A Discussion on the Different Types of Value

If you look up the term “value” in a dictionary, you will find that the word has a number of possible meanings, either as a noun or a verb. But in the context of how processing can add “value”, we are really only interested in three of those definitions; one noun, two verbs.

val·ue [?valyo?o]

NOUN

1.      The regard that something is held to deserve; the importance, worth, or usefulness of something:

• The material or monetary worth of something:
• The worth of something compared to the price paid or asked for it:

VERB

1.      To estimate the monetary worth of (something):

2.      To consider (someone or something) to be important or beneficial; have a high opinion of:

Revenue Drivers fall into four principal types:

• CAPEX which impact the upfront costs of installing the offering
• OPEX which impact the operating costs associated with the offering, and
• Revenue Improvement, which is the way that the offering enables the client to generate more money (e.g. processing cheaper feed stocks, producing more valuable products, having reduced unplanned equipment downtime)
• Increased Market Share, where the amount of business within a particular sector is increased in relationship to the competition, typically a strategic decision.

When considering any of the revenue drivers, it is always worth examining why an individual or organization may or may not care about a particular driver. It may be that it is not something that is a part of their job description or current work assignment or responsibility (“Someone else is responsible for the operating budget. I’m responsible for the Capital budget”). It may be that the driver is not sufficiently large enough to make an impact (“It may be lighter, but I still need the same size crane to lift it”). Or it may just be that they were not aware that the driver even existed (“No-one has ever said anything, and we’ve always done it this way”). Maybe the individual does not want to change from the brand that he is used to using? The ability to communicate effectively how the various features of an offering brings benefits that deliver on the revenue drivers is the key to being able to effectively establish its true value in any given opportunity.

So, how do the various benefits impact the revenue drivers? And how exactly is it possible to put a financial value against some of these benefits? Let us examine a number of these in turn.

Plot Area Reduction

In situations where real estate costs are at a premium, having a solution that requires a lesser amount compared to an alternative can bring significant benefits. The size of a processing module or a processing facility may be reduced, which impacts the capital expenditure associated with the project. But reduced plot area is not just limited to real estate benefits. Transportation logistics can be simpler (for example allowing a single truck to transport multiple equipment items instead of needing separate transportation). And smaller footprint may allow installation in a location that was previously inaccessible or too small, something that needs to be considered during retrofitting or equipment upgrades. A reduction in transportation costs should be fairly easy to quantify, but the impact that a footprint reduction may have to the cost of a production facility is not quite so easy. Having additional space in a particular location may facilitate maintenance activities or may allow for additional equipment to be relocated nearer to where it is actually required.

Height Reduction

Being able to reduce equipment height really comes into its own if the alternate solution would require additional equipment supports, platforming and access, or necessitate the design of multi-level structures with deck penetrations. Transportation can be an issue if equipment if too tall. If you have to ship equipment on its side, there are additional complications in re-righting the equipment, and there are also additional design considerations for lifting, all of which add cost to the party responsible for the transportation. And there is also the question of the location of the center of gravity which can have an impact on the design of any support structure through bending moments. The height of equipment can impact the location into which it can be installed (Crane interference is always a concern for tall towers), and if you are needing to install something that cannot fit between decks onto a facility that will not allow for deck penetrations, then alternative support methods, such as cantilevered platforms, need to be evaluated.

Weight Reduction

When it comes to weight reduction, it is not just the dry equipment weight that is of importance. Operating weights and flooded weights need to be taken into consideration for any structure that is required to support the equipment. And these weights are linked to the issues associated with the center of gravity. Heavier equipment requires stronger support and stronger lifting equipment, which has an impact on the budgets of those providing them. Weight can also have an impact on transportation costs. And offshore, production facilities are often limited by the amount of weight that can be supported at a particular location. Exceeding this weight limitation can eliminate a particular technology from consideration. But it is not just the weight of the overall equipment that needs to be considered. If there are particular equipment components that need to be removed for maintenance, then suitable facilities need to be provided to allow for these activities. If the components cannot be lifted safely by manpower, then lifting equipment will need to be provided. Crane access is not always possible so additional facilities for the removal of heavy maintenance components would need to be installed, and someone will be responsible for the cost of these items, as well as their installation and maintenance.

Purchase Price

The price you see is not always the price you pay. To say that people are not influenced by the capital purchase price of any solution is a dangerous assumption. If your product or service offering is being evaluated by having to satisfy a check list of items, the person or organization doing the buying may well believe that, so long as the products check all the boxes, then the competitive offerings are essentially identical, and it comes down only to purchase price. But if there are hidden costs of ownership that have not been part of the evaluation, then concentrating on the purchase price differences will not give a true evaluation (It is very important to recognize that the purchase price and the cost of ownership, or life-cycle cost, are very different things). But if the evaluating party is not responsible for those additional costs, what then? Well, it will be up to the equipment or service provider to educate the buying party as to how the cost of ownership can be very different from the purchase price.

Ancillary Equipment

Every piece of equipment and service that is offered has an impact on the type and operation of equipment around it. This can be for the better or for the worse. The inclusion of a particular technology may reduce the size and cost of certain ancillary equipment but may necessitate the inclusion of other services or equipment. Deciding to forego certain maintenance activities may reduce the operating budget in the short term, but when something breaks, there can be a sudden larger expenditure in the long term. As such, to truly get an understanding of how equipment or a service impacts the overall facility, it is necessary to take a wider, more holistic approach to the evaluation. And once again, the benefit of the equipment or service may not be felt in the immediate location but elsewhere, and if the benefit is not going to be felt by the person doing the evaluation, there is a tendency to remove that benefit from consideration.

Installation Costs

The cost of installation covers a multitude of aspects depending on the situation; Cranage, transportation, manpower, time frame, pre-commissioning, commissioning, and storage are just some of the things that need to be taken into consideration. The integration of equipment into a facility can be time consuming and costly. Providing a single, fully pre-packaged system may take less time to integrate into a facility, thus reducing costs, but may require specialized equipment (such as a heavy lift crane) thus increasing costs. Having an appreciation of how a particular solution impacts installation, particularly from the client or end-user perspective, can provide an understanding of how a particular solution can add additional value.

3rd Party Costs

Whenever equipment or a service is provided, if that equipment or service does not include for certain necessary items, then those items will have to be provided by someone else. Quite often this falls under the remit of a 3rd party contractor or engineering company. Depending on the activity, the costs associated with involving a 3rd party can vary significantly from those associated with the equipment or service provider undertaking those activities. Providing a fully integrated equipment package with all the instrumentation and electrical hook-up already completed, eliminates the need for hook-up work after delivery. However, if there is already a significant amount of that activity already being undertaken at the processing site, and only a small amount required for the equipment being provided, the economics may change. In general, however, anything that reduces the involvement of 3rd parties will reduce costs and provide value.

 Chemicals Costs

The ability to optimize chemical usage within a processing facility can result in significant operation savings for the party responsible for paying for those chemicals. However, it is not always the case that the party undertaking the evaluation of an equipment or service offering is the same party that is responsible for the cost of the chemicals. So why would they care? Well, someone somewhere is going to be paying for them, and unless any demonstrable savings from a reduction in chemical usage or change in chemical type can be introduced into the evaluation process, then this is an opportunity missed. But it is not just the unit cost of the chemicals that need to be considered. There are significant logistical cost associated with purchasing, transportation, the ancillary equipment for injection and the associated man-power that will be incurred by relevant parties. It is quite possible that a chemical that has a more expensive unit cost will ultimately prove to have a cheaper usage cost once the logistical costs of getting it from the manufacturing location to the processing facility have been taken into consideration. One further thing that should also be taken into account is the cost associated with neutralizing any chemicals (if that is actually possible) prior to discharge into the environment. Certain environmentally sensitive areas (e.g. Alaska) have very strict limitation of what can or cannot be discharged. If discharge streams cannot be safely disposed of at site, then they will need to be collected, transported, treated and disposed of at an alternate location, all of which has significant associated costs. As such, providing chemicals or equipment that operates using chemicals that avoid these charges can add significant value.

Reliability / Up Time

There is the old adage which says, “Time is Money”. In the case of processing, the adage should be adjusted slightly to read “Up-time is Money”. If the inlet fluids to a piece of equipment or system are not being processing to the required level for sale or discharge, then the product will either not be saleable or will not demand as high a sale price. And discharge of off-specification effluents could result in significant fines. As such, having equipment or services that permit operation for extended periods at the necessary performance is of high importance. However, there is a balance between the risk associated with having equipment out of action and the costs associated with stand-by capability. For critical duty equipment, having installed stand-by capacity can mitigate reliability concerns but this can prove extremely expensive and not always practical. Being able to provide equipment with a demonstrable reliability or services which increase reliability and uptime is an extremely important area where value can be added. And the numbers get very large very quickly. If a 100,000 Barrel per day Oil production facility is not able to produce, with oil at $30 a barrel, the cost per day is $3 million, the cost per week is $21 Million, the cost per month is $630 million, and it just keeps growing. Whilst there is an argument that says that the money has not been lost as the oil is still in the ground, there is a very real cost of having a facility that is not generating any revenue.

Consumables

Consumables can be considered much in the same way that we have looked at chemicals. It is not only the purchase price of the items that need consideration, but the logistics associated with getting them from point on manufacture to point of use. And any fees involved with treating the effluent of disposal of spent materials needs to be included within our value equation. These costs are going to be incurred and will be impacting the budget responsibility of someone within the end-user’s organization, and it is important for a client to have an appreciation of these costs if they are serious about reducing the overall cost of ownership related to a processing facility. Being able to extend the time between replacements of the consumable item is often worth more than finding a cheaper unit price for the consumable item. Think of the cost of a simple cartridge filter element. Now think about all the associated costs of replacing that filter offshore. There are costs associated with purchasing, onshore transportation, port charges, offshore, manpower offshore (for unloading, permitting, replacement, & lifting), return transportation, disposal charges…The list is quite extensive. Now ask yourself whether or not the cost you paid for the element is the actual cost of installation. Sometimes paying a little more upfront on something that lasts longer makes more economic sense from an overall perspective.

Maintenance Costs

Whilst maintenance costs and reliability are often seen as hand-in-glove, they are actually different aspects of a processing facility’s operating budget. The most obvious example of a maintenance activity with which most people would be familiar would be that of changing the oil in their vehicle. Some types of vehicle require an oil change every 3000 miles, some every 5000, some every 10,000. Whilst there are obvious benefits with undertaking regular maintenance activities (See Reliability / Up-time), these are also the types of activities that are often overlooked or considered non-urgent. Being able to provide equipment that has a less frequent maintenance cycle can add value, but so also can providing services that take the responsibility for undertaking maintenance activities out of the client’s hands. By maintaining the equipment in optimal condition, means that up-time is maximized, and more expensive equipment fixes are not required, or are at least a far rarer occurrence.

Waste Management Costs

Nearly all processes produce some form of waste stream, be it a continuous effluent, an intermittent discharge, or just a volume of fluid that needs to be handled during venting and draining of the equipment. Irrespective or how often the waste stream is produced, the facility must be able to handle it and there is a cost associated with doing so. But it is not just the volume and frequency of discharge that add to the cost of waste management, but also the concentration and types of the contaminants within the waste stream that need to be considered. And there is the manner of treatment as well. Should the waste stream be treated in a continuous manner? Or should it be collected up and then handled on a batch basis? Any type of equipment, process, or service that can reduce the costs associated with waste management can provide significant added value to a client, provided that they understand the benefits that they are receiving.

 Utilities Costs

Whilst some may consider utilities to be in a similar class as chemicals and consumables, costs associated with utilities can very significant, depending on the location of the processing facility in question. In desert areas, water is often more valuable than oil, and any process that can reduce the volume of water that is required for it to operate satisfactorily can be of significant benefit. Likewise processes that do not require utilities to be treated to as high a level of purity as alternate processing options provide benefits. And it is not just the continuous everyday utility consumption that needs to be considered. Some processes operate on a batch basis may have a short-term utility consumption requirement, but that utility is consumed at a very high rate during that time, necessitating some manner of storage for the utilities in question. And some the utilities used in some processes, once consumed, produce waste streams that need to be properly handled. The type, manner, production, consumption, and disposal rate of utilities all have associated costs. Any method of mitigating the costs associated with utilities can provide significant value to a client if properly understood and evaluated.

Operability / Controllability

Processes that have a high degree of operability and controllability can provide value to clients, especially if the feed streams are known to have or are foreseen to be having a high degree of variation. Being able to respond automatically to or being able to handle an unforeseen (or even planned) process change can avoid process upsets and any resultant reduction in throughput, degradation of product quality, or even process shutdown. And during this time, the operators are doing whatever they need to do to re-establish overall control of the system. The ability for a process to automatically compensate for upsets via control and instrumentation, or simply by selection of a robust process that can tolerate variances in the inlet fluids, free up the operators for other activities. And operability is usually closely linked to safety. Having one less thing to worry about is always of benefit.

Administrative Costs

Administrative costs are the costs that an organization incurs not directly tied to a specific function such as manufacturing, production or sales. These costs are related to the organization as a whole as opposed to an individual department. However, someone somewhere is still going to be paying for them. That is just the cost of doing business. Well would not it be nice if those costs could be reduced? There are many ways of reducing the administrative costs associated with processing, and any way that an equipment or service offering can have a positive impact on those costs can bring value if communicated effectively.

Processing using Cheaper Feed Stocks

For Processing Facilities that have to purchase their feed stocks in order to make their products, the ability to the cheapest possible feed whilst maintaining product quality is of paramount importance to their economic model. Whilst lower grade feeds can be purchased for a lower price, but they normally come with more impurities or problem components, and hence more associated issues. Quite often, to maintain product quality in light of these impurities and problems components, there is a reduction in throughput for the processing facility. So, although the feed is cheaper, the facility is not producing as much saleable product, which impacts the overall revenue stream. Anything that can be done to the process that will allow throughput to be maintained at the original level, or at least not to be reduced by quite as much, has significant value to the operator.

Producing a more valuable Product

In general, the better quality the product, the higher the sales price it can command. Put another way, if you have a sub-standard product, if you are able to improve the quality, then the sales price may increase. Whilst improving product quality can obviously have an effect on sales price, there are limits that need to be understood. If your ultimate product discharge is going to be mixed in with production fluids from other sources that only have to meet a particular specification (this is the norm for fluids being transferred into a shared pipeline), processing beyond the pipeline specification can be viewed as unnecessary, as you will not get any additional credit for the additional quality. But it is not just the sales prices of the final product that can be influenced by product quality. If you have a multi-stage process, the size, cost and performance of each processing stage is impacted by the product quality of the previous stages. By utilizing a process that delivers an improved product compared to another, the downstream processing requirements could be reduced, the lifespan of consumables could be extended, processing steps could be eliminated, or alternate processes selected. It is a balance between the capital costs, operating costs, and the revenue being generated.

Increased Throughput

Being able to increase throughput of a production or processing facility beyond that for which it was originally rated is normally of interest to the facility owner. Either through retro-fitting or debottlenecking, if the processing facility is turning feedstock into a more valuable end product (allowing for operating costs), then for every additional unit of feed that can be processed into product, it is additional revenue to the facility owner. However, in increasing throughput for a system, there are numerous checks that need to be made. Pipe sizes need to be verified for velocities and pressure drop. Controls and instrumentation need to be within their operational ranges. Consumable items and utilities need to be made available according to the new operational environment. Can the equipment or processes that are downstream of the upgrade location actually handle the increased throughput, or will additional investment be required to upgrade other processes? And if there is an impact on product quality, this needs to be examined with regards to product value. There is no point in processing 10% more feed if the product is worth 20% less.

Reduced Downtime

Reduced downtime quite often goes hand-in-glove with operability and controllability. Downtime can have a significant impact of revenues. For example, in refineries, crude feeds can change on a very regular basis (sometimes every 4 days), and when this change occurs, it is not uncommon to have a reduced feed rate of 25% for a period of time (8 hours is not un-typical) to allow the system to re-establish performance from the inlet desalting system. For a refinery that processes 100,000 barrels of oil per day, this is equivalent to a reduction in throughput of over 3 million barrels, which is approximately 1 month of production every year. Any equipment that would be capable of reducing this downtime (even by a small amount) would have a significant benefit to the economics of the facility.

Summary

Whilst there are many factors that can have potential value to customers, and those that I have identified above are some of those factors, it is really having an understanding as to where the problems truly lie that can have the most significant impact. Quite often people are not aware that their problems actually have genuine solutions, as they have been working with make-do solutions up to this point. Identifying the main problems and how the various features of the solutions provide the benefits that positively impact the revenue streams is key to being able to communicate the value of any offering. And being able to assign a financial impact to the benefits that a particular offering brings to a client, which is not always the easiest of tasks, only serves to reinforce the “Added Value” message.

Exactly how to communicate the value message? Well, that is a discussion for another day.