(57k) Risk Based Decision Making Methods for Evaluating Complex Technologies, a Comparative Analysis on Pipelines and Railroad for Crude Oil Transport

Decision making for long-term capital intensive projects involve large number of uncertainties. Traditional risk assessments are based on probabilities which are estimated from limited data sets and provide limited flexibility for complex technologies. Further, the environment and specific conditions under which the data is obtained may be unknown and yield to erroneous extrapolations. The method proposed in this work utilizes a novel method for estimation of the risk based on the net present value of technologies and provides the basis for a decision support tool based on the expected value theorem. This is demonstrated using the case of the safety and economic crisis in onshore crude oil transport in the continental United States. The exponential growth of crude oil production in the continental United States has led to crisis in the mid-stream industry with existing pipeline infrastructure under pressure to service the increased production. This fact is reflected in the 4000% increase in the carloads in a span of five years from 2009 to 2013. This has been compounded by the volatile fluctuation in crude oil price from $100 to $30 over the past few years. This has put enormous constraints on capital decision making. Since railroad infrastructure albeit aged, already exists in many regions, loading and unloading crude oil is relatively easy and their connection to the refining centers along the Gulf of Mexico apart from sites in the east and west coast make it an option to many producers. In this paper a novel decision making model is proposed using the concept of ‘Net present value’ of a technology to evaluate the option between railroad and as suitable mid-stream alternatives for the transportation of crude oil. The model is built on using a prescriptive decision making technique for the quantification of factors affecting the decision, incorporating also the utility of wealth of the decision maker. Monte-Carlo simulation is further used to obtain results and trends based on variation of initial parameters. This analysis can provide a basis for making decisions given the complex environment of crude oil transport operations and can be extended to a variety of geographies given that they satisfy the requirements of the model. The method can also be further extended to other technology evaluation given appropriate factors can be identified to build the model.