1

Risk Mitigation for the Failure of Digester Blow Valve in Pulp

and Paper Sector using Long term Contracts

Author: Abhishek Bhadra

Company: GENPACT

Mentor N Murali, GENPACT

Jayashree Thiyagarajan, GENPACT

2

Table of Contents

Abstract_______________________________________________________________ 3

Dynamics of the Global Pulp and Paper Market ______________________________ 4

Indian Market Scenario__________________________________________________ 5

The Process ___________________________________________________________ 6

Right Valve for the right application________________________________________ 8

Main Areas of Failure ___________________________________________________ 8

MTBF (Mean Time between Failure)_______________________________________ 9 Buyer’s Perspective _________________________________________________________ 9 Seller’s Perspective ________________________________________________________ 10

Risk Mitigation________________________________________________________ 10 Structure _________________________________________________________________ 10 Salient Terms _____________________________________________________________ 11

Case Study ___________________________________________________________ 11

Risk Minimizing Initiatives ______________________________________________ 12

3

Abstract

Twenty four hours per day, day after day, week after week, month after month, continuously work with corrosive and erosive fluids under high pressure and at high temperatures. Splashing of pulp and alkaline fluids, vibrations created by refiners and pumps, pressure shocks, crystallization and scaling, impurities such as sand and metal wires. It is under these conditions valves installed in the pulp and paper industry work and it should work properly as a failure will cause tremendous costs. In spite of all the technical precautions, failures do happen in the valves which are the integral part of the pulping process. In the following chapters we’ll try and identify the various causes which results in failures and the area in the pulping process which is most adversely affected by the control valve failures. We’ll try and follow a data driven as well as realistic approach in order to identify the root cause. We’ll also try and formulate a Risk Mitigation strategy for the failures using long term contract solution. During my stint as a Product Manager for one of the leading control valve manufacturer I had observed that the digester blow valve had been the centre of all kinds of debates between the manufacturer and the buyer. The situation normally ended up as a no win situation for both the parties. The pulp production lost money because of the failure and the manufacturer lost money and customer satisfaction. Using the solution of Long term service contracts and simple risk mitigation strategies, we’ll try and come up with a win-win situation for both the parties. We’ll begin the paper by briefly describing the size of the pulp and paper market in India and the world. We’ll also discuss the pulp and paper process and the criticality of the control valves in the smooth functioning of the production.

4

Then finally we’ll move on to the long term deal structure that would be suitable for both the buyer and seller. We’ll discuss the risks involved in such a deal structure and the various mitigation strategies.

Dynamics of the Global Pulp and Paper Market “Almost a billion new consumers will enter the global marketplace in the next decade as economic growth in emerging markets pushes them beyond the threshold level of USD 5,000 in annual household income – a point where people generally begin to spend on discretionary goods” McKinsey The World is changing fast and the consumer landscape is changing faster. There’s deregulation everywhere and previously unexplored markets are opening up. This brings increased competition and eventually results in the manufacturing moving to the low cost regions. The Rapid Economic Growth in the developing markets like India and China acts as a catalyst to the changing landscape.

There’s restructuring in the old world. For example North America is downsizing and adjusting to maturing domestic market. Western Europe is upgrading with new capacity and closing the old ones in order to reduce over capacity. There’s rapid expansion in the emerging markets. Capacity is increasing ahead of domestic demand growth. The pulp production is slowly shifting southwards. There’s trend which shows that more and more high cost mills are closing down in the northern hemisphere. Where as there’s rapid expansion and organic growth in Latin America and Asia. The fiber deficit in Asia has contributed to the increasing trade flows between the continents.

5

Indian Market Scenario Although per capita paper consumption in India is very low compared to other countries the paper industry holds a considerable share in manufacturing production. Today more than 380 small and big paper mills produce a variety of different paper, paperboard as well as newsprint products. Cultural paper constitutes the biggest share in production with 41% (in 1991), followed by Kraft-paper with a share of 27%, paperboard with 17%, newsprint with 12% and specialty paper at 3% (Sharma et al., 1998). Installed production capacity increased substantially from 0.77 million tonnes in 1970-71 to 3.95 million tonnes in 1994-95. Production, however, has not increased accordingly. While in 1970-71 production ran at almost full capacity, in 1994-95, only 2.51 million tonnes of paper and paper board were produced. Capacity utilization had decreased from 99% in 1970-71 to a low of 60% in 1992-93 and slightly increased again to 64% in 1994-95 Number of Paper Mills, Production and Capacity

6

Size, type and quality of the paper producing units are very diverse. As of 1995, more than 50% of paper and paper board products were produced in only 38 paper mills. The average size of a paper mill in India was 10,400 tonnes per annum (TPA), compared with 85,000 TPA in Asia and about 300,000 TPA in Europe and North America. About two thirds of India’s paper mills have a capacity of less than 18,000 TPA (Meadows, 1997). Large mills are defined as mills with an installed capacity exceeding 20,000 TPA. Medium size mills have a capacity between 10,000 TPA and 20,000 TPA while small mills are defined as mills with a capacity of less than 10,000 TPA. According to this definition, only 48 large mills holding a share of 52% of total capacity were counted in India in 1990. The range of size within this category varied considerably, between 20,000 TPA and more than 100,000 TPA. Large mills account for nearly 90% of the cultural paper production. Demand for paper and paper products has continuously been increasing over time. Consumption of paper and paper board equaled 1.2 million tonnes in 1980-81 and increased to 2.6 million tonnes in 1994-95. This trend is expected to be maintained in the future.

The Process

Chemical pulping is dominated by two processes the sulphate process and the sulphite process. Each process is designed to produce pulp with specific characteristics. In sulphate pulping the cooking liquor is alkaline it has a high pH. The active chemicals are sodium hydroxide and sodium sulphide. The process is named after sodium sulphate, which is used to replace losses of sodium and sulphate.

7

Cooking: The cooking processes for sulphate and sulphite are basically the same. In both cases the chips are impregnated with cooking liquor, heated under pressure to 130-170 °C and held at that temperature for some time. Then the pressure and consequently the temperature are lowered and the pulp are blown or washed out of the digester. There are two main types of process equipment for cooking - the batch digester and the continuous digester. In the batch digester chips and cooking liquor are filled and the contents are heated under pressure according to a specified temperature-time programme. By the end of the programme the digester is emptied - blown – to the blow tank. In the continuous digester steamed chips and liquor are filled in an even continuous flow into the pressurized digester. The contents is heated up by various circulation systems as it moves downwards. The cooked and partly washed pulp is fed out of the bottom in a uniform flow. The spent cooking liquor (black liquor) is separated by screens around the digester. The liquor is directed to the flash tanks where the pressure is decreased below the vapor pressure. The generated steam is used for steaming of the chips and the black liquor goes to the evaporation. The cooking process for both types of digesters is basically the same. Each type has its advantages, but most new cooking plants world wide are built with continuous digesters. The next steps in the pulping process are:

1. Washing: The washing process aims at separating the black liquor from the fibers as efficient as possible with a minimum of dilution of the liquor.

2. Screening: Screening systems takes away knots – whether knots or just poorly impregnated chips – and shaves - poorly disintegrated fiber aggregates and fiber bundles.

3. Bleaching: In the bleaching plant the pulp is treated in several stages with chemicals containing chlorine oxygen and peroxide.

4. Evaporation: The evaporation process increases the dryness of the pulp from 15% to 60%. To make it combustible.

5. Recovery: The thick liquor from the evaporation plant is burnt in the recovery boiler to generate steam and recover cooking chemicals.

8

Right Valve for the right application

The author with a set of full bore ball valves The 3D cross section of a full bore ball valve The blow valve controls the level in the digester. It works under very hard flow conditions. The pressure drop can be up to 22 bars at a temperature of 160-180 °C. The pulp contains knots, stones, etc, which wear-out the valves fast (6-30 months). Ball valves with cylindrical bore and locked stellite seat rings are used. Stellited outlet or ceramic sleeves can prolong the life-time.

Main Areas of Failure

Pareto

0102030405060708090

DigesterBlow Valve

switchingvalves

MP Steamfeed

Flash tank level0

0.2

0.4

0.6

0.8

1

1.2

Frequency Cum %

It has been observed that because of the extreme conditions the digester blow valve had been the most important cause of stoppage in production.

9

MTBF (Mean Time between Failure)

months

0

5

10

15

20

V1 V2 V3 V4 V5 V6 V7 V8 V9 V10 V11

months

The data shows the MTBF of a sample of 11 full bore ball valves. On an average it has been observed that the failure happens between the 5th month and the 10th month of commissioning. Normally valve vendor is supposed to provide a PBG (Performance Bank Guarantee) which is valid for 12 months from commissioning or 18 months from shipping (whichever is earlier). The failure between the 5th and the 10th month leaves the vendor low and dry. Most of the time, because of irregular checking the failure gets detected real late when the only solution left is replacing the ball (the most expensive spare parts) or replacing entire valve. If the vendor does not take mitigating actions the PBG is encashed by the buyer, which normally equals to 20% of the entire deal amount. The buyer loses valuable production time which results in high revenue leakage and opportunity costs. Hence it’s a no-win situation for both the buyer and the seller which normally results in a bottleneck or courtroom drama!!

Buyer’s Perspective

Production Loss High Opportunity cost Revenue Leakage Losses due to raw material pile up.

10

Seller’s Perspective

Replacement Cost Spare Parts Cost Opportunity Cost Untimely encashment of PBG resulting in revenue leakage Dip in customer satisfaction index

Risk Mitigation The only way to arrive at a Win-Win situation for both the buyer and the seller is having a long term customized service agreement. The salient points of a CSA contract are:

Predictable cash flow for the seller Risk Transferred to the seller for the failures. Technology upgrades at lower costs. Responsibility of the seller to have a dedicated customer support team Increased productivity for the buyer. Protection against market fluctuation Predictable work-scope for the seller Higher margins for the seller in long term

Structure The CSA is a long term contract covering equipment maintenance which includes material and repair. The deal structure could be made as per the requirement of the buyer.

The simple predictable monthly billings would be = Rate($/Valve operating Hrs) * monthly valve operating hours.

The severity factors to be used for calculating monthly revenue for different valves could be based out of the different parameters used for selecting the right valve 1. Medium (Taking water at 20 Degree C and density 1 gm/cc as the base the

severity could increase or decrease with the alkalinity or acidity of the medium)

2. Average flow of the liquid (The severity should increase with increase in the flow volume)

3. Pressure rating of the valve(higher the pressure rating, higher the severity) 4. dP or the differential pressure across the valve(Higher the pressure drop

higher the severity) 5. Finally the Cv/Kv or the capacity of the valve should also be taken into

consideration for the severity calculation.

11

The cost to the seller would be the cost of the maintenance shop visits. More the number of shop visits, lesser would be the margin of seller.

The higher number of shop visits and hence higher cost for the high risk (with high severity factors) critical application valves would be offset by the low risk less critical valves.

There will be yearly escalation of the $/Valve operating hrs rate based on the macro economic factors and the agreed upon global indices.

A Contract Margin review would be performed by the seller on a yearly basis in order to understand the profitability of the contract.

Salient Terms

Booked Sales: Sales $ based on cost incurred and estimated OM% at completion Calculated as ((Cost/(1-OM Rate))

Billed Sales: Sales $ billed or collected Deferred Balance: Booked Sales-Billed Sales OM is based on “at completion” sales minus cost There is only one OM Rate on the contract at any point in time. Deferred balance should be zero at the end of the contract

Case Study Assumptions:

Three years have passed since 2004, the year the contract was signed. The valves are operating pretty close to expectations with 20 valves, 4900 hours

per year There had been 25 shop visits with average cost of $1450 /Shop Visit

Till Date Cost $ 36, 250 (25 *1450) CTD Revenue (0.13$/hr) $40,801 (estimated OM at completion is 11.2% hence Revenue= Till date Cost/(1-OM%) Till Date Billing $38,220 (20 valves*4900Hrs*$0.13/hr*3yrs) OM% 11.2% (Current “at completion OM%) Booked OM $4,551 (Till date revenue-Till date cost) Deferred Balance $2,581 (Revenue-Billings) Conclusion: If the contract ended today the business would have to write off $2,581 of OM. At the end of the contract the deferred balance should always be zero.

12

Risk Minimizing Initiatives There are various steps which valve vendor can take at the design phase of the deal in order to minimize risk and increase the MTBF.

Avoid over sizing of the pumps. Increase the pressure level by moving the valve closer to the pump and/or place the valve on a lower level.

Select a larger valve which will be working with a smaller opening angle e.g. better pressure recovery factor (FL).

Select a valve with better pressure recovery factor (FL) Use two valves in serial. Use fixed restrictions, preferably after the valve. Use valves with Stellited outlet or ceramics.

The cavitation test bed for testing the control valves