Sanctioning a Dew-Point Control Unit Under Price Uncertainty
A gas plant processes 180 MMscfd at 78 bar. Hydrocarbon dew point occasionally reaches +8 degrees C against a sales specification of -2 degrees C at 70 bar. The pipeline operator has issued two warnings and can curtail 20% of nominations. Option A is TEG dehydration plus a Joule-Thomson valve and cold separator: CAPEX $42 million, 1,200 bpd NGL recovery, OPEX $3.1 million per year. Option B is a turboexpander with a demethanizer: CAPEX $68 million, 1,850 bpd NGL recovery, OPEX $4.3 million per year. Both have a 15-year life. NGL netback is $48/bbl and the gas-sales penalty avoided is estimated at $2.4 million per year for both options. The discount rate is 12%. Option B needs a nine-day shutdown with $0.9 million of lost margin; Option A can be tied in during a planned three-day outage. Management requires payback under four years. NGL price has a 40% chance of falling to $32/bbl.
1. Calculate the incremental NPV and payback of Option B over Option A, and test the $32/bbl NGL case.
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Incremental NGL is 1,850 - 1,200 = 650 bpd. At $48/bbl that is $31,200/day, or $11.39 million per year. Incremental OPEX is $4.3 - $3.1 = $1.2 million per year, so incremental net cash flow is $10.19 million per year. The gas-penalty avoidance is common to both options and cancels in the incremental case.
Incremental CAPEX is $68 - $42 = $26 million, plus $0.9 million of shutdown margin, or $26.9 million. The 15-year annuity factor at 12% is (1 - 1.12^-15)/0.12 = 6.81. Incremental NPV = 10.19 x 6.81 - 26.9 = $42.5 million. Simple payback is 26 / 10.19 = 2.6 years, within the four-year rule.
At $32/bbl, incremental NGL revenue is 650 x 32 = $20,800/day, or $7.59 million per year. Net cash flow is $6.39 million per year, NPV = 6.39 x 6.81 - 26.9 = $16.6 million, and payback is 4.2 years. Option B remains value-positive but breaches the payback rule in that scenario. The 40% probability case is therefore a schedule and financing question, not a value-destruction question.
2. Management wants to apply the four-year payback rule mechanically. Advise the investment committee on whether to sanction Option B and what conditions to attach.
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Payback is a liquidity screen, not a value test. It ignores cash flow after the cut-off and the time value of money, and it penalises Option B for a larger upfront spend even though the incremental NPV is strongly positive in both price cases. The correct test is whether the project clears the 12% hurdle with margin under the downside, and it does: $16.6 million at $32/bbl.
Sanction Option B, subject to conditions. First, require a performance guarantee on dew point (-2 degrees C at 70 bar) and on NGL recovery, with liquidated damages. Second, fix the nine-day shutdown into a planned outage and confirm the $0.9 million estimate against lost nominations. Third, hedge or contract a floor for part of the NGL volume, or negotiate a tolling arrangement, to protect the downside case. Fourth, check whether the turboexpander can be phased so that the cold box is installed first. Do not choose Option A merely to satisfy a payback rule: it leaves less dew-point margin and less NGL upside, and the operator curtailment risk remains.