ISO 15663-2:2001
(Main)Petroleum and natural gas industries — Life-cycle costing — Part 2: Guidance on application of methodology and calculation methods
Petroleum and natural gas industries — Life-cycle costing — Part 2: Guidance on application of methodology and calculation methods
This part of ISO 15663 provides guidance on application of the methodology for life-cycle costing for the development and operation of facilities for drilling, production and pipeline transportation within the petroleum and natural gas industries. This part of ISO 15663 also provides guidance on the application and calculations of the life-cycle costing process defined in ISO 15663-1.[1] This part of ISO 15663 is not concerned with determining the life-cycle cost of individual items of equipment, but rather with life-cycle costing in order to estimate the cost differences between competing project options.
Industries du pétrole et du gaz naturel — Estimation des coûts globaux de production et de traitement — Partie 2: Lignes directrices relatives à l'application de la méthodologie et aux méthodes de calcul
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INTERNATIONAL ISO
STANDARD 15663-2
First edition
2001-09-01
Petroleum and natural gas industries —
Life-cycle costing —
Part 2:
Guidance on application of methodology
and calculation methods
Industries du pétrole et du gaz naturel — Estimation des coûts globaux de
production et de traitement —
Partie 2: Lignes directrices relatives à l'application de la méthodologie et
aux méthodes de calcul
Reference number
ISO 15663-2:2001(E)
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ISO 15663-2:2001(E)
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ISO 15663-2:2001(E)
Contents Page
1 Scope . 1
2 Terms, definitions and abbreviated terms . 1
3 The process of life-cycle costing . 2
3.1 The project focus . 2
3.2 Step 1 — Diagnosis and scope definition . 2
3.3 Step 2 — Data collection and structured breakdown of costs . 7
3.4 Step 3 — Analysis and modelling . 11
3.5 Step 4 — Reporting and decision making . 19
4 Life-cycle costing related techniques . 21
4.1 Economic evaluation methods . 21
4.2 Reliability, availability and maintainability (RAM) techniques . 27
Bibliography. 29
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ISO 15663-2:2001(E)
Foreword
ISO (the International Organization for Standardization) is a worldwide federation of national standards bodies (ISO
member bodies). The work of preparing International Standards is normally carried out through ISO technical
committees. Each member body interested in a subject for which a technical committee has been established has
the right to be represented on that committee. International organizations, governmental and non-governmental, in
liaison with ISO, also take part in the work. ISO collaborates closely with the International Electrotechnical
Commission (IEC) on all matters of electrotechnical standardization.
International Standards are drafted in accordance with the rules given in the ISO/IEC Directives, Part 3.
Draft International Standards adopted by the technical committees are circulated to the member bodies for voting.
Publication as an International Standard requires approval by at least 75 % of the member bodies casting a vote.
Attention is drawn to the possibility that some of the elements of this part of ISO 15663 may be the subject of patent
rights. ISO shall not be held responsible for identifying any or all such patent rights.
International Standard ISO 15663-2 was prepared by Technical Committee ISO/TC 67, Materials, equipment and
offshore structures for petroleum and natural gas industries.
ISO 15663 consists of the following parts, under the general title Petroleum and natural gas industries — Life-cycle
costing:
— Part 1: Methodology
— Part 2: Guidance on application of methodology and calculation methods
— Part 3: Implementation guidelines
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ISO 15663-2:2001(E)
Introduction
This part of ISO 15663 was developed in order to encourage the adoption of a common and consistent approach to
life-cycle costing within the petroleum and natural gas industries. This will occur faster and more effectively if a com-
mon approach is agreed internationally.
This part of ISO 15663 has been prepared to provide guidance on the application of the methodology given in
ISO 15663-1 [1] and on the calculations related to it.
It provides practical guidance towards the individual steps of the life-cycle costing process and aims to
— show how the potentials for added value can be achieved without life-cycle costing turning into a costly and
time-consuming process;
— indicate how to structure the work within the process and define focus areas;
— transfer the experience of industry in applying the methodology, so that a common and consistent approach can
be achieved.
It also promotes an understanding of the related methodologies and techniques and their application within the
life-cycle costing framework.
Life-cycle costing is distinct from investment appraisal in that it is not concerned with determining the financial
viability of a development. It is concerned only with determining the differences between competing options and
establishing the options which best meet the owner’s business objectives.
This part of ISO 15663 is based on the principles defined in IEC 60300-3-3, Dependability management — Part 3:
Application guide — Section 3: Life cycle costing.
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INTERNATIONAL STANDARD ISO 15663-2:2001(E)
Petroleum and natural gas industries — Life-cycle costing —
Part 2:
Guidance on application of methodology and calculation methods
1 Scope
This part of ISO 15663 provides guidance on application of the methodology for life-cycle costing for the development
and operation of facilities for drilling, production and pipeline transportation within the petroleum and natural gas in-
dustries.
This part of ISO 15663 also provides guidance on the application and calculations of the life-cycle costing process
[1]
defined in ISO 15663-1.
This part of ISO 15663 is not concerned with determining the life-cycle cost of individual items of equipment, but
rather with life-cycle costing in order to estimate the cost differences between competing project options.
2 Terms, definitions and abbreviated terms
For the purposes of this part of ISO 15663, the following terms, definitions and abbreviated terms apply.
2.1 Terms and definitions
2.1.1
initial investment
investment outlay for a project
NOTE Also known as CAPEX.
2.1.2
present value
value of the project cash flow excluding the initial investment outlay
2.1.3
life-cycle costing
process of evaluating the difference between the life-cycle costs of two or more alternative options
2.2 Abbreviated terms
CAPEX capital expenditure
FMECA failure mode effect and criticality analysis
FV future value
H,S&E health, safety and environment
IRR internal rate of return
NPV net present value
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OPEX operating expenditure
®
OREDA offshore reliability database
PI profitability index
PV present value
RAM reliability, availability and maintainability
RCM reliability-centred maintenance
TTE tools and test equipment
WACC weighted average capital cost
3 The process of life-cycle costing
3.1 The project focus
[1]
This subclause provides a guideline for the different steps of the methodology described in ISO 15663-1 . It should
be recognized that the contribution of life-cycle costing to a project is no more or less important than that made by
other support functions such as design, reliability or engineering.
Each of these functions provides its own unique perspective on the problem and each examines some aspects of
performance. Life-cycle costing adds a long-term financial perspective and provides the means to
— predict financial performance through life on a quantitative basis,
— assess the financial implications of the contributions made by other functions,
— compare alternative options on a common financial basis.
Life-cycle costing cannot act in isolation and should interact with the other functions as part of the team approach.
3.2 Step 1 — Diagnosis and scope definition
3.2.1 Identify objectives
The objectives should be established through discussion with stakeholders and other members of the team,
particularly the manager responsible for the overall work.
Two important aspects need to be established.
a) What are we looking at?
This provides the focus for the work and should establish what functions, systems or equipment are being examined.
b) Why are we looking at it?
This establishes the reason for the work.
These questions can be used to allow the user to relate the life-cycle costing work to the objectives.
Simple examples might be as follows.
EXAMPLE 1 What — a pumping system is being examined. Why — because the hydrocarbons need to be moved from one
location to another.
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The objective that life-cycle costing should address is the function of transferring the flow, and a pumping system may
only be one of several options.
EXAMPLE 2 What — maintenance costs across the platform. Why — because maintenance is considered excessive or unless
maintenance costs are reduced, production may be terminated early.
If a decision has already been taken to focus on maintenance and exclude other elements of OPEXs, this should be
questioned. The objective of life-cycle costing is confirm the significant platform cost drivers and then assist in
quantifying the opportunities for reducing costs.
EXAMPLE 3 What — gas compression. Why — there are gas reserves to exploit.
This is sufficient, the objective has been identified and a technical need already established for gas compression.
This would lead into identification of the options available. The objective of life-cycle costing is to support the
evaluation of alternative methods for compression.
EXAMPLE 4 What — a 20 MW power generation package. Why — a response should be made to a formal invitation to tender
that includes life-cycle costing requirements.
The objective is not to provide a response to a tender, but to produce a winning bid, the discussion should now focus
on how the bid team can use life-cycle costing to advantage.
In subsequent iterations of the process, this task may be limited to reconfirmation. However, it may be found that the
life-cycle costing work changes the overall objective. Taking, as an example, maintenance cost optimization, the first
iteration may show that downtime (lost production) is the cost driver, not maintenance costs.
3.2.2 Identification of constraints
The relevant constraints will arise from three principal sources as follows:
— project constraints on what can be achieved within the life-cycle costing work;
These will arise from resource and time scale limitations of the work. A typical example would be the need to change
the contracted specification during construction and hook-up. This might require a response in a few days, or at least
a couple of weeks. The life-cycle costing approach should be tailored to this time scale (“quick and dirty”). This may
mean a go/no go response, i.e. either the change has little impact on life-cycle costs or it has a significant impact.
Generally, where there is a constraint on either the time or resources available to undertake the work, the level of
detail should be reduced and not the number of options considered.
— technical constraints which limit the options available;
EXAMPLE A change to an existing facility that requires additional equipment means there may be topside weight and space
constraints on the options, or an operator may be constrained to certain technical options;
— budgetary constraints.
There may exist limitations on CAPEX or alternatively, the outcome may be subject to hurdle rates, e.g. an option
must achieve an IRR of 10 % before it merits further consideration.
Constraints can be imposed by third parties or other external influences. Examples of such constraints are
environment discharge or health and safety issues.
3.2.3 Establishment of decision criteria
3.2.3.1 General
For life-cycle costing within the oil and gas industry, the decision criteria selected should always reflect the corporate
requirements of the end user, generally the operator. At a lower level, additional considerations may be associated
with the contractor's or vendor's corporate objectives. In an alliance partnership, the criteria will need to be agreed by
all partners.
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In defining the decision criteria, reference should always be made to the originator or customer, both to establish the
criteria and to ensure there is sufficient understanding as to how to apply them. The user's understanding is not
simply limited to technical comprehension, but should also include an agreement as to how criteria should be used
to select options.
3.2.3.2 Measure economic evaluation method
The measure that is selected should enable alignment of technical decisions with corporate objectives. It should
therefore be a structured approach for defining the economic impact of technical decisions.
The most common measures are described in clause 4. These are:
—NPV;
— life-cycle cost;
— IRR;
—PI;
— the payback method;
— break-even;
— cost per standard barrel of oil.
The selection of measure depends on the item under consideration and on which phase or iteration the project has
entered. For the first iterations of the life-cycle costing process, the object investigated is the field development itself
or the development concept. The revenue stream in total can be dedicated to this object. All the traditional economic
evaluation methods can therefore be applied.
For the further iterations, the concept is broken down into the individual systems and further into equipment units. For
these iterations no particular part of the revenue can be related to the object under consideration. The measure of
life-cycle cost can then be applied. Through minimizing the total life-cycle cost of an asset or a function, where impact
on the revenue stream of failures occurring are taken into consideration as a cost, asset value can be maximized in
a consistent manner.
For these later iterations NPV and IRR can be applied when evaluating additional CAPEX resulting in reduced
OPEX. The difference between the options of making the investment or not can then be considered as an investment
appraisal evaluation.
An example of application of different measures or criteria is shown in Figure 1.
In the process of life-cycle costing, often only the difference between various options for filling a function can be
evaluated. The possible measures that can be applied are then reduced to NPV or life-cycle cost, since the others
listed are calculated from the total cost and revenue stream associated with the decision.
3.2.3.3 Assumptions
The assumptions that are set for calculations are vital for the evaluation of alternatives in order to determine which
gives the highest added value. The most important assumptions are listed in Table 1. The areas to be aware of for
calculations are addressed under 3.4.1.
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Figure 1 — Asset boundaries and evaluation of functional requirements
Table 1 — Assumptions
— Timing
— Investment year
— Start of operation
How costs during operation are
weighed against the initial investment
— Life of field
— Discount rate
Which is the best system
solution/equipment alternative?
— Pre-tax / After-tax-calculations
— Output requirement over time
The impact of improving efficiency
—Costofpower
— Production profile
The potential cost of failures
— Criticality
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3.2.4 Identify potential options
Options and sub-options for the function under review should be considered by a multidisciplinary team.
The use of a facilitator who can structure the meeting and log all options generated by the team can significantly
improve the quality of the exercise. A well-proven technique to generate options and identify cost drivers is a
functional/cost analysis of the investment. This technique is part of value engineering or functional value analysis
workshops. Reference is made to clause 4. In function/cost analysis, a multidisciplinary team establishes the main
functions of the investment and then establishes the sub-functions for the main functions. The equipment options for
each sub-function are then identified and evaluated by the team. The evaluation of options will normally be in two
stages: initial evaluation is carried out on a qualitative basis and some options may be evaluated from further study.
Remaining options after the first screening are evaluated by undertaking life-cycle costing. Option generation and
evaluation are normally carried out in distinct phases to ensure that evaluation does not inhibit the option generation
process.
3.2.5 Establish options
Establishing the potential options implies screening the options arising from the previous task. The work can be
carried out as the second half of the function/cost analysis, carried out in a full value engineering or functional value
analysis workshop. This can save time and effort, and the ideas from the brainstorming are still fresh in people’s
minds.
The screening process should be applied consistently, in that each option should be subject to the same assessment
criteria. A typical range of screening criteria may include the following questions:
— Is it technically feasible?
—Isitpractical?
— Is it too expensive?
— Can it meet the programme?
— Can it meet the HS&E programme?
— Are the risks acceptable (technical, financial, revenue)?
— Is it consistent with corporate policy and is it acceptable to our partner?
— Can we evaluate it?
3.2.6 Define costs to be included in the analysis
To identify the cost elements related to an asset or a system, the function of the asset and the
interrelations/dependencies toward the other systems should be evaluated.
Evaluation of operation can be in terms of what should be added to get the right output. This may include
— output requirements,
— power requirement,
— requirement of utilities/support systems,
— downstream effect of efficiency, resistance, etc.
Evaluation of maintenance can be in terms of what should be added to keep the process going. This may include
— regularity requirements for the system,
— maintenance concept/workload.
Revenue impact can be evaluated in terms of the consequence of failures.
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ISO 15663-1 [1] describes the approach that should be followed. The output from these activities is a list of cost is-
sues for possible inclusion in the assessment, and taken together they define the life-cycle cost boundary. They need
to be agreed among the team members.
3.3 Step 2 — Data collection and structured breakdown of costs
3.3.1 Identify potential cost drivers
A key issue within life-cycle costing is to keep the focus on the cost drivers, the major cost elements. What constitutes
the largest costs can come as a surprise if similar assets have not been evaluated earlier.
Thecostdrivers vary accordingto
— application,
— equipment type,
— equipment configuration.
For the offshore oil industry, the major cost elements are normally found among
— CAPEX,
— OPEX,
— maintenance cost,
— revenue impact of failures leading to production shutdown.
A cost driver can be one dominating cost or a combination.
All the basic information required to undertake this step is established in the previous step. In this task the user
should take the list from the previous task, and for each option review each cost issue to determine if it is likely to be
a life-cycle cost driver. This is an attempt to second-guess the outcome of the assessment. To assist in this process,
it may be convenient to group the issues under related headings.
Useful tools in determining the cost drivers can be FMECA or a functional value analysis, as described in clause 4.
The outcome of this task will be the list of cost issues, but with the potential drivers highlighted.
3.3.2 Define cost elements
This task pursues the focus of the previous task, in that its principal aim is to identify the minimum level of detail
necessary to discriminate between options. Although all the cost issues identified during Step 1 need to be
addressed and estimated, effort in this task should be concentrated on identifying the cost elements required for the
potential cost drivers.
The approach for each cost driver should be to consider the minimum number of cost elements required to estimate
the cost driver.
The remaining cost issues should be considered in terms of whether can they be estimated directly, i.e. are they cost
elements, and is it possible to group any of the cost issues under single headings.
The aim of the work is to identify the minimum number of cost elements, so that sensitivity analysis can be conducted
on the cost drivers, and to reduce the effort associated with the remaining cost issues. A candidate list of cost
elements is provided in 4.1.3.
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The important features of the task are that it starts the user thinking about
— how the costs are calculated in the model,
— how sensitivity analysis will be accommodated, with the focus on the cost drivers,
— the practical issues associated with data collection, such as its availability, its quality and to whom the user needs
to talk. It also provides an insight into the amount of effort likely to be required and how this may be tailored to the
available resources.
The focus of the evaluation should be on differences between alternatives. Cost elements that are the same for all
alternatives can normally be excluded.
This work provides the user with an agenda for the discussion that will follow on the structured breakdown of costs.
3.3.3 Establish structured breakdown of costs
The objective of this task is to align the need for information, as defined by the cost elements, with the ability of the
organisation to respond.
All main elements of life-cycle cost should be considered, i.e. CAPEX, OPEX, revenue impact and commissioning
cost.
The cost elements should be structured taking into account
— the way in which costs are acquired and recorded,
— the way cost elements are calculated.
The output from the task will be an agreed structured breakdown of costs.
3.3.4 Identify and collect data
3.3.4.1 General
The structured breakdown of costs identifies the cost data required. Of necessity, the previous discussions defining
the structured breakdown of costs will have addressed practical issues such as the data sources.
A data collection procedure should be identified and defined.
The aim of setting up and implementing a procedure for collecting data is to
— define data requirements for life-cycle costing analysis,
— identify the sources from which to obtain data,
— establish the necessary level of quality control.
3.3.4.2 Data generation
This subclause outlines the sources from which the input data for the calculations can normally be obtained.
As a general statement, most data that are to be used in life-cycle costing analysis can be retrieved in the following
two basic forms:
a) paper-based;
b) computer-based.
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Appropriate data can be obtained from operators, contractors and vendors, in either format from their existing
sources and databases, such as:
— accounting and financing system;
— purchasing system;
— engineering system;
— maintenance management system;
— reliability management system.
Data for CAPEXs can be:
— design and administration man-hours;
— equipment and material purchase;
— fabrication cost;
— installation cost;
— commissioning cost;
— insurance spares cost;
— reinvestment cost.
For new equipment, adjustments should be made from comparison with similar existing equipment.
Data for OPEXs can be:
— man-hours per system;
— spare parts consumption per system;
— logistic support cost;
— energy consumption cost;
— insurance cost;
— onshore support cost.
Data for revenue impact can be failure data. The following types of data can be extracted or referenced using
®
OREDA :
— inventory data, covering the identification information of the equipment of concern, including the design
characteristics, the environment and the operation conditions;
— operating data, that are necessary for calculating the failure rates (calendar/operating time, number of
demands);
— failure event data, including failure rate, failure mode, the subsystem/item failed, the degree of failure (severity
®
class, according to OREDA terminology);
— maintenance data, including the type of maintenance, the repair activity, the downtime/repair time, maintenance
program/interval, the resources required (which are very useful for estimating OPEXs).
Revenue impact is based on the production profile given in the plan for development and operation. For fields already
in operation, actual and predicted future production form the basis.
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3.3.4.3 Data quality and adjustment
3.3.4.3.1 Data adjustment
3.3.4.3.1.1 General
Historic data should be adjusted for differences in system design and capacity, difference in oil characteristics, time
in operation, monetary inflation/deflation, and cost development over time/trend prediction.
3.3.4.3.1.2 System design and capacity
Adjustment should be made for significant differences in system design and in different number of equipment units
within the system to be evaluated, and the source of the historic data for the existing systems.
3.3.4.3.1.3 Oil characteristics
Adjustment should be made for significant differences in expected lifetime or failure frequencies for equipment due to
characteristics of the oil or fluid handled.
3.3.4.3.1.4 Time in operation
Failures normally are more frequent early in operation (running-in period), and after long times in operation when the
equipment is starting to deteriorate. Adjustment should be made for the operating phase of the reference systems
and equipment.
Due to product development and feedback to the vendors, equipment quality normally improves over time.
Adjustment of historic data should be made for significant design improvements.
3.3.4.3.1.5 Monetary inflation/deflation
Adjustment should be made for cost differences due to monetary inflation/deflation occurring between the historic
records and the time of investment.
For cost adjustment, the cost index for the oil industry over the relevant years should be used.
3.3.4.3.1.6 Forecasting cost development
When the time span from the evaluation to cost occurrence and the deviation between cost development rate and the
inflation rate are significant, methods for trend prediction should be used to forecast future cost development.
For expected cost development close to the inflation rate:
a) adjustments of the costs per year for inflation should be performed when using a nominal discount rate;
b) adjustment for inflation should not be done when using a real-term interest rate.
3.3.4.3.2 Data qualification
The sample of historic data should be large enough to obtain data of acceptable accuracy in relation to the decision
to be made.
Man-hours and spare parts consumption should be averaged over enough years to give a calculation of sufficient
accuracy.
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