Process Economics
Content
Introduction
The economic nature of chemical process
Economic Evaluation of Chemical Process Projects
Costs of Chemical Process Projects
Capital Investment
Operating Costs
Revenue and Profits of Chemical Processes
Economic Evaluation Techniques
Net Present Value
Internal Rate of Return
Payback Period
Economic Evaluation of a Major Project in Practice
Cost Estimation
Accounting for Uncertainty in the Cost Estimate
Nature of Costs for a Single Item
Total Project Cost Estimate Incorporating Uncertainty
Intangible Considerations
Economic Evaluation of Modifications to Operating Process Plants
Optimization of Operating Costs
Objective Functions for Optimizing Operating Costs
Operating Constraints
Optimization Techniques
Challenges for the Future
Introduction
The chemical processes transform raw materials into more
useful and therefore, more valuable materials that provide
benefits to the end users. Fertilizer manufacturer, for example,
enables more productive use of land to provide higher yields of
important crops.
In order to sustain the manufacture of useful products the
processes must be economically profitable. In other words the
costs of manufacture must be less than the income generated
through product sales.
Process economics is an important element of the Chemical
Engineering discipline and is concerned with the Optimization of
profit which is determined by the process engineering design
and ultimately operation.
The Economic Nature of Chemical Processes
Chemical processes fundamentally transform raw materials into more
useful products that are consequently of higher value. In its simplest
form a chemical process consists of a series of material and heat flows
which can be represented by a simple model as shown in Figure:
Each of these material or energy flows has an economic value either as a
cost or a source of income.
At the heart of most chemical processes is a chemical
reaction. The stoichiometry of the chosen transformation
process will set the material and heat flows for the process
and ultimately the economics for that process.
The stoichiometry and thermodynamics of a chemical reaction
determines the degree to which the feed materials are converted to
products as well as the overall heat requirements. Unconverted feed
material is separated and recycled or re-used to improve the product
yield.
All of this processing requires additional unit operations which have
energy requirements in the form of electricity, steam, cooling water,
refrigeration etc. These demands will have to be met by generating on
site or importing from third parties.
Feedstock
The cost associated with feedstock is determined by both its quantity
and quality. The presence of impurities can reduce catalyst activity and
increase corrosion leading to the introduction of further processing
steps, higher operating costs to replace catalysts and the use of more
expensive corrosion resistant materials for equipment fabrication.
Catalyst
Catalyst selection is usually made on the basis of product yield and
selectivity. Optimization of the catalyst can reduce investment and
operating costs.
Energy
A major cost for most chemical processes is energy. Energy streams are
required in a variety of forms both as sources of heat and also as heat sinks
e.g. steam for heating, electricity for pump and compressor motors, water
for cooling. It is always desirable to use energy efficiently.
Products
The major source of revenue that determines the economic performance
is the product streams. the two important parameters are the quantity
and quality. The quantity is determined by the reaction route, quality of
the feedstock and catalyst selection. Quality influences not only the value
of a product but it will determine the investment and operating costs.
Waste Products
Waste products are those materials that have no utility and therefore no
value. Most waste products attract a disposal cost and should therefore
be minimized. The costs associated with waste streams are incurred by
the requirement to treat waste streams to make them suitable for
disposal into the environment
Interactions
The setting of the overall heat and material balance is therefore a critical
step in any project to develop a process for manufacturing a particular
chemical. There are usually a large number of technically feasible options
available to meet a particular process objective for a new plant.
Economic Evaluation of Chemical Process Projects
The net profit from the operation of a process plant equals the total
income minus all the costs associated with its operation including the
administrative functions. For new process plants or modifications to
existing process plants the cash flow across the entire lifecycle of the
project must be considered to determine the economic performance.
A typical project lifecycle cash flow is represented below in Figure.
Year 0 represents the point at which the project to construct the
process plant has finished and the plant is put into operation.
From year 0 onwards the income on an annual basis (after tax)
becomes positive and the cumulative cash flow increases with
time.
At the end of Year 4 (beginning of Year 5), the cash flow becomes
positive indicating that the capital investment is completely
repaid. This time period is known as the payback time.
At the end of the project life (Year 10) when the operation ceases
and the plant is shutdown, the working capital and land value are
recovered.
The working capital recovery comes from sales of feedstock,
stored product and equipment. At the end of the project the
overall net cash flow is positive meaning that wealth has been
created by the project which can then be distributed to
shareholders or used for future investments.
Costs of Chemical Process Projects
The costs that must be taken into account during the economic
evaluation of a project to build or modify a process plant can be
broken down into two main categories:
Capital investment
Operating costs.
Capital Investment
The capital investment consists of two elements fixed capital and
working capital. The fixed capital is the money necessary to purchase and
install all the equipment required for the complete operation of the
process. It is sub-divided into:
direct Cost
indirect costs.
The direct costs include the following items:
Purchased equipment
Purchased equipment installation
Instrumentation and controls
Piping
Electrical systems
Buildings
Site preparation
Utility systems
Non-process equipments
Distribution systems
The indirect costs include the following items:
Engineering and supervision costs
Legal fees
Construction
Contractors fees.
Contingency.
Operating Costs
The operating cost or total product cost is the sum of the manufacturing costs
and the general administrative expenses. The manufacturing costs consist of the
following Items:
Direct production costs raw materials, utilities, maintenance, operating
supplies, operating labor, direct supervision, laboratory charges and patents.
These are also referred to as variable costs as they depend on the plant
operating and to some extent on the production volume.
Fixed costs depreciation, local taxes, insurance, rent and interest payments.
These costs are independent of production volumes.
Plant overheads general plant upkeep, payroll overhead, health, safety and
security.
The general administrative charges are generally made up of management
salaries, legal fees, communications, distribution and marketing costs, and
research and development
costs.
Revenue and Profits of Chemical Processes
In order for a process plant to be profitable it must generate products that are
of a higher value than the ongoing operating costs. This revenue is generated
through product sales. In most competitive chemical markets the product
prices are fixed by supply and demand and these can be difficult to forecast. In
order to overcome this problem, most organizations will set a standard
product price used to test the economics of projects.
It is important when estimating revenues to take into account the expected
availability of the plant.
The operating profit (pre-tax) is calculated on an annual basis by
subtracting the total operating costs from the total revenues for each year.
Depreciation is a mechanism whereby revenue is set aside in order to
replace the equipment at the end of its useful life.
The final post-tax profit is calculated by subtracting the tax from the
operating profit less depreciation.
