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Giselle Valdivia posted May 29, 2018 12:15 PM
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Cost drivers
In economics, direct costs and overhead costs are two divided components of entire cost. Examining these two individually can be helpful to show how much of the firm’s costs are tied to its production level, and how much are not. The energy industry is no exclusion. This energy company requires large sites, heavy equipment and skilled labor to manage the transportation of raw petroleum, seaward pipeline transportation of raw petroleum and for its refinery services, all of which will result in both direct and overhead costs.
The main direct costs that will be incurred are the upstream costs that will be used to transport the raw petroleum from its source to where it is being refined. Massive pipelines will be needed as well as massive storage tanks to store the petroleum. Skilled labor will also be needed in this. The cost of pipelines that will be required has been estimated as 23,000 million dollars. I came up with this cost by finding the average of the prices that are available in the market today. With an estimated volume of 922,700 liters of oil, the company will require massive storage tanks. I estimated a total of ten tanks each with a capacity of 100,000 liters. The cost of each tank was estimated to be 10,000 dollars and again the price was determined using the best offers in the market. The selected tanks prove to be the most durable, rust free, fire resistance, anticorrosive and have 15 years warranty. Production and refining will cost a total of 55,400 dollars. This was determined using the current market regulations. It is however important to note that this price can vary depending on the market regulations in the course of the project. Ten employees will be employed and their total earnings will be 432,000 dollars annually. This was calculated using the standard rate in the market for paying industrial workers. Every employee will be paid 14 dollars per hour and The overhead costs include water and electricity which were determined using the current rates and the estimated consumption by the company. When the employees are required to work over time they will be paid 16 dollars per hour. Petrochemicals will cost 6,500 dollars according to the market price and the quantity that will be required for this particular company.
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1. Crude and product pipelines. 23,000
1. Production. 32,400
1. Refining costs. 13,400
1. Other transportation. 2,500
1. Ten 100,000litres tanks 100,000
1. Employees(10) 432,000
Total 171,300
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Direct materials and labor
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Sometimes spot prices (the quoted price of oil that day) but more often is based on a fixed-rate production contract to reduce volatility. Higher oil/gas prices mean more revenue.
Midstream costs are driven by installation/repair/maintenance of pipelines and pumps, as well personnel. Revenue is linear with volume of oil/gas moved through the pipeline. Generally, higher oil consumption across the board increases profits.
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1. Overtime pay for employees 23,040
1. Water 1,200
1. Electricity 3,600
1. Petrochemicals 6,500
1. Miscellaneous 10,000
Total 44,340
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The total cost
The total costs incurred are 215,640 dollars and the anticipated sales are 990,000 dollars from sales of at least 900,000litres of oil refined. The cost of sale is 1.10 dollars per liter according to the current market price. Therefore, the gross profit will be 774,360 dollars.
References
Pedersen, Charlie. (2014). Noisøe: No Oil Imports from Sunni/Shiite Exporters. I Universe Inc.
Purich, D. L. (2010). Enzyme Kinetics: Catalysis & control: a reference to theory and best-practice methods. Amsterdam: Elsevier.
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CostDrivers.docx
