Real Options: A Tool for Managing Technical Risk in a Mine Plan

NPV is a static measure of project value which does not discriminate between levels of internal and external risk in project valuation. Due to current investment project?s characteristics, a much more complex model is needed: one that includes the value of flexibility and the different risk levels associated with variables subject to uncertainty (price, costs, exchange rates, grade and tonnage of the deposits, cut off grade, among many others). Few of these variables present any correlation or can be treated uniformly. In this context, Real Option Valuation (ROV) arose more than a decade ago, as a mainly theoretical model with the potential for simultaneous calculation of the risk associated with such variables. This paper reviews the literature regarding the application of Real Options Valuation in mining, noting the prior focus on external risks, and presents a case study where ROV is applied to quantify risk associated to mine planning

Energy Management and Demand Response of Industrial Systems

Energy management is an important concept that has come to the forefront in recent years under the smart grid paradigm. Energy conservation and management can help defer some capacity addition requirements in the long-term, which is very significant in the context of continuously growing demand for energy. It can also alleviate the adverse environmental impacts of commissioning new generation plants. Therefore, there is a continuous need for the development of appropriate tools to ensure efficient energy usage by existing and new loads and the efficient integration of distributed energy resources (DER). There is a need for energy conservation in the industrial sector as it accounts for the largest share of energy consumption among all customer sectors. Also considering their high energy density, industrial facilities have significant potential for participating in demand side management (DSM) programs and help in reducing the system peak demand by reducing or shifting their load in response to energy price signals. However industrial demand response (DR) is typically constrained by the operational requirements such as process interdependencies and material flow management. An EMS framework is proposed in this thesis for optimal load management of industrial loads which includes improved load estimation technique and uncertainty mitigation using MPC. The framework has been applied to a water pumping system (WPS) where an equipment level load modeling is implemented using a NN-based model. Another EMS framework is proposed for an oil refinery process. The refinery EMS is developed based on power demand modeling of the oil refinery process, considering an on-site cogeneration facility. A joint electrical-thermal model is proposed for the cogeneration units to account for the electricity and steam production costs. In addition to load management, DR for industrial loads is investigated as another energy management application. However since DR requires interaction between the energy supplier and the customer, this thesis considers DR from both the local distribution company's (LDC) and industrial customer's perspectives. From the LDC's perspective, the objective is to reduce the network operational costs by minimizing peak demand and flattening the load profile for better utilization of system resources. From the industrial customer's perspective, the objective is to minimize the energy cost using both load management decisions and DR signals sent by the LDC. While the developed EMS models are used to represent the industrial customer's operations, a distribution optimal power flow (DOPF) model is developed to represent distribution system operations. The DR strategy proposed in this thesis is based on effective communication between the customer's EMS and the LDC's operations using a day-ahead contractual mechanism between the two parties, and a real-time operational scheme to mitigate the uncertainties through improved forecasts for energy prices and power demand. Two types of DR signals are proposed; a desired demand profile signal and a retail price signal, which are developed by the LDC and sent to the customer to achieve the desired DR in a collaborative manner. In the retail price based control approach, the signal is produced by a retail pricing model which is designed based on customer's historical data collected by the LDC

A Modeling, Optimization, and Analysis Framework for Designing Multi-Product Lignocellulosic Biorefineries

The objective of this research is to propose a methodology to develop modular decision analysis frameworks to design value chains for enterprises in the renewable fuels and chemicals sector. The decision support framework focuses on providing strategic decision support to startup and new product ventures. The tasks that are embedded in the framework include process and systems design, technology and product selection, forecasting cost and market variables, designing network capacities, and analysis of risks. The Decision support system (DSS) proposed is based on optimization modeling; systems design are carried out using integer programming with multiple sets of process and network configurations utilized as inputs. Uncertainty is incorporated using real options, which are utilized to design network processing capacity for the conversion of biomass resources. Risk analysis is carried out using Monte Carlo methods. The DSS framework is exemplified using a lignocellulosic biorefinery case study that is assumed to be located in Louisiana. The biorefinery utilizes energy crops as feedstocks and processes them into cellulosic biofuels and biobased chemicals. Optimization modeling is utilized to select an optimal network, a fractionation technology, a fermentation configuration, and optimal product recovery and purification unit operations. A decision tree is then used to design incremental capacity under uncertain market parameters. The valuation methodology proposed stresses flexibility in decision making in the face of market uncertainties as is the case with renewable fuels and chemicals. The value of flexibility, termed as “Option Value” is shown to significantly improve the net present value of the proposed biorefinery. Monte Carlo simulations are utilized to develop risk curves for alternate capacity design plans. Risk curves show a favorable risk reward ratio for the case of incremental capacity design with embedded decision options. The framework proposed here can be used by enterprises, government entities and decision makers in general to test, validate, and design technological superstructures and network processing capacities, conduct scenario analyses, and quantify the financial impacts and risks of their representative designs. We plan to further add functionality to the DSS framework and make available the tools developed to wide audience through an “open-source” software distribution model

Development of a life cycle cost estimating framework for oil refineries

This study is concerned with the understanding of some vital features of various life cycle costing methodologies and tools. Integrating these features with the refinery technical processes would assist in the development of a life cycle costing framework for oil refineries. The aim of this research is to develop a comprehensive life cycle cost estimating framework for the evaluation of not only the total cost and system effectiveness of new refineries but also the revamping, and maintenance of the existing refineries. Several conceptual life cycle costing models relating to various life cycle stages were reviewed, and their attachment to specific life cycle activities assessed. Furthermore, the literature review and the industry survey identified that a vital requirement for the development of a life cycle costing framework is the establishment of a structured conceptual life cycle costing model and a cost breakdown structure that will depict major cost categories and cost elements in the LCC framework. Consequently, a standard conceptual life cycle costing model and its cost breakdown structure were developed and integrated into a proposed LCC framework for oil refineries. A combination of the literature review findings and industry survey were also used to ascertain the current life cycle costing practice. It was identified that there is a lack of a practical framework to compare two or more options of refinery schemes for system effectiveness. This led to the development of a novel life cycle cost estimating framework that could be used in the evaluation of the total cost and system effectiveness of a new refinery when there is no performance data. Finally, the framework’s applicability and effectiveness was demonstrated through its application on a case study. The validation of the proposed framework and the cost estimates development within the case study was successfully carried out by experts from the industry and academia. Consequent upon the research findings, key areas for future work were identified. The implementation of the findings of this research within the industry could provide the much needed long-term benefit that comes with the formalisation of life cycle costing practice

Energy issues in the developing world

In 1986 and 1987 the lower oil prices called into question many of the fundamental assumptions that were the stock in trade of energy experts during the previous ten years. This document is a collection of papers representing responses to concerns prepared by current and former World Bank staff. Although these papers raise a variety of different concerns, a common theme that runs throughout the paper is the need to continue the pursuit of efficiency goals in the energy sector. The developing world still needs large amounts of capital to meet its ever-expanding energy requirements. These capital requirements will be a significant part of most countries'total investment plan. Given the problems of debt and public revenues, the report concludes that the pursuit of efficiency is just as important under lower fuel prices as it is under rising fuel prices.Power&Energy Conversion,Urban Environment,Environmental Economics&Policies,Energy Demand,Energy and Environment

Service company's adaptation of supply chain to cope with volatile oil and gas market

The oil and gas market has great significance across the globe, but the unpredictability in this industry is a huge challenge that affects all the supply chains in this market. These conditions contribute to a competitive and diverse market where service firms struggle to keep productivity in order to lower costs and boost operating performance. This paper gathers data on the oilfield service industry and explore existing literature on service supply chain agility to discover empirically the application of strategies that can be implemented within the sector. The major difficulties and risks faced during an oil crisis were identified through analyses on the performance of the leading global service provider (Schlumberger). Global mobility and supplier related challenges were found to be the main factors that harm the company's capacity to deal with market fluctuations. And the constructive tactics developed to achieve a strategic edge over competition have been used as the foundation of this study. Through executives’ interview, internal documentation research and relevant literature review it was discovered that agility in Schlumberger was attained by establishing supply chain visibility and the development of flexible policies and processes. By leveraging internal capabilities and digital solutions to enhance the procurement activities and overcome the looming risks it´s possible to successfully operate in complex market. A recommendation framework was presented as supply chain managers’ benchmarking scheme. This framework highlighted approaches that can be taken in terms of suppliers, internal capabilities and customers as a way to contribute to greater supply chain agility

Review of mathematical models for production planning under uncertainty due to lack of homogeneity: proposal of a conceptual model

[EN] Lack of homogeneity in the product (LHP) appears in some production processes that confer heterogeneity in the characteristics of the products obtained. Supply chains with this issue have to classify the product in different homogeneous subsets, whose quantity is uncertain during the production planning process. This paper proposes a generic framework for reviewing in a unified way the literature about production planning models dealing with LHP uncertainty. This analysis allows the identification of similarities among sectors to transfer solutions between them and gaps existing in the literature for further research. The results of the review show: (1) sectors affected by LHP inherent uncertainty, (2) the inherent LHP uncertainty types modelled, and (3) the approaches for modelling LHP uncertainty most widely employed. Finally, we suggest a conceptual model reflecting the aspects to be considered when modelling the production planning in sectors with LHP in an uncertain environment.This research was initiated within the framework of the project funded by the Ministerio de Economía y Competitividad [Ref. DPI2011-23597] entitled ‘Methods and models for operations planning and order management in supply chains characterised by uncertainty in production due to the lack of product uniformity’ (PLANGES-FHP) already finished. After, the project leading to this application has received funding from the European Union’s research and innovation programme under the H2020 Marie Skłodowska-Curie Actions with the grant agreement No 691249, Project entitled ’Enhancing and implementing Knowledge based ICT solutions within high Riskand Uncertain Conditions for Agriculture Production Systems’ (RUC-APS).Mundi, I.; Alemany Díaz, MDM.; Poler, R.; Fuertes-Miquel, VS. (2019). 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An Empirical Study of Selected Causes and Effects of Semirigid Prices in the Petroleum Refining Industry with Emphasis on the Period 1963 through 1972

The premise of this study is that certain policies within and without the petroleum industry have interacted to produce semirigid industry prices. One effect of this price rigidity is the inflexibility that is passed on to costs whenever the traditional joint-cost-accounting allocation (based on relative market value) is used in conjunction with these prices. In studying the problem, activities and policies which combined to cause artificial price restraints in the petroleum-refining industry from 1963 to 1972 were reviewed. The accounting and economic implications and the effect on refinery investment of the resulting semirigid prices were investigated. Published wholesale gasoline prices were compared with the wholesale price indexes from 1963 to 1972. The gasoline price trend was significantly different from the intense inflationary trend which began in 1964. A test of regression line slopes covering the inflationary period resulted in a rejection of the null hypothesis of slope similarity. Therefore, no adjustment for price-level changes was necessary. A major reversal in the wholesale gasoline price trend was found to be centered on 1959, and appears to be caused by the Oil Import Program. Marginal cost pricing when discontinuities existed, coupled with industry policy rigidities, added to the undesirable effect of government involvement in the refined-products marketing picture. This involvement was further complicated by rigid policies and biases of other nonindustry groups. Unyielding adherence by each group to policies that needed modification appeared to cause the price rigidities. Government officials pursued a low-cost-energy policy with a threefold effect: (1) A low-price natural-gas policy encouraged consumption and held competing product prices low. (2) Import restrictions on residual fuel oil were frequently reduced to maintain low prices, increasing import dependency. (3) The wholesale gasoline price was attacked from the two following sources when a disproportionate percentage of crude oil was allowed to marginal producers: (A) Government policies interacted with a marginal-cost pricing scheme to produce an unstable price-depressing effect in the industry. (B) The government then forced a rollback in price advances of refined products by threatening complete removal of import controls. These external interferences placed upward rigidities on price and drove the average return on investment for the industry below the national average for all manufacturers. Uncertainties introduced by ecological considerations, along with the low return on investment, temporarily halted most new construction. Large companies changed from a policy favoring totally new refinery construction to one which balanced refinery facilities. Smaller firms continued to rely heavily on construction with used equipment to hold down investment costs. Without modification, the economic models presented in the literature failed to explain the activities of an industry with all the outward appearance of an oligopoly. The refining industry appeared (for a limited time) to be unable to function as an oligopoly. The writer attempted to show the possible effects of government intervention by presenting two modified economic models. Both the conventional kinked-demand-curve approach and one designed to provide for external as well as internal constraints were considered. A review of the price-relative joint-cost allocator disclosed a time interval during which this accounting allocator proved invalid. Inquiry revealed an industry trend toward the managerial use of a volume allocator rather than the price-relative cost allocator. The industry, now faced with extensive planning and control problems, will face even more pressing requirements for detailed accounting information. Thus it seems essential for the industrialist and the academicians to work together in striving for a more realistic solution to the cost-allocation problem, a solution which may be multi-staged