Money Matters

Process industry economics should be taught in undergrad chemical engineering, says David Brennan

MY interest in process economics was sparked when working as a newly-graduated chemical engineer in a chlor-alkali plant at ICI Australia. My duties included process design and developing expenditure proposals for projects, as well as a period managing plant operations where reliability, production output, and operating costs were a priority. Following my industrial work, I joined RMIT University as a lecturer, where my tasks included teaching process economics and managing the design project.

Despite my industrial experience I felt I still needed further experience in economic evaluation, and I arranged a year’s secondment to ICI Australia’s planning and development department, working on an ethylene expansion project. My tasks included exploring the optimum capacity of a new ethylene plant, where I learnt that most Australian process plants had increased their capacity during operating life to meet market growth. This aroused my curiosity into how this had been achieved technically and economically, which I explored in my PhD project at Melbourne University a few years later. I then wrote my first book on process industry economics and shortly after, joined Monash University.

My accumulated experience in industry, teaching and research, including supervision of postgraduate students and further industrial secondments, has been an ongoing stimulus to my further learning. Much of my research has been in combined economic and environmental assessment applied to different industry sectors, while undergraduate design projects have explored alternative technologies, project concepts and site locations for specific products.

Process economics in chemical engineering education and practice

Process industry economics has traditionally been an inextricable part of chemical engineering education, reflecting its importance in professional practice. However, the material taught, method of teaching, and skills developed can vary considerably. In a predominantly technical discipline, process economics is often viewed by educators as an essential but minor component.

A broad foundation of valuable literature on process economics principles and their application was written in the latter part of the 20th century, but rather less has been written in this century. Recognising the importance of process economics to the chemical engineering profession, IChemE has supported publication of books^1-4 on capital cost estimation, economic evaluation of projects, and process industry economics, including my most recent book.

Contexts in which chemical engineers practise after graduation have increasingly diversified over time, both in work function and the related industry. Contexts for work function include research, design, operations, safety and environment specialisation, and sales and marketing, while industry contexts include chemical, food and beverage, pharmaceutical, fuels, minerals, water, and energy. In all these contexts, process economics is essential for enabling effective technological change and business success, but in each situation, economic perspectives can assume different priorities.

Most developments in chemical engineering eventually bear fruit in an operating plant, which is an important case for consideration. A new chemical engineering graduate working in this environment soon realises that every project initiative needs both capital investment and approval from senior company management to proceed. Management requires thorough documentation from the project’s proponents, commonly referred to as an expenditure proposal, supporting the case for approval. Projects may involve an entirely new plant, or modifications to an existing plant. For a new plant, there are four pillars in economic evaluation which shape the investment decision:

• market evaluation for the proposed product(s);
• capital cost estimation for the proposed plant;
• operating cost estimation for manufacturing the product; and
• profitability evaluation based on cash flow analysis.

Figure 1 shows some links between key decisions and outcomes in these evaluations.

Project evolution

Upstream of sanction there is an evolutionary phase of a project where basic concepts are explored, involving market or cost-saving opportunity, product specification, feedstock source, process technology, plant capacity, and site selection. During this phase, many ideas and key questions are raised involving the drivers, scope, and timing for investment.

The level of engineering detail and accuracy of estimating costs and benefits is less for feasibility studies than for the ultimate proposal. In the case of fixed capital cost for a plant for example, early estimates typically adopt a factorial approach based on purchased equipment costs, while detailed estimates rely heavily on expertise of cost estimators and engineers from multiple disciplines.

Chemical engineers engaged in project evolution and proposals prior to sanction need to appreciate:

• the time duration and cost of design and evaluation activities in generating cost estimates;
• the organisational frameworks and procedures involved in working with other engineering disciplines, specialists in technology, safety, and environmental assessment, and accountants and senior management; and
• iterative decision-making inherent in project development derived from the interdependence of technical, economic, safety, and environmental assessments; from stakeholder considerations encompassing shareholders, financers, customers, employees, and communities adjoining processing sites; and from potential dynamics of markets, capital costs, and operating costs over time.

Following sanction, detailed design demands economic considerations related to equipment specification and procurement, plant layout, piping, and instrumentation. Trade-offs between capital and operating costs, implications of plant reliability for sales revenue and maintenance costs, and required time frameworks for design and construction are all important.

Capital and operating cost estimation of process plants

Chemical engineers have important roles in capital and operating cost estimation, derived both from their process and plant design inputs and understanding of process operations. For capital costs, there are three main inputs – fixed capital, working capital, and startup capital – each dependent on multiple influences.

Fixed capital includes inside battery limits (incorporating the cost of the process plant), outside battery limits (incorporating costs of raw material and product storages, site generated utilities, effluent treatment facilities, and buildings external to the plant. Influences on fixed capital include design and technology choices, site location, labour cost and labour productivity.

Working capital incorporates the value of stocks of raw materials influenced by their purchased costs; stocks of products influenced by their cash operating costs; inventories of materials in the process; and the balance between debtors and creditors. Influences on working capital include access to both raw material supplies and product users.

Startup capital includes non-recurring costs between construction and satisfactory operation.

Operating costs

For operating costs, the breadth of influences on contributing costs derived from project decisions and commercial inputs is extensive and diverse, as indicated in Figure 2.

It is important to recognise that a spectrum of disciplines and expertise is needed in commercial practice to achieve reliable capital and operating estimates. A further spectrum of personnel and skills is required in market and profitability evaluations. The extent and diversity of personnel and skills required for the four pillars of evaluation is outlined in Figure 3. A resulting challenge is the need for effective management in integrating and appraising the contributions of participating personnel within and across the four pillars to achieve project success.

Priorities in teaching process economics

In chemical engineering education (as well as practice) it is important to encourage a thinking approach in all aspects of cost estimation and profitability evaluation. Students should be made aware of the organisational framework and project sequence leading to market evaluation, cost estimation, project approval and implementation. An important priority is an appreciation of the influence of engineering principles contributing to costs, eg linking capital and operating cost estimates with relevant system boundaries; identifying dependence of equipment cost on capacity (or size), design pressure and temperature, and materials of construction; and understanding the engineering features contributing to installed plant costs.

Also important is an appreciation of business influences on markets, and costs of materials and labour; and the ability to adopt both simplified and detailed approaches to estimating (eg capital costs of plants – use of both published plant cost data and engineering estimates; and operating costs – use of both simplified estimates based on raw materials, utilities, personnel, and capital dependent costs, and complete, detailed estimates).

Students must also be made aware of logistics influences on fixed and working capital for storage requirements, and transport costs of raw materials and products. A further priority is exploring the links between environmental and safety standards and economics, both in terms of costs incurred to improve performance and financial penalties resulting from failures.

Process economics courses can be taught effectively as a single course, or within larger design and/or management subjects. A balanced process economics course should include the four pillars identified in Figure 1 supplemented by related case examples and problems. Practice by students in tackling problems in the four pillars is a priority, and lays the foundation for further work within the wider task of the undergraduate design project.

A further challenge in education is to ensure an awareness of economic implications in specific areas of professional practice. These include for example:

• Evaluating technologies at research and development phase where priorities include the development stages and corresponding timeframes needed before commercialisation, and cost estimating and economic evaluation techniques appropriate at these stages.
• Analysing benefits and burdens of environmentally driven projects considering internal costs of managing emissions and wastes including monitoring, permit applications, fines, and future liabilities; external costs (externalities) of damage to the environment or wider society; function of economic instruments such as emission charges or tradeable permits; and choice of suitable sustainability indicators.
• Safety assessment, including financial implications of minor and major accidents; approaches to risk minimisation in design and operation; and links between insurance costs and perceived risks, derived from project details or previous operating performance.
• Understanding financial positions of companies derived from financial statements, outlining incoming and outgoing cash flows, extent of loan and equity funds, and implications for project financing.

Application of process economics within the traditional student design project

The student design project is a vital opportunity for students to apply the four pillars of economic evaluation, and appreciate the economic implications of project conception and design. The design project has specific advantages in that it both mirrors the scope and complexity of industrial projects and is tackled at the completion of undergraduate education, when student knowledge and maturity has peaked.

Applications of process economics within the design project include:

• market evaluation;
• technology evaluation, identifying capital and operating cost merits of alternatives;
• process synthesis, where cost considerations guide process flowsheet development;
• decisions in equipment selection and design; and
• cost estimates and profitability assessment of the developed process and plant design.

Where an up-front feasibility study is incorporated, economic considerations extend to feedstock source, site selection, and logistics.

Past design projects have potential value for teaching process economics by providing resources for setting class assignments, for example:

• a pool of equipment specifications and drawings useful as a basis for estimating purchased and installed equipment costs;
• cases and contexts for exploring operating cost and profitability assessments; and
• cases for evaluating uses, demands and selling prices for different products.

Conclusions

Process economics is an essential part of chemical engineering practice and should be adequately reflected in undergraduate education.

The curriculum should include market evaluation, capital and operating cost estimation, and profitability assessment. A thinking approach should be encouraged among students in linking engineering decisions with the capital and operating costs of process plants. An awareness of the extent of tasks and diversity of skills required to bring project concepts to fruition should be included within teaching objectives. Exposure to the wider roles of economic assessment in evaluating alternative technologies and projects, and integration with environmental, safety and sustainability assessments should also be pursued.

Working through problems in elements of the four pillars is essential for students to gain a basic understanding. This can then be fruitfully applied and expanded in the wider context of the design project at the conclusion of the undergraduate course.

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References

1. Gerrard, AM, Guide to Capital Cost Estimating, 4th edition, IChemE, ACostE, 2000.
2. Allen, DH, Economic Evaluation of Projects, 3rd edition,
IChemE, 1991.
3. Brennan, D, Process Industry Economics. Principles, Concepts and Applications, Second Edition, IChemE, Elsevier 2020.
4. Moilanen, T and Martin, C, Financial Evaluation of Environmental Investments, IChemE, 1996.