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JOHN FOORDESTABLISHED 1828International Valuers of Industrial Plant and Property

Petrochemical Valuations - Avoiding Under-Insurance

Graham Copland CEng MIMechE

Managing Director

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JOHN FOORDESTABLISHED 1828International 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

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JOHN FOORDESTABLISHED 1828International Valuers of Industrial Plant and Property

Why do Insurance Values Change?

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JOHN FOORDESTABLISHED 1828International Valuers of Industrial Plant and Property

Why do Insurance Values Change?

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JOHN FOORDESTABLISHED 1828International 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

PreJFA J

FA

42%

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JOHN FOORDESTABLISHED 1828International Valuers of Industrial Plant and Property

Site Layout PlanPartial Loss Scenario

Wrong split of values/plant identificationproblems in partial loss

*Importance of correct plant identification and reporting by area

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JOHN FOORDESTABLISHED 1828International 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 betweenthe Insured & Insurers = US$400,000

A Hypothetical ScenarioAverage

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JOHN FOORDESTABLISHED 1828International Valuers of Industrial Plant and Property

AverageApplied

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JOHN FOORDESTABLISHED 1828International Valuers of Industrial Plant and Property

Case Study - Large Petrochemical FacilityBuilt 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

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JOHN FOORDESTABLISHED 1828International Valuers of Industrial Plant and Property

Case Study - Typical Small 4 Leg RigBuilt 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

http://upload.wikimedia.org/wikipedia/commons/a/a1/Oil_platform.jpeg

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JOHN FOORDESTABLISHED 1828International Valuers of Industrial Plant and Property

Case StudyOil RefineryKorea

Replacement for New Valuation Refinery - Top 5 in world Client approached local valuation company Use of Asset Indiceswrong.

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JOHN FOORDESTABLISHED 1828International Valuers of Industrial Plant and Property

Case StudyLNGDifferent 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

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JOHN FOORDESTABLISHED 1828International Valuers of Industrial Plant and Property

Valuers Approach Methodology & Research

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JOHN FOORDESTABLISHED 1828International Valuers of Industrial Plant and Property

The Valuers Approach

On Site Surveys Physically Inspecting the assets and estimating thereplacement cost on sitesite 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 activitiesfor similar assets across the world

Benchmarking International Making direct comparisons between the assetsbeing valued and previous similar assets

Analysis of List Costs Cost Indexing/Computer Modeling

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JOHN FOORDESTABLISHED 1828International Valuers of Industrial Plant and Property

Current Prices Of Equipment, Commodities & ConstructionMaterial Due To World Demand

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JOHN FOORDESTABLISHED 1828International Valuers of Industrial Plant and Property

Commodity & Construction Cost Tracking

0%

10%

20%

30%

40%

50%

60%

70%

Nelson Farrar Refinery Index

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JOHN FOORDESTABLISHED 1828International Valuers of Industrial Plant and Property

Commodity & Construction Cost Tracking

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JOHN FOORDESTABLISHED 1828International Valuers of Industrial Plant and Property

Costing

Modular Section Material cost

Weights

On shore off shore costs

Rig Configuration Installation costs

Vessel costs

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JOHN FOORDESTABLISHED 1828International 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 withdemand

Valuationsassist all parties in reducing time to settlement/contentious claims

Regular health checks are important

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JOHN FOORDESTABLISHED 1828International Valuers of Industrial Plant and Property

John Foord

Beijing Office/ Representation

Market Respect

Experience LevelValuers and Researchers

Detailed and Factual Reports Independent

Industry Specialist Recognition

Support from the Lead Markets

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JOHN FOORDESTABLISHED 1828International Valuers of Industrial Plant and Property

Thank You