Improving the Lifecycle Performance of Engineering Projects with Flexible Strategies: Example of On‐Shore LNG Production Design

Abstract

This paper presents an innovative flexibility analysis as a practical, effective procedure to improve the expected value of large-scale, capital-intensive projects when there is market uncertainty. Its novelty lies in its approach and scope. Its approach develops understanding of the drivers of the value of flexibility, so as to build acceptance among decision-makers. Its scope explicitly considers the combined effects of uncertainty, economies of scale, learning, and geographic distribution. It demonstrates how these factors combine to impact the benefits of flexibility in the early stages of design and project evaluation in the context of uncertainty. It makes this point through a specific example: the long-term deployment of liquefied natural gas (LNG) technology to supply the transportation market. It contrasts the base case fixed design (a big centralized production facility) with flexible modular designs that phase capacity additions over time and space. The proposed flexibility method compares design alternatives based on several indicators of economic lifecycle performance (Net Present Value (NPV), Initial Capex, etc.). Results indicate that flexible modular deployment strategies can significantly improve the economic performance of large, expensive projects. As sensitivity analyses show, the improvements can be significant over a wide range of analytical assumptions. An important insight is that higher learning rates increase the benefits of flexibility, counteracting the effects of economies of scale. Overall, the study shows that flexibility in engineering design of major production facilities such as LNG plants has multiple, supporting advantages due to uncertainty, learning, and location. C⃝ 2015 Wiley Periodicals, Inc. Syst Eng 18: 253-268, 2015

Engineering Options Analysis (EOA): Applications

“…11.1 Alternative design configurations of the LNG production and distribution system. Adapted from Cardin et al (2015) • Flexible strategy-timing: this strategy deploys capacity at the central site according to how demand does or does not grow over time (Fig. 11.1b).…”

“…Interested readers can find additional details in Ranjbar-Bourani (2015) and Cardin et al (2015). While these specific cost parameters are treated as fixed inputs in this study, an EOA analysis in general could just as easily treat any of these parameters, specifically including the discount rate, as uncertain variables with associated distributions.…”

“…11.2) when they determined the optimal size of the fixed design. The analysis presented here builds on this previous study by working with available market research at the collaborating Adapted from Cardin et al (2015) consultant firm to generate a broad range of possible variants of the base case fixed demand (gray lines on Fig. 11.2).…”

An Approach for Integrating Valuable Flexibility During Conceptual Design of Networks

“…When real options are embedded in the physical design of the network, they enable network developers to adapt the network in the face of uncertainty by utilizing the upside opportunities and minimizing the downside risks de Neufville and Scholtes 2011). Moreover, (Cardin et al 2015) real options analysis provides analytical tools to quantitatively assess the value of flexibility by allowing for objective evaluation of design concepts (de Neufville 2003). Therefore, unlike the robust design approach, which de-sensitizes design to future fluctuations and inherently encourages a reactive response, the flexible design approach is characterized by considering a wide range of possible future scenarios and by taking pro-active actions to mitigate and exploit uncertainty.…”

“…Therefore, unlike the robust design approach, which de-sensitizes design to future fluctuations and inherently encourages a reactive response, the flexible design approach is characterized by considering a wide range of possible future scenarios and by taking pro-active actions to mitigate and exploit uncertainty. There are several examples on applications of the flexible design approach in large-scale infrastructure systems (Babajide et al 2009;Buurman et al 2009;Deng et al 2013;Lin et al 2013;Cardin et al 2015), thus demonstrating that incorporating flexibility considerably improves life cycle performance of engineering systems.…”