JOHN FOORD ESTABLISHED 1828 International Valuers of Industrial Plant and Property
Petrochemical Valuations - Avoiding Under-Insurance
Graham Copland CEng MIMechE
Managing Director
JOHN FOORD ESTABLISHED 1828 International Valuers of Industrial Plant and Property
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Sums Insured
Key Issue :
Who is responsible for determining Your Sums insured?
Lack of insurance valuation knowledge
Concept of insuring assets at book value
In-frequent sums insured review
Under insurance only becomes and
issue after a loss
Difficulty in recovering after a substantial loss
JOHN FOORD ESTABLISHED 1828 International Valuers of Industrial Plant and Property
Why do Insurance Values Change?
JOHN FOORD ESTABLISHED 1828 International Valuers of Industrial Plant and Property
Why do Insurance Values Change?
JOHN FOORD ESTABLISHED 1828 International Valuers of Industrial Plant and Property
Why is there Under-Insurance?
• Businesses are unaware their insurance cover is inadequate
• Inaccurate valuations due to methodology used to assess Sums Insured, such as:
• Information from internal engineers
• Financial system generated asset list
• Elements not allowed for in the Sums Insured:
• Major loss inflation omitted
• Extra costs of reinstatement omitted
• Perceived affordability
POWER
GENERATION
Pre
JF
A JF
A
42%
JOHN FOORD ESTABLISHED 1828 International Valuers of Industrial Plant and Property
Site Layout Plan – Partial Loss Scenario
• Wrong split of values/plant identification – problems in partial loss
* Importance of correct plant identification and reporting by area
JOHN FOORD ESTABLISHED 1828 International Valuers of Industrial Plant and Property
Under Insurance/Application of Average:
Full value of the property at the time of the fire = US$1,000,000
Sums insured at the time of the fire were insured for = US$500,000
Partial loss sustained as agreed between
the Insured & Insurers = US$400,000
A Hypothetical Scenario…Average
JOHN FOORD ESTABLISHED 1828 International Valuers of Industrial Plant and Property
Average…Applied
JOHN FOORD ESTABLISHED 1828 International Valuers of Industrial Plant and Property
Case Study - Large Petrochemical Facility – Built In 2003
• Construction cost (2003) US$2B
• Depreciated Cost (book value) US$1.2B
• Replacement Cost US$2.7B
* Assuming no change in technology and it is a total rebuild
JOHN FOORD ESTABLISHED 1828 International Valuers of Industrial Plant and Property
Case Study - Typical Small 4 Leg Rig – Built In 2001
Difference in values:
• Construction cost (2001) US$ 70M
• Depreciated Cost (book value) US$ 40M
• Replacement Cost US$140M
* Assuming no change in technology and it is a total rebuild
JOHN FOORD ESTABLISHED 1828 International Valuers of Industrial Plant and Property
Case Study – Oil Refinery – Korea
• Replacement for New Valuation
• Refinery - Top 5 in world
• Client approached local valuation company
• Use of Asset Indices – wrong.
JOHN FOORD ESTABLISHED 1828 International Valuers of Industrial Plant and Property
Case Study – LNG – Different Years Of Construction
• Construction @ 1983
- 3 X 2,800,000 tpa trains
• Construction @ 1995
- 3 X 2,600,000 tpa trains
• Construction @ 2004
- 2 X 3,900,000 tpa trains
JOHN FOORD ESTABLISHED 1828 International Valuers of Industrial Plant and Property
Valuers Approach – Methodology & Research
JOHN FOORD ESTABLISHED 1828 International Valuers of Industrial Plant and Property
The Valuer’s Approach
• On Site Surveys Physically Inspecting the assets and estimating the
replacement cost on site – site values
• Calculations Calculations “build up” of value by functional units
• Market Research Making contact with the original contractors
• Benchmarking – Database Accessing research sources to review cost activities
for similar assets across the world
• Benchmarking International Making direct comparisons between the assets
being valued and previous similar assets
• Analysis of List Costs Cost Indexing/Computer Modeling
JOHN FOORD ESTABLISHED 1828 International Valuers of Industrial Plant and Property
Plant Cost Database – Example
AIR COMPRESSORS - CENTRIFUGAL (70 BAR)
DRIVE (HP) DRIVE (KW) PRESSURE (PSI) PRESSURE (BAR) BASIS OF COSTS 2009 REPLACEMENT COST
(US$)
COMPRESSOR & MOTOR
2009 REPLACEMENT COST
(US$)
PER KW
50 37 1,000 70 US GULF 44,064 1,182
100 75 1,000 70 US GULF 76,788 1,030
200 149 1,000 70 US GULF 133,596 896
300 224 1,000 70 US GULF 184,788 826
400 298 1,000 70 US GULF 232,632 780
500 373 1,000 70 US GULF 278,100 746
1,000 746 1,000 70 US GULF 484,272 649
2,000 1,491 1,000 70 US GULF 843,156 565
3,000 2,237 1,000 70 US GULF 1,166,184 521
4,000 2,983 1,000 70 US GULF 1,467,936 492
5,000 3,729 1,000 70 US GULF 1,754,892 471
6,000 4,474 1,000 70 US GULF 2,030,400 454
7,000 5,220 1,000 70 US GULF 2,296,944 440
8,000 5,966 1,000 70 US GULF 2,555,820 428
9,000 6,711 1,000 70 US GULF 2,808,432 418
10,000 7,457 1,000 70 US GULF 3,055,320 410
JOHN FOORD ESTABLISHED 1828 International Valuers of Industrial Plant and Property
Current Prices Of Equipment, Commodities & Construction
Material Due To World Demand
JOHN FOORD ESTABLISHED 1828 International Valuers of Industrial Plant and Property
Commodity & Construction Cost Tracking
0%
10%
20%
30%
40%
50%
60%
70%
Nelson Farrar Refinery Index
JOHN FOORD ESTABLISHED 1828 International Valuers of Industrial Plant and Property
Commodity & Construction Cost Tracking
JOHN FOORD ESTABLISHED 1828 International Valuers of Industrial Plant and Property
Costing
• Modular Section Material cost
• Weights
• On shore off shore costs
• Rig Configuration
• Installation costs
• Vessel costs
JOHN FOORD ESTABLISHED 1828 International Valuers of Industrial Plant and Property
To Summarise
• Regular review of sums insured
• Be informed about insurance coverage and how it works
• Ensure all elements are included in the replacement value
• Be aware of supply and demand - material, labour, construction costs vary with
demand
• Valuations – assist all parties in reducing time to settlement/contentious claims
• Regular “health checks” are important
JOHN FOORD ESTABLISHED 1828 International Valuers of Industrial Plant and Property
John Foord
• Beijing Office/ Representation
• Market Respect
• Experience Level – Valuers and Researchers
• Detailed and Factual Reports
• Independent
• Industry Specialist Recognition
• Support from the Lead Markets
JOHN FOORD ESTABLISHED 1828 International Valuers of Industrial Plant and Property
Thank You