Project Management in the Oil and Gas Industry

Table 2.1 Financial life time.
5 year life
Automobiles
Trucks
Drilling equipment
Computer
10 year life
Crude oil refining equipment
15 year life
Transmission pipeline and equipment
31.5 year life
Buildings

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Project Economic Analysis 45
2.2.1.2 Declining-Balance 
Method
D
sv
c
t
1
1
4
.
 
(2.2)
Depreciation rate per year
1
10000
50000
1
5
.
2.2.1.3 Sum-of-the-Year-Digits
 
D
t
= (y/SYD)(C–SV),
(2.3)
where Y equals the number of years remaining in depreciation and SYD 
equals the sum of the year digits.
Table 2.3 Declining–balance method.
Book value at the end 
of the year
Depreciation value 
per year
Year
50000
0
35000
50000 × 0.3 = 15000
1
24500
35000 × 0.3 = 10500
2
17150
24500 × 0.3 = 7350
3
12000
17150 × 0.3 = 5150
4
8400
12000 × 0.3 = 3600
5
Table 2.2 Straight-line method.
Book value at the end 
of the year 
Depreciation value 
per year
Year
50000
8000
0
42000
8000
1
34000
8000
2
26000
8000
3
18000
8000
4
10000
8000
5

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46 Project Management in the Oil and Gas Industry
2.2.1.4 Sinking-Fund 
Method
 
D
t
= (C–SV) F
(2.4)
where F equals the factor for many values at five years for an interest rate 
assuming seven percent.
First year = (50000 – 10000)(0.1774) = 7069.
Second Year = 7096 + 0.06(7096) = 7521.8.
2.2.1.5 Service-Out 
Method
This method depends on the time period in which the equipment 
operates, for example, drilling equipment or digging tunnels where the 
rate of depreciation is associated with use. Assume that the cost of the 
equipment is around $12,0000 and the value of the equipment when sold 
at the end of the project, which is at the dig about 15,0000 meters, is 
$6000. In this case, we calculate the depreciation rate from the following 
equation:
Depreciation rate = (120000–6000)/150000 = 0.76 $/m.