Chevron Overseas Petroleum, Inc. entered into a 1993 joint venture agreement with the Republic of Kazakhstan, a former republic of the old Soviet Union, to develop the huge Tengiz oil field. Unfortunately, the climate in the region is harsh making it difficult to keep oil flowing. The untreated oil comes out of the ground at 114? F. Even though the pipelines are insulated, as the oil gets further from the well on its way to be processed, hydrate salts begin to precipitate out of the liquid phase as the oil cools. These hydrate salts create a dangerous condition as they form plugs in the line. ,, ,,The method for preventing this trap pressure condition is to inject methanol (MeOH) into the oil stream. This keeps the oil flowing and prevents hydrate salts from precipitating out of the liquid phase. The present methanol loading and storage facility is a completely manual controlled system, with no fire protection and with a rapidly deteriorating tank that causes leaks. The scope of repairs and upgrades is extensive. The storage tanks are rusting and are leaking at the riveted joints. The manual level control system causes frequent tank overfills. There is no fire protection system as water is not available at this site. ,, ,,The present storage facility has bee in service for 5 years. Permit requirements require upgrades to achieve minimum acceptable Kazakhstan standards. Upgrades, in the amount of $104,000, will extend the life of the current facility to about 10 years. However, upgrades will not completely stop the leaks. The expected spill and leak losses will amount to $5,000 a year. The annual operating costs are expected to be $36,000.,, ,,As an alternative, a new methanol storage facility can be designed based on minimum, acceptable international oil industry practice. The new facility which would cost $325,000, would last about 12 years before a major upgrade would be required. However it is believed that oil transfer technology will be such that methanol will not be necessary in 10 years. The pipeline heating and insulation systems will make methanol storage and use systems obsolete. With a lower risk of leaks, spills, and evaporation loss of a more closely monitored-system, the expected annual operating cost would be $12,000.,, ,,a) Assume that the storage tanks (the new as well as the upgraded ones) will have no salvage values at the end of their useful lives (after considering the removal costs), and that the tanks will be depreciated by the straight-line method according to the Kazakhstanâ€™s tax law. If Chevronâ€™s interest rate is 20% for foreign projects, which option is a better choice?,,b) How would the decision change as you consider the risk of spills (clean-up costs) and evaporation of product related to environmental impact?,
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