Page 596 - Marine Structural Design

572 Pori V Risk Assessment

C. How should the project be carried out?
For day-to-day execution of the project, including the selection of equipment and services
from contractors, it is necessary to use criteria that can be easily related to the consequences of
such decisions. LCC may be a suitable criterion in this context.
32.2.2 Limit State Functions
The limit state functions in a probabilistic analysis are defined based on NPV or IRR. LCC
criterion could virtually be traced down to NPV criterion.
If the event is the achievement of a specified internal rate of return in this project, the limit
state function can be formulated as:

(32.1)

The total period of 30 year is considered in Fq(32.1). I, denotes the income generated in the
nth year and C, is the cost in the nth year. Both 1, and C,, are functions of input variables
(basic variables) expressed in the equation by X. A negative value of the function G(X)
implies that the internal rate of return is less than the irr .
The limit state function for the decision criteria based on the net present value is similarly:

(32.2)
In this case, the function G(X) is negative if the net present value is less than the value npv for
a corporate rate of return irr .

32.3 Economic Risk Modeling
The cost variables are related to the cost of design, construction, installation, and operation
(including maintenance). The income variables, however, are related to the reservoir size and
characteristics, oil and gas prices, currency fluctuations, inflation and interest changes, and
taxation rules. Modeling the uncertainties associated with income and cost variables is
therefore the core of economic risk modeling.
A typical North Sea oil and gas field project in the development and operation phase is chosen
as a representative case to illustrate the economic risk modeling. These are adapted from
Bitner-Gregersen, et a1 (1992). These data are listed only for the illustrative purpose, and
should be updated specifically for each project considered. The field is assumed to be in
production for 25 years afier 5 years of construction and installation period. The decision
criteria are based on the IRR or NPV, and limit state functions are subsequently defined in the
form of Eqn. (32.1) and Eqn. (32.2). Modeling of cost variables, income variables, and their
uncertainties are described in the following Sub-sections.
32.3.1 Cost Variable Modeling
An overview of the costs during development and operation phases are presented below
(Odland, 1999):
Facility Costs