European Federation of Corrosion

Publications
NUMBER 32

A Working Party Report on

The Life Cycle Costing of

Corrosion in the Oil and Gas
Industry: a Guideline
Edited by P. S. Jackman

M A N E Y
Published for the European Federation of Covvosion
o n beharf of The Institute of Materials, Minerals and Mining
 BO761
First published in 2003 by
Maney Publishing
1 Carlton House Terrace
London SWlY 5DB

on behalf of
The Institute of Materials Minerals and Mining
o 1 0 ~ 2003
3
All rights reserved

ISBN 1-902653-85-8

Typeset in the Uk by
Maney Publishing
Printed and bound in the UK by
The Charlesworth Group, Huddersfield
 Preface

This EFC publication addresses the important subject of the analysis of life
cycle cost of corrosion as it may be applied in the oil and gas production
industries. The publication is not intended to be a stand-alone document but
to guide the analyst to corrosion-specific subjects for inclusion in an overall
analysis. The process of life cycle costing has recently been standardised in
IS0 15663, Parts 1 to 3.
While this publication has been produced by EFC Working Party 13 on
Corrosion in Oil and Gas Production much of the preparatory work was
carried out by a group of experts from NACE Italy lead by Domenico
Condanni to whom due acknowledgement is made. Also, the content
has drawn from former NORSOK standards, now withdrawn, which are
acknowledged at various places in the publication. The Nickel Development
Institute is thanked for its support of EFC Working Party 13.

Philip S. Jackman
(Consultant to NiDI)
Chairman of EFC Wovking Party 13 on
Corrosion in Oil and Gas Production,
1998 to 2001.

8
 OTHER VOLUMES IN THE EFC SERIES
Corrosion in the Nuclear Industry
Piepared by the Worktizg Party on Nuclear
Corrosi o n
Practical Corrosion Principles: a
manual of corrosion experiments
Prepared by the Working Party on
Corrosioii Educatioi?
General Guidelines for Corrosion
Testing of Materials for Marine
Applications
Prepared by the Working Party on
Marine Corrosion
Guidelines on Electrochemical
Corrosion Measurements
Prepared by tile Working Party on
Phystco-Chemical Methods of corrosion
Tes ti tzg
Illustrated Case Histories of Marine
Corrosion
Prepared by the Working Party on
Mal irie Corrosioiz
Corrosion Education Manual
Prepared by the Working Party on
Coriosioiz Education
Corrosion Problems Related to Nuclear
Waste Disposal
Prepared by tire Working Party on
r\ruclear Corrosion
Microbial Corrosion
Prepared by the Working Party O H
Microbial COTrosioii
Microbiological Degradation of
Materials - and Methods of Protection
Workillg
Corrosion
10 Marine Corrosion of Stainless Steels:
Chlorination and Microbial Effects
Prepared by the Working Party on Marine
Corrosion
9
11 Corrosion Inhibitors
Prepared by the Working Party o n Inhibitors
1 2 Modifications of Passive Films
Prepared by the Working Party on Surface
Science and Mechanisms of Corrosion and
Protection
13 Predicting CO2 Corrosion in the Oil
and Gas Industry
Prepared by the working Party 011 Oil aizd
Gas
14 Guidelines for Methods of Testing
and Research in High Temperature
Corrosion
Prepared by the Working Party on
Corrosion by Hot Gases and Coinbustion
Products
15 Microbial Corrosion (Proceedings of
the 3 r d International EFC Workshop)
Prepared by the Working Party on Microbial
Corrosion
16 Guidelines on Materials Requirements
for Carbon and Low Alloy Steels for
H,S-Containing Environments in Oil
and Gas Production
Prepared by the Working Party on
Corrosion i n Oil and Gas Production
17 Corrosion Resistant Alloys for Oil and
Gas Production: Guidance on General
Requirements and Test Methods for
H,S Service
Prepared by the Working Party o n
Corrosion in Oil aizd Gas Production
18 Stainless Steel in Concrete: State of the
Art Report
Prepared by the Working Party on Coyrosiotz
of Reinforcement in Concrete
19 Sea Water Corrosion of Stainless Steels
- Mechanisms and Experiences
Prepared by the Working Parties on Marine
Corrosion and Microbial Corrosioii
10 The Life Cycle Cost of Corrosioiz iii the Oil and Gas Iiidustry

20 Organic and Inorganic Coatings for 29 Microbial Corrosion (Proceedings of

Corrosion Prevention - Research and
Experiences
Papersfroin E U R O C O R R ’96
21 Corrosion-Deformation Interactions
C D I ‘96i n conjunction zuitii E U R O C O R R
‘96
22 Aspects of Microbially Induced
Corrosion
Papers from E U R O C O R R ’96and the EFC
Working Party on Microbial Coriosiori
23 CO, Corrosion Control in Oil and Gas
Production - Design Considerations
Prepared b y tke Workiizg Party O M Corrosion
21 mid Gas Production
ifz 0
24 Electrochemical Rehabilitation
Methods for Reinforced Concrete
Structures - A State of the Art Report
Prepared b y the Workiizg Parti/ o i l Corrosioii
of Reitifoicement in Coiicrete
25 Corrosion of Reinforcement in
Concrete - Monitoring, Prevention and
Rehabilitation
Papers from E U R O C O R R ‘97
26 Advances in Corrosion Control and
Materials in Oil and Gas Production
Papersfroin E U R O C O R R ‘97aiid
E U R O C O R R ‘98
27 Cyclic Oxidation of High Temperature
Materials
Proceediizgs of n i i EFC iVorkskop,
Fraiikftrt/Maiiz, 1999
28 Electrochemical Approach to Selected
Corrosion and Corrosion Control Studies
Papers froin 50 ISE Meeting, Pnzlia, 1999
the 4 t h International EFC Workshop)
Prepared by tke Working Party on Microbial
Corrosion
30 Survey of Literature on Crevice
Corrosion (1979-1998): Mechanisms,
Test Methods and Results, Practical
Experience, Protective Measures and
Monitoring
Prepared by F. P.IJsseling and the Working
Party on ,Variiie Corrosion
31 Corrosion of Reinforcement in
Concrete: Corrosion Mechanisms and
Corrosion Protection
PapersfYoiii E U R O C O R R ’99and
the Working Party oii Corrosioii of
Reiiiforceiizeiit of Coiicrete
33 Marine Corrosion of Stainless Steels:
Testing, Selection, Experience,
Protection and Monitoring
Edited by D. Fbon
34 Lifetime Modelling of High
Temperature Corrosion Processes
Proceedings of an EFC Workshop
2002
Edited b y M . Sckiitze, W . J. Quadakkers
aid I. R. Nickolls
35 Corrosion Inhibitors for Steel in
Concrete
State of tile A r t Report
Edited by B. Elseiier
36 Prediction of Long Term Corrosion
Behaviour in Nuclear Waste Systems
Proceedings o f n i i EFC Workskop,
Cndarache, France, Soveniber 2001

Available fyom

@
M A N E Y
MANEY PUBLISHING, HUDSON ROAD, LEEDS LS9 7DL, UK
Tel: 0113 2497481 Fax: 0113 2486983
Email: mane yemane y. co .uk
 European Federation of Corrosion Publications
Series Introduction
The EFC, incorporated in Belgium,was founded in 1955 with the purpose of promoting
European co-operation in the fields of research into corrosion and corrosion prevention.
Membership is based upon participation by corrosion societies and committees in technical
working parties. Member societies appoint delegates to working parties, whose membership
is expanded by personal corresponding membership.
The activities of the working parties cover corrosion topics associated with inhibition,
education, reinforcement of conncrete, microbial effects, hot gases and combustion products,
environment-sensitive fracture, marine environments, surface science, physico-chemical
methods of measurement, the nuclear industry, computer-based information systems,
corrosion in the oil and gas industry, and coatings. Working parties on other topics are
established as required. The working parties function in various ways, e.g. by preparing
reports, organising symposia, conducting intensive courses andproducing instructional
material, including films. The activities of the working parties are co-ordinated through a
Science and Technology Advisory Committee, by the Scientific Secretary.
The administration of the EFC is handled by three secretariats: DECHEMAe.V. in Germany,
the Societe de Chimie Industrielle in France, and the Institute of Materials,Minerals and
Mining in the United Kingdom. These three secretariats meet at the Board of Administrators
of the EFC. There is an annual General Assembly at which delegates from all member
societies meet to determine and approve EFC policy. News of EFC activities, forthcoming
conferences, courses, etc.is published in a range of accredited corrosion and certain other
journals throughout Europe. More detailed descriptions of activities are given in a newsletter
prepared by the Scientific Secretary. The output of the EFC takes various forms. Papers on
particular topics, for example, reviews or results of experimental work, may be published in
scientific and technical journals in one or more countries in Europe. Conference proceedings
are often published by the organisation responsible for the conference.
In 1987 the then Institute of Metals was appointed as the official EFC publisher. Although the
arrangement is non-exclusive and other routes for publication are still available, it is expected that
the working parties of the EFC will use the Institute for publication of of reports, proceedings, etc.
wherever possible. The name of the Institute of Metals was changed to the Institute of Materials
in 1992 and to the Institute of Materials, Minerals and Mining (IOM3)in 2002 following its merger
with the Institution of Mining and Metallurgy. The series is now published by Maney Publishing
on behalf of the Institute of Materials, Minerals and Mining.

A. D.MERCER
EFC Series Editor, The Institute of Materials, Minerals and Mining, UK

EFC Secretariats are located at:

Dr B. A. Rickinson, European Federation of Corrosion, The Institute of Materials, Minerals

and Mining, 1 Carlton House Terrace, London SWlY 5DB, UK

Mr R. Mas
Federation Europeene de la Corrosion, Societe de Chimie Industrielle,
28 rue Saint Dominique, F-75007 Paris, FRANCE

Professor Dr G. Kreysa
Europaische Foderation Korrosion, DECHEMA e.V., Theodor-Heuss-Allee 25,
D60486, Frankfurt, GERMANY

7
Contents

Series Introduction ...................................................................................................... 7

Preface.......................................................................................................................... 8

1. Definitions and Abbreviations .............................................................................. 11

1.1 Definitions............................................................................................................................. 11
1.1.1 Capital Expenditure (Capex)............................................................................ 11
1.1.2 Corrosion......................................................................................................... 11
1.1.3 Corrosion Allowance........................................................................................ 11
1.1.4 Corrosion Cost ................................................................................................ 11
1.1.5 Cost Contributor .............................................................................................. 11
1.1.6 Critical Failure ................................................................................................. 11
1.1.7 Discounting...................................................................................................... 12
1.1.8 Life Cycle Cost ................................................................................................ 12
1.1.9 Lost Production Costs ..................................................................................... 12
1.1.10 Net Present Value ......................................................................................... 12
1.1.11 Operating Expenditure (Opex) ....................................................................... 12
1.1.12 Operational Level .......................................................................................... 12
1.1.13 Regularity ...................................................................................................... 12
1.1.14 Risk ............................................................................................................... 13
1.1.15 Risk, Consequences of.................................................................................. 13
1.2 Abbreviations........................................................................................................................ 13

2. Standards Referred to in This Document ............................................................ 17

3. Introduction............................................................................................................ 19
3.1 Compilation and Prediction.................................................................................................. 19
3.2 Published Standards............................................................................................................ 19

This page has been reformatted by Knovel to provide easier navigation. 5

6 Contents
3.3 Compilation of Data.............................................................................................................. 19
3.4 Analysis of the Life Cycle Cost of Corrosion....................................................................... 19

4. Scope ...................................................................................................................... 21
4.1 Approach .............................................................................................................................. 21
4.2 Upstream Hydrocarbon Systems ........................................................................................ 21
4.3 Published Standards............................................................................................................ 21

5. Objectives............................................................................................................... 23
5.1 Cost of Corrosion - Data Gathering..................................................................................... 23
5.2 Cost Contributors ................................................................................................................. 23
5.3 Calculation Methods ............................................................................................................ 23
5.4 Consequence of Risk........................................................................................................... 23

6. Compilation of Corrosion Cost Data.................................................................... 24

6.1 Cost Expression and Units .................................................................................................. 24
6.2 Classification of Costs of Corrosion .................................................................................... 24
6.2.1 Capital Costs ................................................................................................... 24
6.2.2 Operating Costs............................................................................................... 24
6.2.3 Cost of Lost Production Caused by Equipment Failure.................................... 25
6.3 Avoidable and Unavoidable Costs ...................................................................................... 25
6.3.1 Avoidable Costs .............................................................................................. 25
6.3.2 Unavoidable Costs - Corrosion Prevention ...................................................... 26
6.3.3 Unavoidable Costs - Corrosion Failure ............................................................ 26
6.4 Cost Elements of Corrosion................................................................................................. 27
6.4.1 General............................................................................................................ 27
6.4.2 Example Data Recording Forms...................................................................... 27
6.4.3 Capital Costs (Capex): Examples of Cost Contributors ................................... 27
6.4.4 Operating Costs (Opex): Examples of Cost Contributors................................. 28
6.4.5 Lost Production Costs ..................................................................................... 30
6.4.6 Material Residual Value................................................................................... 30

This page has been reformatted by Knovel to provide easier navigation.

 Contents 7
7. The Life Cycle Cost of Corrosion for New Facilities .......................................... 32
7.1 Introduction........................................................................................................................... 32
7.2 Cost Contributors ................................................................................................................. 32
7.3 Capital Cost (Capex)............................................................................................................ 32
7.3.1 General............................................................................................................ 32
7.3.2 Design ............................................................................................................. 33
7.3.3 Construction .................................................................................................... 33
7.4 Operating Cost (Opex)......................................................................................................... 34
7.4.1 General............................................................................................................ 34
7.4.2 Preventive Maintenance .................................................................................. 34
7.4.3 Corrective Maintenance................................................................................... 34
7.4.4 Energy Consumption ....................................................................................... 34
7.4.5 Routine Servicing ............................................................................................ 35
7.5 Lost Production Costs.......................................................................................................... 35
7.6 Material Residual Value ....................................................................................................... 35
7.7 LCC Calculation Methods .................................................................................................... 35
7.7.1 General............................................................................................................ 35
7.7.2 Assumptions .................................................................................................... 35
7.7.3 Value of Money Related to Time ..................................................................... 37
7.7.4 Capital Costs ................................................................................................... 37
7.7.5 Operating Costs............................................................................................... 37
7.7.6 Lost Production Costs ..................................................................................... 37
7.7.7 Life Cycle Cost ................................................................................................ 37
7.7.8 Remanent Life ................................................................................................. 37
7.7.9 Uncertainty ...................................................................................................... 37
7.7.10 Risk Analysis ................................................................................................. 38

8. Bibliography........................................................................................................... 39

Annex A: Example Data Recording Forms.............................................................. 41

Annex B: The Classification, Definition and Collection of the Costs of

Corrosion - Examples of Formulae .................................................................... 47

This page has been reformatted by Knovel to provide easier navigation.

8 Contents
Annex C: The Life Cycle Cost of Corrosion for New Facilities - Examples
of Formulae .......................................................................................................... 49

Annex D: Case Study - An Example of a Life Cycle Cost Analysis....................... 53

Annex E: Quantifying the Consequences of Risk in Life Cycle Cost

Analysis ................................................................................................................ 59

This page has been reformatted by Knovel to provide easier navigation.

 1 Definitions and Abbreviations

1.1 Definitions
1.1.1 Capital expenditure (Capex)
The costs normally associated with the design, purchase, construction
and commissioning of a new facility but may also include costs of major
refurbishment work.

1.1.2 Corrosion
Interaction between a metal and its environment that results in changes in
the properties of the metal and which may lead to significant impairment of
the function of the metal, the environment or the technical system of which
these form a part. [IS0 80441.

1.1.3 Corrosion allowance

A designed addition to the thickness of a component to allow for reduction
in thickness of that component by corrosion during its design life, while
ensuring continued safe operation.

1.1.4 Corrosion cost

Increase in cost through the life of a plant due exclusively to corrosion or
corrosion protection. Total corrosion cost is given by the sum of the corrosion
costs associated with four aspects of the life of a facility: Capex, Opex, cost of
lost production caused by equipment failure and material residual value.

1.1.5 Cost contributor

Each item that contributes to the formation of corrosion costs in a specific
phase of the facility’s life. (Examples: corrosion allowance in the construction
phase; corrosion inhibitor injection in the operating phase).
Note: Throughout this guideline, for convenience, the European unit of
currency is used, the Euro, E .

1.1.6 Critical failure

A component or system failure giving rise to costs together with production

11
12 The Life Cycle Cost of Corrosion in the Oil and Gas Industry

losses and/or facility shut-down.

1.1.7 Discounting
The method used in investment appraisal where future costs, revenues
and benefits are reduced to their value as seen in present day terms. The
discount rate is applied to the cost, revenue and benefit streams, which will
have been normally expressed in terms of current economic conditions.

1.1.8 Life cycle cost

The discounted sum after tax of investment, operating cost and cost of
lost production due to equipment failure and/or maintenance during the
lifetime of the field. Also known as ’Net present value’.

1.1.9 Lost production costs

The costs or penalty charges associated with losing production. Lost
production costs are the costs associated with lost revenue and/or the lost
revenue itself. For gas contracts, costs may also be associated with penalty
charges.

1.1.10 Net present value

See ’life cycle cost’.

1.1.11 Operating expenditure (Opex)

The costs associated with operating and maintaining a facility.

1.1.12 Operational level

Different efficiencies of operation of a facility each requiring different
power consumption and having related levels of production. The maximum
operational level, having the maximum production, is 100 %.

1.1.13 Regularity
A measure of a system’s capability to meet the demand for deliveries. In the
context of this document the term has been used to represent the ratio of
actual to planned delivery from a system.
 The Life Cycle Cost of Covrosion in the Oiland Gas hidustry 13

1.1.14 Risk
The probability of the failure of a component or system.

1.1.15 Risk, consequences of

Costs, resulting from a failure of a component or system, of such factors
as lost production, injury to personnel, environmental impact and safety
issues.

1.2 Abbreviations

AC
Cost of chemicals added to mitigate corrosion (additives cost)

bbl
Barrel of oil

C
cost

CLIP
Cost of one hour downtime per year throughout the lifetime calculated as
the difference in Net Present Value between a production profile with the
full simulated availability and one with one hour lower availability per
year

CA
corrosion allowance

CAS
corrosion allowance for the shell side of heat exchangers

CAt
corrosion allowance for the tube side of heat exchangers

CAC
Cost of the corrosion allowance (corrosion allowance cost)

Cnpex
Capital expenditure
14 Tke Life Cycle Cost ofcorrosion in the Oil mid Gas llzdtlstry

CLP
Cost of lost production

CIC
Cost of installing and operating a corrosion inhibition system (corrosion
inhibitor cost).

CY
Net cost in year t

d
Optimum dosage of inhibitor or additive

D
Internal diameter

DRP
Duration of reduced production

E
Average number of critical failures per year

EC
Cost of energy consumption

G
Mass flow rate of inhibited fluid

h
Hour

k
The discount rate/interest rate to be used for the LCC evaluation

L
Length

LCC
Life cycle cost or life cycle costing
 The Life Cycl~Cost ofcovvosion in file Oiland Gas Incltlstvy 15

rn
The number of years in operation

11
The lifetime of a facility or function

N
Number of operating days in a year

NPV
Net present value

0,
Average fraction of time equipment will be operated at level 1

Oyex
Operating expenditure

P
Probability of reduced production

POF
Probability of failure

Q,
Power requirement at operational level 1 for equipment requiring power
(for example, a pump)

QPL
Quantity of production loss per unit time

S
Active surface area of heat exchangers

SM3
Standard cubic metre of gas (SM3is the industry usage, where M3denotes
m3.

Sd
Average over-dosage of inhibitor, technically justified, with respect to the
optimum dosage
16 The Life Cycle Cost ofCorvosion in the Oil and Gas lndustvy

Y
1)The year under evaluation
2 ) Year

P
A dosage factor for an anti-corrosion additive

P’
An over-dosage factor of an anti-corrosion additive

Pin
Efficiency at operation level n

P
Density of material

(3
The total standard deviation

o3
t
The standard deviation for cost element e
 2. Standards Referred to in this
Document

I S 0 15663-1:Petroleum and natural gas industries: Life cycle costing - Part

1:Methodology.
IS0 15663-2:Petroleum and natural gas industries: Life cycle costing - Part
2: Guidance on application of methodology and calculation methods.
IS0 15663-3: Petroleum and natural gas industries: Life cycle costing - Part
3: Implementation guidelines.

W i t h d r a w n standards (replaced by I S 0 15663):

NORSOK 0-CR-001: Life cycle cost for systems and equipment, Rev 1,
1996.
NORSOK 0-CR-002: Life cycle cost for production facility.

17
 3 Introduction

3.1 Compilation and prediction

In this guideline, analysis of life cycle cost of corrosion is dealt with in two
separate but related and complementary parts:
(a) Compilation and analysis of cost of corrosion data from service
experience.
(b) The prediction of the life cycle cost from cost data from suppliers and
service experience and using the experience of the analyst.

3.2 Published standards

The prediction of life cycle costs is a developed science which is documented
in the published standard IS0 15663 Parts 1 to 3.
In preparing this guideline, reference has been made to NORSOK
standards 0-CR-001 and 0-CR-002 (now withdrawn and replaced by I S 0
15663). However this guideline looks specifically at the life cycle cost of
corrosion and does not deal as extensively with the whole subject as the
published standards. In like manner, the above standards do not deal
specifically with the cost of corrosion.
It is not intended that this guideline should replace the published
standards and full reference should be made to them.

3.3 Compilation of data

No guideline previously existed for the compilation of cost of corrosion
data from service experience from an operating facility. The application of
the guideline provided in this document will lead to a database of corrosion
related information to aid the analyst in predicting life cycle costs of
corrosion more accurately.

3.4 Analysis of the life cycle cost of corrosion

3.4.1
This document provides guidance for the analysis of life cycle costs for a new

19
20 The Life Cycle Cost of Corrosion in the Oil and Gas Industry

facility, specifically addressing only those costs influenced by corrosion. A

database of information established using the guidance on data compilation
will aid the analyst to make sensible predictions of the economic impact of
corrosion related incidents.

3.4.2
LCC analysis may be used to predict the total discounted cost of a new
facility (absolute cost analysis) or may be used to compare different
solutions in terms of, for example, material selection (cost-by-difference
analysis). These approaches are not differentiated in this document.
 4 Scope

4.1 Approach
This document is in two principal parts. The first part provides guidance
on establishing a system to monitor the cost of corrosion throughout the
life of a facility. Subjects are identified where costs relating to corrosion or
corrosion prevention may arise but these are not intended to be exclusive.
Each of four phases in the life of a facility are examined: Capital cost (Capex),
Operating cost (Opex), cost of lost production caused by equipment failure
and material residual value. Each operator should add unidentified subjects
or phases, which may be specific to his operation.
The second part provides guidance on a systematic approach to identify
and minimise the cost of corrosion in the calculation of life cycle cost for a
new facility. It is intended to aid system and equipment design to give the
best lifetime cost combined with overall system integrity.

4.2 Upstream hydrocarbon systems

The guideline is written to aid economic and safe material selection and
corrosion protection of upstream hydrocarbon systems but the same
principles may be applied in other circumstances.

4.3 Published standards

This guideline should not be used in isolation but in combination
with recognised and proven LCC methods. These practices have been
standardised in IS0 15663 Parts 1 to 3 and previously in NORSOK O-CR-
001 and 0-CR-002 (now withdrawn and replaced by IS0 15663).

21
 5 Objectives

5.1 Cost of corrosion - data gathering

This document provides structured guidance on establishing a system for
gathering cost of corrosion data during the life of a facility. The objective
is that a database of information will be available for analysts during later
LCC studies for new facilities which are the same or similar to the one in
question.

5.2 Cost contributors

Specifically as applied to the LCC evaluation for material selection and
corrosion protection, this guideline classifies and defines contributors to the
cost of corrosion for materials, equipment and operation by examining:
a) capital cost (Capex)
b) operating cost (Opex)
c) cost of lost production caused by equipment failure
d) material residual value

5.3 Calculation methods

This guideline classifies and defines calculation methods necessary for the
LCC evaluation process.

5.4 Consequence of risk

This guideline identifies the importance of quantifying the consequence of
risk in a LCC analysis and indicates some useful risk analysis tools.

23
24 The Life Cycle Cost ofCovrosion in fize Oil and Gas Industry

6 Compilation of Corrosion Cost Data

6.1 Cost expression and units

Costs of corrosion should be collected and classified on a year-by-year basis
and be related to the year in which they occur.

Costs of corrosion are expressed in local currency. In this document, the

European unit of currency, the Euro, E,is used as an example.

6.2 Classification of costs of corrosion

Costs of corrosion are classified by reference to the phase of the facility’s life
in which they arise.
By convention and for convenience, facility life may be divided into four
phases:
Capital costs (Capex)
Operating cost (Opex)
Cost of lost production caused by equipment failure
Material residual value.
Alternative arrangements for dividing the life of a facility may, of course, be
adopted.

6.2.1 Capital costs

Corrosion related costs during the Capex phase include those costs
associated with:
the design of equipment and systems to control, minimise and/or
prevent corrosion of the facility, and
the purchase and construction of the corrosion prevention systems
defined in the design phase to control, monitor and prevent corrosion.

6.2.2 Operating costs

Corrosion related costs during the operational phase include the costs for
operation of the systems and equipment adopted to control, monitor and
prevent corrosion and further include:
 The Life Cycle Cost ofcovrosioiz in the Oil and Gas Industry 25

the costs associated with planned and unplanned maintenance needed

to prevent or reduce corrosion whether or not this requires facility shut-
down
and
the costs incurred to repair corrosion damage which has occurred during
plant operation.
Normally facility shut-down is required during maintenance and the
associated costs for loss of production should be considered.
Additionally operating costs include stand-by costs which are the costs of
measures taken to prevent corrosion during facility shut downs. It is usual
to include the costs for protection of stored metallic items with stand-by
costs. The costs of insurance may be included.

6.2.3 Cost of lost production caused by equipment failure

The cost of production lost owing to corrosion-related equipment failure
may be included in the analysis. However it should be remembered that the
production may simply be deferred until later in the facility’s life and the
revenue recovered at that stage.

6.3 Avoidable and unavoidable costs

Costs of corrosion can be divided into avoidable and unavoidable costs.
This classification, although based on a subjective evaluation by the analyst,
permits the identification of costs that can be optimised.

6.3.1 Avoidable costs

Avoidable costs are the costs of corrosion that can be reduced or eliminated
by correctly applying the most economical corrosion control technology
presently available (’state-of-the-art’).

Examples of avoidable costs are:

(a) the costs associated with a corrosion event caused by an incorrect
selection of materials. In this case all the relevant costs are avoidable
but should be reduced by the extra cost of an adequate material when
correctly chosen in the design phase;
(b) the costs for the repair of a steel structure immersed in sea-water with
inadequate, or without, cathodic protection. The avoidable costs include
the costs for the intervention, any replacement required together with the
26 The Lift. Cycle Cost of Corrosion in the Oil and Gas Industry

costs of installing an adequate cathodic protection system. These costs are

subject to a reduction equal to the costs of an adequate cathodic protection
system installed from the beginning;
(c) where corrosion inhibition is used, the costs of the inhibitor injected in
excess of the optimum and technically justified dosage.
(d) failure to employ the most effective maintenance strategy for
components that are prone to corrosion. Risk-based maintenance may
reduce planned maintenance costs significantly but result in failure and
associated unplanned maintenance.

6.3.2 Unavoidable costs - corrosion prevention

With reference to corrosion prevention, as described in the note in 6.2.1,
unavoidable costs are the costs incurred by applying the most appropriate
corrosion prevention technology available at that time. Technical advances
are required before unavoidable costs of corrosion can be reduced.

Examples of unavoidable costs are:

(a) for metallic structures exposed to atmosphere, the costs of surface
treatment (for example, painting, coatings or galvanising), where this is
considered the most convenient corrosion prevention measure;
(b) for a buried steel pipeline, the costs of coating and cathodic
protection;
(c) where corrosion resistant alloys are used to prevent corrosion and/or
contamination of the product, the difference in cost with respect to carbon
steel;
(d) a corrosion inhibition system and the inhibitor used.

6.3.3 Unavoidable costs - corrosion failure

With reference to a corrosion failure, all the relevant costs are considered
unavoidable if the corrosion event was not predictable based on knowledge
and information available at the moment the event occurred.
Corrosion may be caused by a previously unknown corrosion pheno-
menon or by unexpected environmental conditions which are outside the
design criteria for the facility. Where corrosion is caused by a previously
unknown phenomenon the need for research into this corrosion should be
strongly considered.
 The Life Cycle Cost of Corrosion in the Oiland Gas Industry 27

6.4 Cost elements of corrosion

6.4.1 General
The costs of corrosion are embodied in the four, previously described,
phases in a facility's life: Capital costs (Capex); Operating cost (Opex); Cost
of lost production caused by equipment failure; Material residual value.
Typical examples of costs are given in the following sub-clauses. These are
not intended to be comprehensive and the analyst should pay particular
attention to any peculiarities in the facility being examined.

6.4.2 Example data recording forms

Annex A contains examples of forms for recording cost of corrosion data.
Each of the above facility life phases has an example form. As noted in 6.4.1,
the examples are not intended to be comprehensive and attention should be
paid to other possible cost contributors.

6.4.3 Capital costs (Capex):examples of cost contributors

Design: examples of cost confributovs
Design costs include costs for:
(i) the design of corrosion prevention systems (see Note)
(ii) experts and corrosion engineers involved in the studies into the
corrosivity of the produced fluid and for prediction of corrosion
phenomena
(iii) laboratory corrosion tests to rank materials, paints, coatings,
inhibitors and chemicals
(iv) technical-economical analysis of the alternatives to be adopted
Note: The term 'corrosion prevention systems' is taken to mean any one or
combination of the following:
(a) corrosion protection, such as paint or coatings or cathodic protection
(b) corrosion mitigation, such as the use of corrosion inhibitors and other
chemicals
(c) corrosion prevention by the use of suitable materials
(d) corrosion allowances on non-corrosion resistant materials
(e) corrosion monitoring.
Example form 1, Annex A, is a guide for collecting costs of corrosion in the
design phase.

Construcfion: examples of cost confvibutovs

28 The Life Cycle Cost of C o r m i o n in the Oil arid Gas Industry

A guide for collecting costs of corrosion during the construction phase is

given in Example form 2, Annex A and includes:
(a) Corrosion allowance
The costs of the corrosion allowance may be calculated as the cost of the
material additional to the requirements of the basic mechanical design
including related extra costs for joining, for instance by welding, for
transportation and erection. In Annex B, B.l examples of formulae are given
for determining the costs of the corrosion allowance.
(b) Design redundancy
The cost of additional equipment installed to increase the plant reliability
and to reduce the risks of down-time owing to corrosion related failures by
providing equipment back-up.
(c) Equipment for the injection of corrosion inhibitors and chemicals
The cost of the equipment for the injection of corrosion inhibitors and other
chemicals for mitigating the corrosivity of the produced fluid. Examples of
such equipment include pumps, access fittings, piping and storage tanks.
(d) Corrosion resistant materials
The cost of a corrosion resistant alloy for an item includes the material cost as
well as the relevant costs of, for example, assembly, welding and protection
while in storage, less the same costs for the item made from a material which
is not corrosion resistant.
(e) Specific treatments
The total cost of additional treatments for corrosion control purposes.
For example, the stress relief heat treatment necessary to prevent sulfide
stress corrosion cracking of susceptible material in sour (hydrogen sulfide
containing) environments.
(f) Painting and coating
The cost for painting and coating metal structures, including the costs for
the protection itself, surface preparation and application.
(g) Monitoring systems
The cost for monitoring probes, including fittings and devices for their
installation, the instrumentation for data reading, storage and processing.
(h) Cathodic protection
The costs for cathodic protection include the costs of all materials and
instrumentation and their installation.
 The Life Cycle Cost of Covosion in the Oil and Gas Industvy 29

(i) Temporary corrosion prevention methods

The costs of corrosion prevention measures that are required to prevent
corrosion which may occur after installation but before the start-up of the
facility. This may include, for example, the costs associated with different
qualities of water for the pressure test required for different materials.

6.4.4 Operating costs (Opex):examples of cost contributors

Example form 3, Annex A, is a guide for collecting costs of corrosion in the
operating phase.
Personnel costs as well as material costs should be considered and
included where appropriate.

(a) Corrosion prevention and monitoring

The costs associated with:
(i) corrosion inhibitors and corrosion control chemicals (see the
Annex B, B.2 to assess the unavoidable quota)
(ii) monitoring probes
(iii) electrical power for dosage pumps and cathodic protection.

(b) Technical assistance and services

The costs associated with:
(i) personnel for routine control
(ii) routine controls (for example, NDE during plant activity,
the use of intelligent pigs)
(iii) specific studies carried out to solve corrosion problems found
during monitoring activities.

(c) Operating emergencies without plant shut down

All costs are collected associated with corrosion-related incidents that do
not require plant shut-down. Such costs may include:
(i) repair of minor failures (includingmaterials and work to carry
out the intervention and repair)
(ii) additional operating costs as a consequence of the incident.
Examples of operating emergencies might be repair to a CP system or
replacement of an injection pump for corrosion inhibitor, oxygen scavenger
or biocide.

(d) Insurance
Costs of insurance against corrosion-related risks.
30 The Life Cycle Cost ofcormion in the Oil a i d Gas IiidzistYy

Maintenance: examples of cost contributors

Example form 4, Annex A, is a guide for collecting costs of corrosion in the
maintenance phase. Only those costs for personnel and materials directly
associated with corrosion should be included.

(a) Maintenance
Maintenance costs include, amongst others, the following items:
(i) repairs
(ii) replacement
(iii) maintenance of corrosion control equipment
(iv) painting.

The costs for operations necessary to start and complete maintenance

operations should be considered for inclusion:
(v) conditioning and degassing pipelines and vessels
(vi) well work-overs
(vii) scaffolding
(viii) removal and reinstallation of thermal insulation
(x) removal of catalyst.

(b) Technical assistance

Costs to be considered include:
(i) supervision of personnel during maintenance
(ii) maintenance controls
(iii) specialist studies to solve corrosion problems found during
the inspection phase.

S taizd-by: examples of cost coli tribu tors

Example form 5, Annex A, is a guide for collecting costs of corrosion in the
stand-by phase. Only those costs directly associated with corrosion should
be included.

(a) Specific corrosion prevention methods

These costs include:
(i) painting or other forms of corrosion protection
(ii) removal and replacement of thermal insulation
(iii) pressurisation of vessels with nitrogen
(iv) periodic inspection during stand-by
(v) unscheduled maintenance found to be necessary
(vi) unscheduled inspections.
(b) Corrosion prevention in warehouse
Costs of materials and actions necessary to prevent corrosion during storage
of components.

6.4.5 Lost production costs

Lost production costs are the financial losses or penalty charges which are
associated with losing production because of corrosion related failures and
include the costs associated with lost revenue and/or the lost revenue itself.
For gas contracts, costs may also be associated with penalty charges.
The method of calculating the cost of lost production needs to be defined
and probably varies for each operating company.
While it is not a universally applied practice, this lost production costs
may be off-set by the value of the deferred production when the oil or gas is
produced at the end of the facility’s life.

6.4.6 Material residual value

While the guideline is not intended to deal with aspects of decommissioning,
at the end of the facility’s life it may be possible to recover some or part of
the value of the materials used. This may be particularly valuable when
corrosion resistant materials have been used. Benefit derived from this
recovery may be used to offset initial costs.

31
32 The Lzfe Cycle Cost of Corrosion in the Oil and Gas Industry

7 The Life Cycle Cost of Corrosion for

New Facilities

7.1 Introduction
The aim is to maximise the profit from the operation of a facility by
minimising or eliminating the costs associated with corrosion. This aim is
part of the similar overall aim of LCC and should not be taken in isolation
but incorporated, as a specialist subject, into the overall LCC analysis.
As noted in clause 4, Scope, LCC analysis may be performed as either an
absolute cost analysis or as a cost-by-difference analysis.
The LCC analysis will only be as good as the data and experience used
for the analysis. By operating a system of life-time data accumulation,
as described in clause 6, the degree of accuracy should, with time and
experience, be improved.

7.2 Cost contributors

The cost contributors used to calculate the life cycle cost of corrosion may be
described under the headings:
Capital cost
Operating cost
Lost production cost
Material residual value.

Each of these cost contributors has a number of elements described below. As

noted in clause 6, alternative breakdowns in cost contributors are possible.
Depending on the circumstance and the analyst, the cost contributors could
be classified as shown in clause 6.2 or in some other breakdown.

7.3 Capital cost (Capex)

7.3.1 General
 The Life Cycle Cost of Corrosion in the Oiland Gas Industry 33

Capex includes the costs for hydrocarbon systems, utility systems

and structures a n d covers the design a n d construction phases.

7.3.2 Design
Capex includes:
(a) The cost of performing a complete study of the system
corrosivity, including material selection, surface
protection, inhibition, cathodic protection and corrosion
monitoring.
(b) The cost of testing and qualification of materials and
systems.

7.3.3 Construction
Capex includes:
The cost for selected corrosion resistant materials, including
costs for assembling, fabrication, welding, consumables etc.,
less the cost of the same item built with a material which is
not corrosion resistant, assumed as ’Base Case’.
An alternative and equally valid approach is to calculate and
compare the costs associated with each alternative material.
Where the selected material is not corrosion resistant, the
cost of extra material for a corrosion allowance together with
the extra costs of transport, storage and fabrication.
The cost for purchasing, installing and commissioning
systems and equipment for the injection of corrosion
inhibitors and other chemicals for mitigating the fluid’s
corrosivity.
The cost for painting and coating metal structures, including
the costs for personnel, products, surface preparation
application, inspection and scaffolding.
The cost for purchasing, installing and commissioning
corrosion monitoring systems, including data storage,
processing and analysis equipment.
The cost for purchasing, installing and commissioning
cathodic protection systems; including data storage,
processing and analysis equipment.
The cost of measures taken to prevent corrosion that may
occur after installation, but before start-up of the plant.
34 Tize Life Cycle Cost ofCourosioii in the Oil and Gas lizdustry

7.4 Operating cost (Opex)

7.4.1 General
Operating costs include preventive and corrective maintenance, energy
consumption and routine services.

7.4.2 Preventive maintenance

Preventive maintenance costs include one or any combination of the
following:
(a) The personnel costs to maintain and inspect the systems and
equipment listed in 7.3.3, items c) to f) inclusive, including
planned shut-downs.
(b) The costs for replacement parts and materials associated
with the above items where component failures because of
corrosion can be predicted.

7.4.3 Corrective maintenance

Consideration may be given to the costs of corrective maintenance. This
could be based on previous experience and an assessment of the risk of
defects and failures caused by corrosion. These costs may include one or
any combination of the following aspects:
(a) The costs of failure analysis and studies to solve corrosion
problems encountered in the operating phase.
(b) The personnel costs required to rectify corrosion-related
defects and failures within the facility including the costs of
un-planned shutdowns.
(c) The costs of spare parts and materials associated with item
(b) above.
(d) The consequential costs associated with a corrosion failure
including injury to personnel and equipment, damage to the
environment and necessary clean-up operations and other
safety issues.

7.4.4 Energy consumption

Energy consumption costs should include those costs for systems and
equipment listed under 7.3.3.A formula for calculating energy consumption
cost is provided in Annex C, C.5.
 The Life Cycle Cost of Cor~osionin the Oilaiid Gas Industry 35

7.4.5 Routine servicing

Routine servicing costs include one or all of the following:
(a) Personnel costs for servicing the systems.
(b) The costs of corrosion monitoring.
(c) The costs of consumables and chemicals including
associated logistics costs (for example, storage and trans-
portation).

7.5 Lost production costs

Lost production costs are the financial losses or penalty charges which are
associated with losing production because of corrosion related failures and
include the costs associated with lost revenue and/or the lost revenue itself.
For gas contracts, costs may also be associated with penalty charges.
The method of calculating the cost of lost production needs to be defined
and probably varies for each operating company.While it is not a universally
applied practice, lost production costs may be off-set by the value of the
deferred production when the oil or gas is produced at the end of the
facility’s life.

7.6 Material residual value

At the end of the facility’s life it may be possible to recover some or part
of the value of the materials used. This may be particularly valuable when
corrosion resistant materials have been used. Benefit derived from this
recovery may be used to offset initial costs.

7.7 LCC calculation methods

7.7.1 General
Formulae that may be used for LCC calculations are provided in Annex C.
For information, these formulae were automated in the LCC model which
was provided with NORSOK Standard 0-CR-001 Life Cycle Cost for System
and Equipment (now withdrawn but the formulae may be obtained from
the web-site: www.nts.no /norsok/ O / > .

7.7.2 Assumptions
In order to complete a LCC evaluation values need to be assigned to the
36 The Life Cycle Cost of Corrosion in the Oil and Gas Industry

following cost contributors:

(a) Personnel costs
Offshore personnel costs: E /hour
Onshore personnel costs: E /hour

(b) Lost production costs

See Annex C, C.4.
Cost of lost production: /hour

Note: Although lost production may result in a loss for the

year in question it may result in a surplus of production at
the end of the life of the facility or may permit increased
production at a later date. While there may be an immediate
loss of revenue, the value of this production should be taken
into account.

(c) Operating hours

Annual operating hours: Hours /year

(d) Energy consumption cost

Cost of energy and any associated taxes:
,S / SM3
and / or :E / bbl

(e) Schedule
Base year
Investment year
Operation start-up
Life of field

(f) Discounting
Discount rate
Discount rate variable with time
Discount factor
Capital expenditure
Operating cost
Monetary inflation rate
Taxation rate, where applicable
 The Life Cycle Cost ofCorvosion in the Oil nizd Gns Iizdlnstvy 37

7.7.3 Value of money related to time

The base year for the analysis needs to be established. All costs are then
discounted back to this base year to take into account the depreciation of the
currency. A formula is provided in Annex C, C.2.

7.7.4 Capital costs

Capital costs are calculated by adding the cost contributors listed in 7.3.
Where there is a deviation between the time when the investments will be
made and the base year for the evaluation, capital cost should be discounted
back to the base year as noted in 7.7.3.

7.7.5 Operating costs

Operating costs are calculated by adding the cost contributors listed in 7.4.
A formula is provided in Annex C, C.3.

7.7.6 Lost production costs

The method of calculating the cost of lost production needs to be defined
and probably varies for each operating company. A typical formula is
provided in Annex C, (2.4.

7.7.7 Life cycle cost

The life cycle cost for the subject facility is equal to the sum of the capital
costs, the operating costs and the cost of lost production less any deferred
production recovered at a later time together with material residual value.

7.7.8 Remanent life

Consideration should be given to the possibility that, at the end of its design
life, a facility may still be safe and profitable to continue in operation. If
appropriate, estimated revenue from an extended life may be used to off-set
costs.

7.7.9 Uncertainty
The uncertainty of the calculations should be assessed in relation to the
confidence in input data. To obtain an estimate of the uncertainty involved,
the cost elements may be assumed to be independent and to have a
normal distribution. A formula for the standard deviation is provided in
Annex C, C.5.
 7.7.10 Risk analysis
The extra costs of corrosion resistant materials or of corrosion prevention
methods may be in conflict with the financial targets of the project. Where
this occurs, it is essential to carry out a risk analysis.
The risk analysis may be based on the following factors:

(a) The sensitivity of probability and the cost of failure of the

main cost contributors.
(b) The sensitivity of the discount factor.
(c) The sensitivity of changes to design parameters which led to
the inclusion of corrosion prevention methods in the design
of the facility, for example the corrosivity of the environ-
ment.

The method of risk analysis should be clearly documented. Examples for

quantifying the consequences of risk in a LCC analysis are provided in
Annex E.

38
 8. Bibliography

Hausler, 'Economics of Corrosion Control', Materials Performance,June,

1978

Bennet et al., 'Economic Effects of Metallic Corrosion in the United States'

Corrosioiz,1979

Parker, W.K. Boyd, D.G. Dippold W.H. Fisher, 'NBS Battelle Cost of
Corrosion Study ($ 70 Billion !)', Materials Performance,May-Nov, 1980

L.M. Smith and M. Celant, 'Martensitic stainless steel flowlines - Do they

pay?', Paper S99-08, Proc. Supermartensitic Stainless Steels '99, Brussels,
Belgium, 27-28 May 1999, Belgian Welding Institute, 1999, (this paper has
numerous references to other literature).

See also Annex E, E.5.9 for a further bibliography associated with risk
assessment.

39
 The Llfe Cycle Cost of Corrosioiz in the Oil and Gas ltidusfry 41

Annex A: Example data recording forms

Example form 1
~

SUMMARY
OF COST OF CORROSION EVALUATIONI N DESIGN PHASE

Type of equipment: I Year:

Plant capacity: 1 Design life (years):

Total costs Non-avoidable costs ref

Corrosion studies
Materials selection I
Paint / coating
selection
Inhibitor selection I
Monitoring
selection
CP selection
Corrosion tests

Total cost

COMMENTS

Analysis made by: Dated:

42 Tile Life Cycle Cost ofcovrosioiz iii the Oil aizd Gas liidtisiry

Example form 2

SUMMARY
OF COST EVALUATION I N CONSTRUCTION PHASE
Type of equipment: I Year:
Plant capacity: I Design life (years): I

COST SUMMARY

I Total costs I Non-avoidable costs I ref

Corrosion
allowance, see note
Design redundancy
Inhibition
equipment
Corrosion resistant
materials
Specific treatments
Paint / coatings
Monitoring
systems
Cathodic
protection
Temporary
measures
Total cost
Note: see A m e x B for cost determination of corrosion allozuance.

COMMENTS

Analysis made by: I Dated:

 The Lifr Cycle Cost of Covrosioiz in the Oil and Gas lizdiistry 43

Example form 3

SUMMARY OF COST EVALUATION IN OPERATING PHASE

Type of equipment: Year: I
Plant capacity: Design life (years):
Actual service life (years):

COST SUMMARY
Total costs Non-avoidable costs
Corrosion
prevention and
monitoring, see
note
Technical
assistance
Maintenance
intervention
Insurance
Total cost
Note: see Annex B for cost determination of corrosion prevention.

COMMENTS

Analysis made by: Dated:

44 The Lije Cycle Cost of Corrosion in the Oil arid Gas Iizdzisfry

Example form 4

SUMMARY
OF COST EVALUATION IN MAINTENANCEPHASE
rvpe of eauipment: I Year:
Plant capacity: Design life (years):
Actual service life (years):

Total costs of Non-avoidable

ref
single factors costs
Maintenance
Associated work
Technical
assistance
~~~

rota1 cost 1
COMMENTS

Analysis made by: 1 Dated:

 45

Example form 5

SUMMARY
OF COST EVALUATION IN STAND-BY PHASE
Type of equipment: I Year:
Plant capacity: I Design life (years):
I Actual service life (years):
COST SUMMARY
Total costs of Non-avoidable ref
single factors costs
Corrosion
prevention, see
note
Maintenance prior
to re-start
Warehouse anti-
corrosion measures
Total cost I

Note: see Annex B for cost determination of corrosion prevention.

C oM M EN Ts

Analysis made by: I Dated:

 Tire L$e Cycle Cost o f C o r r o s i o ~in the Oil m i d Gas lidustry 47

Annex B: The classification, definition

and collection of the costs of corrosion
- Examples of formulae

B . l Costs of the corrosion allowance

Corrosion allowance cost (CAC) may be estimated using the following
formulae:

(a) Pipes
CAC = p X X x D x L x C A x E

(b) Columns and vessels

CAC for columns and vessels may be calculated by adding the CAC for a
simple pipe, as in a) above, to the CAC for the closing ends. In this formula
the ends are assumed to be flat (not domed or dished):

CAC for ends = p x 2 x IT x D2 x C A x E

(c) Heat exchangers

CAC for heat exchangers may be considered in two elements as the CAC
for the shell, calculated as in b) above added to the CAC for the tubes,
calculated as in a). Different corrosion allowances will be required for the
shell (CAS)and the tubes (CAt). Thus:

CAC (heat exchanger) = CAC (tubes) + CAC (shell)

where:
p = density of the material in question [tonnes per cubic metre, tm-3]
C A = corrosion allowance [metre, m]
C A S = corrosion allowance for the shell of the heat exchanger [metre, m]
C A t = corrosion allowance for the tubes of the heat exchanger [metre, m]
D = internal diameter [metre, m]
:E = unit cost for the material, in local currency per tonne
L = length [metre, m]
 B.2 Costs of corrosion prevention
Corrosion inhibitors cost (CIC) and additives cost (AC) usually are
determined on the year-end warehouse inventory. The unavoidable quota
can be determined through the formula:

CIC + AC (unavoidable) = 24 x (G x N x p x d + N x p’ x sd) x E

where:
G = mass flow rate of the inhibited fluid [tonnes per hour, th-’1
N = number of operating days in the considered year
d = optimum dosage of inhibitor or additive [kilograms per tonne, kg t-’1
8 = unit cost of inhibitor or additive, in local currency per kilogram, kg
sd = average over-dosage, technically justified, with respect to the optimum
dosage [kilograms per tonne, kg t-’1
p = a dosage factor for the anti-corrosion additive
p’ = an over-dosage factor of the anti-corrosion additive.

48
 The Life Cycle Cost of Corrosion in the Oil and Gas lndustry 49

Annex C: The life cycle cost of corrosion

for new facilities - Examples of formulae

C.1 Introduction
The formulae in Annex C may be used in the calculation of life cycle cost.

C.2 Value of money related to time

The base year for the analysis needs to be established. All costs are
discounted back to this base year to take into account the changing value of
money related to time. In all probability money will depreciate in value.

The following formula may be applied to calculate the discounted cost:

Discounted cost =

where:
CN, = net cost in year t (see note 1 below)
11 = the design life of the facility or function to be evaluated
k = the discount rate/interest rate to be used for the evaluation
t = the year for evaluation

Note 1: CN, can be assumed to be the same for all the years, it can vary
according to production, or it can have some other given variation
throughout the lifetime.
Note 2: Either monetary inflation should be included or the discount rate
should be reduced by an assumed rate of inflation. Note that inflation may
vary with time.

C.3 Operating cost

For costs that will be constant throughout the lifetime of the facility, the
annual cost is multiplied by a discount factor f to obtain the cost over the
50 The L f e Cycle Cost of Corrosion in the Oil and Gas lizdcistvy

lifetime.
If there is a difference in the base year for the evaluation and the start-up
year of operation, the following formula can be used:

where:
a = the difference between the base year for the evaluation and the year for
start-up of operation
rn = the number of years in operation
k = the discount rate/interest rate to be used for the evaluation
t = the year for evaluation

C.4 Lost production cost

C.4.1
The NPV of lost production should be calculated for each year in which lost
production is expected to occur.

C.4.2
The following formula may be used for calculating the cost of lost production
(CLP):

CLP = E x P x D,,x QpLx C,,

where:
C,, = cost of one hour down-time per year throughout the lifetime calculated
as the difference in NPV between a production profile with the simulated
availability and one with one hour lower availability per year [E per hour
per year, e h-'y-'].
CLP = cost of lost production [.E]
D,,= duration of reduced production [hours, h]
E = average number of critical failures per year
P = probability of reduced production (depending on equipment redundancy
levels)
Q,,= quantity of production loss per unit time [for example, barrels per
 The Life Cycle Cost ofcorrosioiz ill f i l e Oil nizd Gas Industuy 51

hour, bbl / h or standard cubic metres per hour, SM3/ h]

Note: In all probability the lost production will be produced at some later
date. Consideration should be given to subtracting the discounted value of
this later production from the discounted costs of lost production.

C.5 Energy Consumption Cost

C.5.1 Constant energy consumption
For a facility where the power requirement is constant throughout the
lifetime and is not dependent on the production the following formula for
the cost of the average annual energy consumption may be used:

where:
EC = cost of energy consumption
Q, = power requirement at operational level 1 for the equipment requiring
power (e.g. a pump)
0,= average fraction of time the equipment will be operated at level 1
I = operational level in steps from 0 to 100 % (100 76 being the maximum
required capacity)
p i , , = efficiency at operation level 1 for related equipment in the power
transmission (i.e. gear, converter, electric motor)
C = cost per kWh based on energy consumption

The average annual cost should be discounted as shown in C.2.

C.5.2 Variable energy consumption

For an equipment package where the power requirement varies throughout
the lifetime, for example it may follow the production profile, the formula to
be used will be the same as that given in C.5.1but will need to be calculated
with different distributions (0,)for operational level for each year and be
discounted.

C.6 Uncertainty
The uncertainty of the calculations should be assessed in relation to the
confidence in the reliability of the input data. To obtain an estimate of the
uncertainty involved, the cost elements may be assumed to be independent
and distributed normally. The standard deviation may then be calculated as
follows:

where:
0,= The total standard deviation
ce= The standard deviation for cost element e
When using the above formula after evaluating two alternatives A and B and
finding that A has the lowest life cycle cost, the result may be considered to
be reliable when:

52
 Tke Life Cycle Cost of Corrosion i n the Oil and Gas Industry 53

Annex D: Case Study - An example of a

life cycle cost analysis

Note 1: This case study is for an oil pipeline. The same principles apply to a
LCC analysis of any new facility.
Note 2: All design parameters and cost figures used in this case study have
been listed as examples only and are not true cost data.

D.1 Case study background

(a) A new subsea oil pipeline between template A and platform B is to
be evaluated. The length of the proposed pipeline is approximately
20 km.

(b) Design parameters for the pipeline:

Design pressure: 300 barg
Operating pressure: 220 barg
Design temperature: 125 "C
Operating temperature: 100 "C
CO, content: 6.0 mol 70
H,S content: 30 PPm
Produced water: Yes
PH ca 5.5
Design lifetime: 20 years

(c) The pipeline is to be coated externally and supplied with cathodic

protection.

d) From the pipeline optimisation study, a pipe with nominal internal

diameter of 273.0 mm will be used.

(e) Corrosion predictions have been performed. Based on the calcula-

tions, the predicted corrosion rates for carbon steel are:
Without corrosion inhibition: ca 5.0 mm / year
54 The Life Cycle Cost of Corrosiorz iii the Oil and Gas lizdirstry

With corrosion inhibition: ca 0.5 mm/year (assuming

90 $% inhibitor efficiency).
(f) Carbon steel is used as example A in this study. Alternative corrosion
resistant materials for this study are duplex stainless steel (example
B) and martensitic stainless steel (13 ZCr) (example C). CRA clad
steel could also have been used in the study.

(g) In this case study, welding and lay-barge costs for examples A, B
and C are estimated equal and are not included. In practice there
may be significant differences in these costs between the example
materials.

(h) The following examples list the different main cost contributors
used in the study.

D.2 Example A - Carbon steel pipeline

(a) Corrosion inhibition is to be used and the pipeline has a corrosion
allowance of t 1 0 mm on the pipe thickness.

(b) The main cost contributors are estimated to be as follows:

Capex:
Complete pipeline study cost: 0.3 million :E
Engineering qualification cost: 0.1 million E *
Material cost: 2.0 million E
Coating cost: 0.5 million $E
Cathodic protection cost: 0.6 million E
Cost for installation of corrosion
inhibitor facilities: 0.3 million ,E
Opex:
Corrosion inhibitor cost: 2.1 million ,E/year **
Monitoring/ pigging cost: 1.0million ,E /year
Pipeline failure and repair:
Pipeline repair cost: 10.0 million ,E ***
Lost production cost caused
by corrosion causing a 30 days’
shutdown in year 15: 25.0 million :E
* Corrosion inhibitor testing
 The L$e Cycle Cost qf Covrosioiz in the Oil mid Gas I d u s f r y 55

** 25 ppm inhibitor in the total fluid

*** Cost due to corrosion in year 15

D.3 Example B - Duplex stainless steel pipeline

The main cost contributors:
Capex:
Complete pipeline study cost: 0.3 million E
Engineering qualification costs: Nil
Material cost: 8.0 million e
Coating cost: 0.5 million
Cathodic protection cost: 0.6 million 63
Opex:
Monitoring / pigging cost: 0.01million e /year

D.4 Example C - 13 %Cr steel pipeline

Capex:
Complete pipeline study cost: 1.0 million E
Engineering qualification costs: 0.5 million e
Material cost: 4.0 million +E
Coating cost: 0.5 million :E
Cathodic protection cost: 0.6 mi1lion.E

Monitoring / pigging cost: 0.2 million E /year

D.5 Risk assessment of a pipeline failure

When the cost evaluation is completed, a risk assessment is
required.
This is particularly the case in this study because the corrosion
prediction for the carbon steel alternative indicated that the
corrosion allowance (+lo mm) would be corroded within the design
lifetime. In this case, it is assumed that there is a 30 Y, risk of having
a leak caused by corrosion, requiring a pipeline repair, in year 15.
Other factors such as safety and environment should also be
considered.
Guidelines on risk assessment are given in Annex E.

D.6 Life cycle cost analysis

 The Life Cycle Cost of Corrosion iiz the Oiland Gas lridtistry

Based on the formula in Annex C, C.3 using an operating cost

discount factor of 10.6:

The discount factor is multiplied by the yearly (and constant)

operating cost in the three example cases:

, Annual Opex E -
Case A 3 100 000 .
Case B 10 000
Case C 200000~

The cost of lost production in year 15 in example A is discounted

back to the starting point:

E
Pipeline repair in year 15 10 000 000
Cost of lost uroduction in vear 15 25 000 000

The discount rate is set to 8 % over a period of 20 years:

Discount rate 8.0%

(e) The total life cycle cost is calculated:

Example Capital cost Operating cost Cost of lost Total cost

E f E production f
f
A 3 800 000 22 870 850 4596750 31267600
B 9 400 000 106 035 0 9 506 035
C 6 600 000 2 120 700 0 8 720 700

D.6 Conclusion
Examples B and C are better alternatives than example A based on an LCC
analysis.

57
 Annex E: Quantifying the consequences
of risk in life cycle cost analysis

E.1 Preface
E.l.l
This annex does not aim to be a thorough guide to the subject of risk
analysis but aims merely to indicate ways in which risk analysis may benefit
decisions made on the basis of a LCC analysis.

E.1.2
Risk analysis as applied to LCC analysis has been the subject of a number of
published papers (see the bibliography at the end of this annex). This annex
has drawn heavily on the paper by Craig, 1995.

E.2 Background
E.2.1
A LCC analysis that does not include risk analysis is incomplete at best and
may be incorrect or misleading at worst.

E.2.2
For the petroleum industry the proper selection of materials of construction
is critical to the economic success and viability of the project. However, a
simple deterministic analysis may, in fact, place the project at higher risk
than if a complete analysis including risk analysis was performed.

E.2.3
Quantifying the consequences (cost)of failure and the cost and consequences
of factors such as lost production, injury to personnel, environmental impact
and safety issues resulting from failures can have a considerable impact on
the final choice of materials. These factors and others must be considered in
the LCC analysis in order to minimise risk and increase reliability.
60 The Life Cycle Cost ofCorvosion iiz the Oil and Gas Industry

E.3 Introduction
E.3.1
The use of corrosion resistant alloys and non-metallic materials to
improve equipment life and reliability in corrosive fluids may be the most
economically viable alternative when the whole lifetime of a facility is
considered, even though the Capex may be the highest. The use of LCC
analysis permits the cost benefits of each alternative to be assessed.

E.3.2
However, LCC analysis is limited because it is entirely deterministic and
does not allow consideration of critical factors that impact on the selection
of materials. These factors, relating to the probability of failure and the
consequences of failure, are often the most costly aspects of the materials
that are selected but are not easily quantifiable.

E.3.3
Critical factors must be considered from a probabilistic standpoint. The
application of risk analysis is necessary to define more appropriately the
consequence of failures.

E.4 Deterministic analysis (LCC)

E.4.1
In LCC analysis the net present value (NPV) for all costs (Capex and Opex)
are calculated and compared. This type of analysis is highly dependent
on the discount rate used. Many oil companies use 12 %, or higher for the
discount rate in order to include some risk. However, high discount rates
do not actually provide a real risk analysis but only favour the lowest cost
case.

E.4.2
In general, LCC analysis cannot fully provide for the consequences of a
failure. The need to take consequences into account is the basis for risk
analysis:

Risk = probability offailure x the consequences

 The Life Cycle Cost ofcorrosion in the Oil and Gas Industry 61

E.5 Probabilistic approach (Risk analysis)

E.5.1
In the petroleum industry, the major consequences of a facility failure are:
lost production, environmental costs (including clean-up costs and fines),
safety issues (loss of life, injury) and bad publicity for the company.

E.5.2
Apart from lost production, it is difficult, prior to any event, to assign a cost
to these consequences but in some cases they can constitute the majority of
the consequential costs. Risk analysis not only incorporates the probability
of failure (POF) but also the monetary consequences of failure.

E.5.3 Expected value analysis

Expected value analysis takes into account the risk of a failure and the NPV
cost of the material and the NPV cost of the consequences of a failure for
each material option being considered.
A probability of failure is assigned to each material and the NPV costs
determined. The expected value for each material is given by the sum of the
probability of failure multiplied by the NPV costs of the material and the
failure and the probability of no failure multiplied by the NPV cost of the
material.

E.5.4 Example of expected value analysis

As a simple example, if the assigned probability of failure for material A is
1 %, the NPV cost of the material is E 500M and the NPV cost of a failure is
+2 250M then the expected value for that material is:

Expected value A = 0.01 x (500M + 250M) + 0.99 x 500M = E 502.5M.

Following the same example, material B may have a POF of 40 %, an NPV

cost of material of :E 150M and an NPV cost of failure of ,E 1000M. Then:

Expected value B = 0.40 x (150M + 1000M) + 0.60 x 150M = E 550M.

The decision to be made is to select the lowest expected value, that is

material A even though this has the higher material cost.
62 Tile Life Cycle Cost of Corrosiori in the Oil arid Gas ZmIu~try

E.5.5 Expected value and probability curves

If the probability of failure and cost of failure are held constant for one
material (A) a probability limit curve may be generated for a second material
(B) by assuming both materials have equal expected values.
In this probability curve various NPV costs of failure for material B are
plotted against the probability of failure for material B. If the estimated NPV
costs of failure for material B are applied to the resulting probability curve,
a probability of failure can be predicted below which material B is the more
economically acceptable. A family of probability curves may be derived for
different probabilities of failure for material A.

E.5.6 Expected utility value analysis

Expected utility value analysis places greater emphasis on the capital
investment and costs of failure by applying a factor to these costs. Utility
functions are subjective and can depend on the magnitude of the monetary
value the analyst or his company normally deals with.

E.5.7 Example of expected utility value analysis

Using the numbers in the example given in E.5.4 and taking the utility
function to be the square of the monetary values then:

Expected utility value A =

0.01 x (500M t 250M)’ + 0.99 x (500M)’ = E 253 125M

Expected utility value B =

0.40 x (150M + 1000M)’ + 0.60 x (150M)’ = E 542500M

As the costs are positive in value, the material with lowest expected utility
value should be chosen.

E.5.8 Monte Carlo analysis

Both expected value and expected utility value analyses take into account
every consequence of a failure. It is possible however to select a single
consequence of failure for analysis. Taking lost production as an example, it
is possible to carry out a Monte Carlo analysis which addresses a triangular
distribution of probability. This is most appropriate when the actual
probability is not known.
In the analysis, each year is considered separately and lost production
in one year has no influence over lost production in following years.
 The Life Cycle Cost ofcowosioiz in the Oil nizd Gas Indtlstuy 63

The likelihood of lost production is assessed, for each option under

consideration, as the minimum numbers of days, the most likely number
of days and the maximum number of days lost production in one year. The
model calculates the NPV of lost production for each year for the design life
of the facility, keeping track of the values for each iteration. The output is
a cumulative probability of failure for each material option compared with
the NPV of lost production over the life of the facility.

E.5.9 Bibliography
B. D. Craig and R. S. Thompson, ‘The importance of risk analysis in life cycle
cost evaluation of carbon steel and CRA pipelines’, Proc. UK Corrosion and
Etlrocorv 94,Institute of Materials, 1994.

B. D. Craig and R. S. Thompson, ’The influence of risk analysis on the

economics of carbon steel and CRA clad flowlines’, Proc. Offshore Technology,
27th Aiiiztlal Conf.,Paper No. 7788, OTC, 1995.

T. Cheldi, P. Cavassi, L. Lazzari and L. Pezzotta, ’Use of decision tree

analysis and Monte Carlo simulation for downhole material selection’, Proc.
Corvosioiz 97, Paper no 18, NACE, 1997.

B. D. Craig, ’Quantifying the Consequences of Risk In Life Cycle Cost

Analysis’, First International Oil and Gas Industry Forum on Life Cycle
Cost, May, 1998, Stavanger, Norway.