Page 508 - Pipelines and Risers

LCC Modeling as a Decision Making Tool in Pipeline Design 475

A useful source of information for an estimated value of the financial loss suffered is the use
of risk matrices available from most operators of offshore installations. A typical risk matrix
would include information that could be correlated to the circumstances of a pipeline failure.

25.4 Time value of Money
The time value of money in the form of an interest rate is an important element in most
decision situations involving the flow of money over time. The reason for this is that money
earns interest through its investment over a period of time, a dollar to be received at some
future date is not worth as much as a dollar in the hand at present.

Money also has a time value due to the purchasing power of a dollar through time. During
periods of inflation the amount of goods that can be bought for a particular amount of money
decreases, as the time of purchase occurs further in the future. Therefore, when considering
the time value of money it is important to recognize both the earning power of money and the
purchasing power of money.

In analyzing the time value of money for a LCC model it is necessary to evaluate all costs on
a common basis, this is usually when an initial investment is made, therefore, all costs must
be evaluated in terms of the initial investment cost. At this stage it is necessary to assess the
types of costs that are likely to be encountered, single payment, annual payments or varying
annual payments.

When calculating the cost of risk it is necessary to recognize, that different types of
probabilities exist; immediate, time independent and time dependent. Immediate failure is a
failure which occurs immediately upon installation of the pipeline (e.g. hydrostatic collapse or
hoop stress criterion). Since the failure occurs immediately the cost does not have to be
adjusted to account for time value of money principles.
Risk= Consequence cost(t= 0) x Pf (25.4)

The second type, time independent, is a failure that can occur at any point during the lifetime
of the pipeline (e.g. trawl impact or dropped objects). It is therefore necessary calculate the
present value of the consequence on the basis of a failure occurring at the midpoint of its life.
This gives an equal assessment of the failure occurring at any given point in time.
Risk = NPV (Consequence cost (t= ?h Total life time)) x Pf (25.5)

The time dependent failure will result in the most complex assessment of the cost assessment.
These types of failures include fatigue and corrosion. Failure probability increases per year,
hence it is necessary to adjust the consequence cost for each year and multiply by the failure
rate of the same year, this can then be cumulated to give a total risk cost.
Total Risk Cost = Z(NPV (Consequence cost (t)) x Pf (t)) (25.6)