Financing Bioeconomy Ventures, Pt. 7 – Engineering Design Assessment: Front-End Engineering Design and Loading Evaluation

By Bernard Cooker, John Diecker, and Daniel Lane, Lee Enterprises Consulting

Special to The Digest

This article is the seventh in a series on the information needed by a Capital Investor, received from the Project Developer (PD), for the Capital Investor to make an informed biotechnology investment. Refs. 1 through 6 are to previous articles in the series. The target audiences are biotechnological capital investors, including venture capitalists, banks, equity investors and individuals. Investors are increasingly requested to commit funds earlier in projects, so engineers are pressured to make more accurate predictions of performance and cost. Front-end engineering design (FEED) and front-end loading (FEL) help this process by formalizing the development process in stages, each with its own work product. This article outlines project development, design and process financial assessment principles and the associated documentation which the Capital Investor should expect from the PD. While references are made to biochemical manufacturing facilities, the evaluation process is essentially the same for biomass power projects and other types of processes.

The critical need for this discipline is well illustrated by LEC consultant Zoltan Kish, who knows of a case where a lapse in due diligence resulted in project failure. Ignoring a consultant’s advice to the contrary, the Project Developer (PD) used inappropriate processing conditions and an incorrect mass/energy balance in their process implementation. After significant, multiple rounds of investment, the project collapsed: the cause could be traced to use of incorrect technical data. In addition to financial information, the underlying scientific/technology base of the business should be considered. Science should be an essential pillar of the company: the PD obtaining the appropriate information on the underlying science and technology is essential for the Capital Investor to make an informed decision to save money and time, and drive the project to profitability for the Capital Investor.

2. Project Scope

The Capital Investor’s goal is sufficiently profitable investment in a project with minimized costs, which is safe, operable and reliable. The PD’s written Project Scope should include:

2.1 Product Identity and Composition. High value-added products, driven by the product properties, maximizing profitability, are particularly desirable. Examples include monomers, advanced materials, surfactants and drug intermediates. This is subject to the market size, product price and the product composition. The PD should document whether he is substituting a better alternative for an existing product or innovating a new one. The PD should inform the Capital Investor how the product is superior to any existing competition in performance, price or other ways. The PD should clarify whether the Capital Investor’s investment develops a process for licensing and sale or finances commercial product manufacturing.

2.2 Plant Capacity. The goal of commercial operation may be reached through one of the following routes:
1.  Advancing from the laboratory directly to commercial scale. However, we do not recommend this under any circumstances, since scale up reveals new obstacles which must be addressed.
2. Advancing to commercial scale from the laboratory via an intermediate scale, namely a pilot plant. The pilot plant can be purpose-built or adapted in-house or an outside toller employed. However, one scale-up of the process is very seldom sufficient.
3. Advancing to commercial scale from the laboratory via various intermediate scales, where capacity is increased about a magnitude at each step. This is the much preferred route.
4. Retrofitting or expanding an existing commercial operation. Here also, piloting should be very seriously considered, to address the scale up issues from the new process.

Advancing directly to commercial scale nominally reduces the capital required. However, with developing technology, the risk of unexpected obstacles and costs is very high indeed. Option 3, our much preferred route, has significant advantages: 1. Scale up at smaller, less financially risky, scale ratios. 2. It yields a pilot product supply for potential customers. 3. Demonstration of the process pilot plant equipment resembling commercial operation. The process equipment capital cost is a fractional power of its capacity and the equipment capital cost per unit of production falls with scale. The PD should disclose the smallest plant capacity making profit at the Capital Investor’s target percentage rate of return on capital. See Section 6.5. The commercial plant capacity and economics should be projected as early as feasible, even before the pilot plant stage. The PD should consider the product sales estimate and market development review in Section 2.1 in determining the capacity.

2.3 Raw Materials. The PD should document sufficient raw material supplies relative to planned production capacity, identifying specific sources and accounting for biomass seasonal sourcing. The costs of raw material transport to the plant and interim storage must be included. The PD should also consider raw material composition and the reliability of imported supplies.

2.4 Commercial Plant Location. The site choice directly affects the process costs. Biomass supplies are regional: the plant should be centered in their supply area. The PD must review the site utility costs, including water rights, sources and treatment options, other required resources, taxes and the impacts of government on costs, including permitting, licensing, regulation and insurance. See ref. 7. The site choice issues include “green field” plant, on undeveloped land, versus an established manufacturing site. Existing plant might be retrofitted and/or expanded. The PD’s detailed transportation evaluation should check feasibility and determine the added costs. The PD should document the site labor force potential and costs, from operational to managerial personnel. See ref. 8.

2.5 Operating Days Per Year. Equipment deteriorates and annual maintenance must be planned. Plants or sections are idled or reduced in rate for essential repairs. For advanced technology operations, the on stream factor is normally 90% or less in year 1. The PD should develop a detailed plan for the shut downs, identifying the needed repairs and including spare parts procurement and costs. Spare parts should be an early part of the techno-economic assessment and major spares should be identified individually. Spares should be in the initial project cost and not treated as later expense.

3. Project Design Criteria Evaluation

3.1 Scale Up. Commercialization sufficiently profitable for the Capital Investor is on a scale orders of magnitude larger than the original laboratory experiments and benefits substantially from economies of scale. The PD and Capital Investor should be cautious regarding the scale up ratios from laboratory to pilot plant and thence to the commercial scale. Chemical and physical processing steps should be designed to minimize cost, complexity and development time. The number and relative magnitude of recycle streams should be minimized: they can disable the process through byproduct accumulation. The PD should also show the Capital Investor that these project design criteria have been addressed: site flood risk, site climate, including temperature and maximum wind speeds, and proximity to residential populations. A geotechnical survey is a requirement, which should be performed by a third party and the final report issued as an addendum to the PD’s package. Additionally, design for operations and maintenance should be considered, including operability, equipment access, hazard analysis and installed equipment duplication.

3.2 Process Uncertainties and Risk. The PD should identify the project technical hurdles, especially high risk elements, “show stoppers” and knowledge gaps, and have a plan to overcome them. Process Flow Diagram (PFD) preparation forces the PD to document and address what is reasonably estimated and what is unknown, reducing project risk. A new process, even in existing, repurposed commercial equipment, still has all the risks of the new process.

3.3 Safety Hazard Assessment. The PD should indicate a future plan for formal, systematic safety reviews, such as Hazard and Operability Reviews, yielding the reduction, mitigation and control of the hazards, as part of the design.

3.4 Environmental and Community Impact. The PD should prepare a thorough review of the potential project impacts on the environment and the local community, with plans for mitigation of adverse effects. The Capital Investor must have confidence that there are no environmental issues, real or perceived, that could prevent or delay project implementation.

1. Process Design Documentation: Flow Diagrams

Every process step occurs under specific conditions, in equipment designed for the step. The three diagram types are: BFDs – Block Flow Diagrams, PFDs – Process Flow Diagrams and PIDs – Piping and Instrumentation Diagrams. The PFDs permit estimation of the commercial scale project economics. See ref. 9.

4.1 Block Flow Diagrams (BFDs). The PD’s BFDs show the process steps as blocks, connected by feed and exit streams. The process purpose identifies the equipment type in each block: no mechanical or utility information is displayed. Key process parameters are shown, including temperature, pressure and flow rates. See ref. 10 for an example. The BFD includes all process flow lines, from left to right, whenever feasible, and crucial material balance elements.

4.2 Process Flow Diagrams (PFDs). The completed PFDs contain enough process design and equipment information to prepare the cost estimates and process economics. Typical PFDs contain:

• All process equipment, as icons, uniquely numbered (ideally using KKS or a similar system), with a descriptive name.
• The equipment numbers and names along the top of the PFD.
• The Equipment Summary, providing the detailed design and information for the capital cost estimate basis, in a separate table.
• All process flow streams, identified by numbers, with their process conditions and compositions, displayed on the PFD or in an accompanying Flow Summary Table.
• All utility streams, except electrical supplies.
• Basic control loops, showing the essential control strategy.

2. Estimated Process Economics

The PD must compute approximate project economics as early as possible, determining if the sales revenue equals the costs plus the Capital Investor’s required profit. Commercial economics include the installed equipment capital cost, raw materials costs, utilities, other consumables, depreciation and the rate of return on capital. The first process economics, with completed PFDs, probably has +/- 30 to 50% accuracy. See ref. 11. This is significant uncertainty but if the required product price is twice the market price, just to cover manufacturing costs, the process is uneconomic.

5.1 Capital Cost Estimation. The process economics estimate starts with the capital cost. The required information is in the PFDs and ancillaries. See Section 4.2.

5.2 Capital Cost Estimate: Type and Accuracy. Capital cost estimate accuracy depends on the degree of project definition. See ref. 11. The Class 4 Major Equipment Estimate, recommended for preliminary economics, is typically in the -30% to +45% range of accuracy. The PD determines individual equipment costs via: 1. Current equipment vendor price quotations. 2. Previously purchased equipment costs, corrected for capacity and time. 3. Databases, adjusted for capacity and time. See ref. 12. Method 1 is the most accurate and recommended.

5.3 Total Installed Plant Capital Cost Estimate. Ref. 13 gives the contributions to the total capital cost, including a process uncertainty contingency. The Lang Factor technique for the total installed plant capital cost can be employed for early economic estimates. The installed plant cost is the equipment purchase cost multiplied by a factor, K, of 3.10 to 4.74, depending on the phase nature of the process streams.

5.4 Depreciation of Capital Investment. The process plant, including utilities, and associated structures have finite lives, decreasing in value over time. The terminal plant value is the scrap value. The capital depreciation is the original capital investment minus the scrap value. The depreciation is charged over multiple years, which may be less than the actual life of the plant, as an operating expense. See ref. 14.

5.5 Estimated Operating Costs. The operating costs are for daily plant operation. They must be estimated for the process economics. The process information in the PFDs and ancillaries is required, with the total installed plant cost and the estimate of the number of operators. The operating costs are the sum of: direct manufacturing costs (varying with the production rate), fixed manufacturing costs (independent of the production rate) and general expenses (corporate overhead). The total operating cost is obtained from:

1. Fixed capital investment, FCI, the installed capital cost of the plant. Section 5.3.
2. Operating labor cost.
3. Utilities cost, from the PFDs and unit costs.
4. Waste treatment cost, from the PFDs and unit cost.
5. Raw materials cost, from the PFDs and unit costs.

All other operating costs, listed in ref. 15, are computed from these five costs.

6. Economic Analysis, Cash Flow, Rate of Return on Investment

• The PD has computed all the cash flows to and from the project: capital investments, scrap value, depreciation, operating costs and sales revenue. The Capital Investor and PD must determine how much profit is generated, whether it meets the Capital Investor’s profitability target and compare it with alternative investments. This invokes the concepts of cumulative cash flow and the time value of money.

6.2 Project Cash Flows. The initial capital investment, later expenditures and revenue occur at various times. These money flows should be shown in a Cash Flow Diagram (CFD). See ref. 16. The vertical axis shows money flows to and from the project and the horizontal axis is time, over the plant life. The Cumulative CFD shows the cumulative cash flow sum. This is an excellent opportunity for the PD to quantify the project’s long term net positive cash flow for the Capital Investor.

6.3 Time Value of Money: Discounting. When comparing capital investments at different times, not simultaneous with the revenue, timing must be considered. Calculation of an investment’s future value uses compound interest. An investment P over n years at an interest rate i gives a future value, F = P(1 + i)ⁿ and P invested now to accrue future value F is P = F/(1 + i)ⁿ.

6.4 Discounted Cash Flow.

Every cash flow in the Cumulative CFD is discounted or brought back to the end of year 1, each Discrete Cash Flow (DCF), being adjusted via the interest rate, i and the elapsed time, k: DCF_adjusted = DCF/(1 + i)^k.

6.5 Discounted Profitability Criterion. The profitability analysis is based on the Discounted Cumulative Cash Flow Diagram (DCCFD). See Sections 6.2 to 6.4. The Discounted Cash Flow Rate of Return (DCFROR) is the interest rate at which all the cash flows must be discounted for the net present value to be zero at the project termination. See ref. 17. The DCFROR is the highest interest or discount rate at which the project breaks even. Higher DCFRORs indicate higher profitability.

7. Conclusions

The Capital Investor should now know what documented information to expect from the Project Developer for his informed assessment of the proposed investment. This article has outlined the usual design and financial analysis steps, consisting of 1. Introduction, 2. Project Scope, defining the key major project factors, 3. Project Design Criteria Evaluation, reviewing the technological design principals, 4. Process Design Documentation: Flow Diagrams, showing the central role of the drawings, the PFDs being the basis for the project costing, 5. Estimated Process Economics, summarizing cost estimation, and 6. Economic Analysis, Cash Flow, Rate of Return on Investment, using the cost information from Section 5 to chart the project cash flows over time, yielding the cumulative cash flow chart. The financial rate of return on the invested capital is computed from the cumulative cash flow chart via discounting, giving the Capital Investor an estimated quantitative measure of the proposed project profitability.

References:

1. “Financing Bioeconomy Ventures: Series Introduction”, W. Lee, Biofuels Digest, (2017)
2. “Initial Project Assessment: The Proforma Analysis”, G. Kutney, Biofuels Digest, (2017)
3. “Initial Project Assessment: Business Plan Analysis”, G. Kutney et al, Biofuels Digest, (2017)
4. “Competitive Technology and Market Assessment: Competition and Strategy Analysis”, L. Bauer et al, Biofuels Digest, (2017)
5. “Competitive Technology and Market Assessment: IP and Patent Analysis”, T. Mazanec et al, Biofuels Digest, (2017)
6. “Pilot Site Assessment”, L. Bauer et al, Biofuels Digest, (2017)
7. “Analysis, Synthesis and Design of Chemical Processes”, 3^rd, R. Turton et al, Prentice Hall, (2009), p. 222 – 223
8. ibid, p. 226
9. ibid, p. 5
10. ibid, p. 8 – 10
11. ibid, p. 178 – 180
12. ibid, p. 182
13. ibid, p. 189 – 192
14. “How to Depreciate Property”, Publication 946, Internal Revenue Service, Department of the Treasury, (2017)
15. “Analysis, Synthesis and Design of Chemical Processes”, 3^rd, R. Turton et al, Prentice Hall, (2009), p. 221 – 224
16. ibid, p. 266 – 269
17. ibid, p. 302 – 306

 

About the Authors

Bernard Cooker, Ph.D , a member of Lee Enterprises Consulting, has 37 years in industrial process R&D, design and scale up. Most recently, Bernard worked for two start-ups in lignocellulosic biomass deconstruction and p-xylene synthesis from cellulose. Previously, he gained wide experience in applied powder mechanics, polymer and monomer synthesis and recovery, development of new propylene oxide processes and catalyst development, testing and manufacture. He also improved the yield of the commercialized PO/TBA epoxidation process. He is an inventor on two biotechnology process patent applications and 20 issued U.S. patents. He has 47 publications in all.

John Diecker has 38 years’ experience in the electric power generation and transmission industry with over three decades of that experience in Southeast Asia. A member of Lee Enterprises Consulting, John has served as a technical, project management and project development consultant to power project owners, developers and contractors, including governments, state-owned enterprises, financial institutions and insurance firms. He has been involved in many types of renewable energy projects and his experience with biomass includes virtually all stages of project development from site selection, engineering, feasibility studies, fuel availability studies, environmental and community impact review, licensing, permitting and construction supervision through operations & maintenance.

Daniel Lane, Ph.D., a member of Lee Enterprises Consulting, has 20 years’ experience in process & technology development in fields including consumer products, specialty chemicals, and renewable fuels and chemicals. He has held executive and senior leadership roles with multiple start-up companies in the renewables industry focusing on biomass conversion and scale-up of technology and processes, including the design and construction of seven pilot- and demonstration-scale facilities around the world, producing first- and second-generation ethanol, cellulosic sugars, and bio-based animal feeds from a variety of lignocellulosic feedstocks. Dr. Lane spent the first half of his career in process engineering and project management, commercializing technology with such companies as Procter & Gamble and Degussa. With his proficiency in process simulation and technoeconomic modeling, he is a recognized expert in technical assessment for both private and government funding sources and has helped companies secure over $170MM in financing.