilities does not provide for evaluation of contingency capital expenditure (CAPEX) beyond local front-end engineering design (FEED) analogue which can lead to a significant risk of underestimation, especially at early stages of projects. International practice embraces examples of complex methodology of contingency assessment. However, as a rule, there are no generally accepted approaches to its assessment which would consider a technological complexity of a particular field facility.

The article considers methodology for estimation of the amount of CAPEX contingency using both Russian and international best practices could be used. The methodology is based on authors many years professional experience as well as on a significant database of the built facilities. The methodology involves an assessment on an object-by-object basis which considers a design (planning) stage of a particular facility as well as its technological complexity. In addition, the authors recommend to run a benchmarking exercise to determine a mid-industry regional comparative cost. The proposed approach makes it possible to quantify contingency cost funds needed to cover risks of early stages of projects development. At the same time the most risky projects with crucial impact on a final project cost are identified. A correct determination of contingency CAPEX will allow to reduce a risk of budget overrun and increase the probability of achieving the expected profitability of the project for the investor.

References

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