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October 20091 FUEL PRICE EVALUATION Comparing different fuel costs is a complex issue requiring an in-depth knowledge of fuel properties and characteristics,

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Presentation on theme: "October 20091 FUEL PRICE EVALUATION Comparing different fuel costs is a complex issue requiring an in-depth knowledge of fuel properties and characteristics,"— Presentation transcript:

1 October FUEL PRICE EVALUATION Comparing different fuel costs is a complex issue requiring an in-depth knowledge of fuel properties and characteristics, pricing mechanisms and the inclusion and value of intangible services.

2 October FUEL PRICE EVALUATION This presentation attempts to clarify the factors that need to be considered and then presents a model for determining these values to allow a more rigorous comparison to be made between alternatives.

3 October INTRODUCTION Fuel prices, and thus values, are difficult to compare as fuels differ in characteristics by having different: –Energy contents (gross & net) –Densities (liquid fuels) –Efficiencies (radiance) –Operating costs –Environmental costs –Other intangible benefits or liabilities

4 October INTRODUCTION The problem is then compounded by fuel prices being quoted in different units, such as: –Rands per ton –Cents per litre –Dollars per ton –Rands per GigaJoule –etc

5 October INTRODUCTION And then made more complicated by quoting prices that are linked to other prices such as: –BFP (Basic Fuel Price) –Durban Bunker (Platts 180) –Company list prices

6 October ENERGY Before any meaningful value comparison can be made between alternatives, all costs must be converted to an appropriate common standard unit. This unit is a Cost per Energy quantity This unit is a Cost per Energy quantity Where the cost is typically in Rands Where the cost is typically in Rands Energy is measured in Joules Energy is measured in Joules The standard unit for heating fuels is for convenience given as: Rands per GigaJoule (R/GJ) The standard unit for heating fuels is for convenience given as: Rands per GigaJoule (R/GJ)

7 October COST PER ENERGY UNIT In order to calculate the Rand/GigaJoule cost from any quoted price the following information is required: In order to calculate the Rand/GigaJoule cost from any quoted price the following information is required: The fuel oil gross and net calorific (energy) value (CV) in MJ/kg The fuel oil gross and net calorific (energy) value (CV) in MJ/kg The Fuel Oil density ( ) in kg/litre, if the price is quoted in cents per litre The Fuel Oil density ( ) in kg/litre, if the price is quoted in cents per litre Once this is known, a cost in Rand / GigaJoule can be calculated.

8 October RANDS/TON If the price is quoted in Rands/ton then the calculation is as follows: R/GJ = (R/t) / (MJ/kg)

9 October CENTS PER LITRE If the price is quoted in cents per litre then the calculation is as follows: If the price is quoted in cents per litre then the calculation is as follows: R/GJ = (c/lt x 10) / ( x CV)

10 October LINKED PRICES Prices are often linked to moving list prices and quoted on a given date. Prices are often linked to moving list prices and quoted on a given date. When comparing quotes all prices must be calculated using the same Base Date. When comparing quotes all prices must be calculated using the same Base Date. Using the same exchange rate if applicable Using the same exchange rate if applicable

11 October BEYOND THE BASIC PRICE When comparing different fuel oil quotes there are many more issues to consider beyond the basic fuel price, such as: –The efficiency of the fuel in the application –The quality cost of the fuel offered both in terms of energy loss from the presence of contaminants and the cost of wear and tear and down time –Operating cost, environmental cost and other intangible costs

12 October BEYOND THE BASIC PRICE Additional value offered by suppliers should be factored in, including: Additional value offered by suppliers should be factored in, including: –Reticulation equipment supplied –Maintenance –Spares provision –Waste removal –Inspection reporting –Consignment stock

13 October BEYOND THE BASIC PRICE If the contract period is for more than a year then the basic price needs to be corrected for any price escalations quoted. If the contract period is for more than a year then the basic price needs to be corrected for any price escalations quoted. A discounted cash flow calculation can be used to make the values comparable as follows: A discounted cash flow calculation can be used to make the values comparable as follows: P e = P b ((1-((1+e/12)^n)*(1+i/12)^-n)/(i/12-e/12)) Where P e = the escalated price, P b = the basic price, e = annual price escalation percentage, n = contract period in months, I = interest rate percentage (prime, cost of capital, investment rate)

14 October BEYOND THE BASIC PRICE Intangible Costs need to be quantified to allow for an objective comparison of suppliers. This may include: Intangible Costs need to be quantified to allow for an objective comparison of suppliers. This may include: –Capacity (financial, people, facilities) –Reliability (storage, logistics, track record) –Technical support (knowledge, personnel) –Stock control –Reactive (response to queries/requests) –Quality management systems –Environmental management systems

15 October SPECIALIST ACTIVITY All this adds up to a specialist activity requiring: –Knowledge of the application –Knowledge of fuel characteristics –An in-depth knowledge of fuel purchasing

16 October COMPARISON MODEL FFS has developed a fuel comparison model to perform these calculations FFS has developed a fuel comparison model to perform these calculations FFS offers this service to industry to facilitate better decision-making FFS offers this service to industry to facilitate better decision-making And to provide users with a true cost of their energy purchase And to provide users with a true cost of their energy purchase

17 October MODEL

18 October MODEL

19 October THE END FFS YOUR PREFERRED SUPPLIER


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