production

economics
ELSEVIER Int. J. Production Economics 42 (1995) 263-273

Techno-economic evaluation of waste lube oil rerefining

Mshammad Farhat Ali*, Faizur Rahman’, Abdullah J. Hamdan
Department of Chemistry. King Fahd Urioersity of Petroleum d Minerals, Dhahran. Saudi Arabia

Received 21 February 1995; accepted 31 October 1995

Abstract
This paper discusses the secondary use of used automotive lubricating oils. Current technologies for processing
waste lube oil into new lubricants is outlined and the performance features of these products are compared with that
of virgin materials. Process technology of Meinken and Mohawk were selected for techno-economic evaluation. A
plant size of 50 000 TPA waste oil re-refining was considered for economic study of these processes. The estimated
production cost for Meinken process was found to be $348.8 per ton and for Mohawk process, assuming hydrogen
supply to be made available from adjacent refinery, it was estimated to be $198.4 per ton. Meinken process appears
to be more popular but profitability was found to be lower than Mohawk. Mohawk process is limited due to loca-
tion factor which requires hydrogen from an adjacent petrochemical plant.

Keywords: Rerefining; Lube oils; Energy utilization; Pollution control

1. Introduction (b) arrangement for proper segregation and col-

Lube oils are the most valuable constituents in
crude oil. Average paraffin base crude oil have typ-
ically 12-16% lube base oils. This compares with
70-75% of lube base oil contained in used auto-
motive oils. It has been established that rerefining
of the waste lube oil is a distinct possibility to
reclaim a large amount of waste oil, thus provid-
ing an important opportunity for proper energy
utilization. The problem of rerefining, however,
has to be treated carefully from various angles,
such as:
(a) assessment of the composition of available
used oils to be refined,
* Corresponding author.
‘Research Institute, KFUPM, Dhahran.
lection of used oils,
(c) use of proven technologies to recover high
yields of reasonable quality product equal to the
virgin base oil,
(d) working out capital investment and net
return to the industry.
About 80 million gallons of automotive lubri-
cating oils are sold in Saudi Arabia. Much of this
oil, after use, is actually contributing to the
increased pollution of land because of indiscrimi-
nate dumping. Any scheme of secondary use of the
waste lube oils would be of interest both for con-
servation of energy resources and for protection of
environment. This paper discusses the secondary
use for the used automotive lubricating oils.
Current technologies for processing waste lube
oil into new lubricants are outlined and the

0925-5273/95/%09.50 Q 1995 Elsevier Science B.V. All rights reserved

SSDI 0925-5273(95)00176-X
264 A4.F Ali et al. lint. J. Prdution Economics 42 (lW5j 263-273

performance features of these products are com- seasonal basis. The inspection data in Table 1 sum-
pared with that of virgin materials. marizes the typical analytical results for 20 sam-
In many countries the rerefining of the used oils ples collected during winter and summer. A
has become an important industry. The objective comparison of physical and chemical properties of
of recovering high-quality raffinates is attained these samples (Table 1) showed few significant
through the use of widely differing techniques. The variations. The water content and fuel dilution can
processes concerned can be classified according significantly affect the viscosity and gravity and
to the chemical or physical method of used-oil this should be considered in drawing inferences
pretreatment selected. Process technology of based upon the properties. The data provide
Meinken, Mohawk and KTI were selected for our insight into the extent of contamination of each oil
study. Meinken process is based on chemical pre- and there are some striking similarities in the con-
treatment; both Mohawk and KTI processes taminant levels. Pentane insolubles varied from
employ physical methods involving distillation and 0.05 to 0.80 wt%. Water content were fairly con-
eliminates the use of sulfuric acid, thus providing sistent in their values from 0.5 to 2.0 ~01%. Fuel
a facility of safer operation than Meinken. dilution varied from 0.6 to 5.0%.
The elemental analysis (Table 2) was done to
determine Fe, Cr, Cu, Mg, Ni, Pb, Zn, Ca and Ba
2. Quality assessment of available used oil in the used oils. These elements were selected as
indicators for assessing the presence of oil addi-
A wide variety of samples of used oil were col- tives, mechanical wear and chemical corrosion.
lected from areas in the eastern region of Saudi Lead is mostly derived from lead in gasoline. The
Arabia. The samples were evaluated on the basis elemental analysis indicated that the principal con-
of physical and chemical properties to determine taminates are lead, iron, zinc, magnesium and cal-
any significant variations either on geographical or cium. Also, the data indicate an increase in wear

Table 1
Inspection data for used lubricating oils

Sample Sp. gravity Viscosity, SUS Viscosity Carbon BS&W Flash pt Pentane TAN Fuel
No. 60/60”F index residue (VOM) (“F) insoluble mg KOH/g dilution
100°F 210°F wt’%, (wt%) (wt%)

2111 0.9030 622 77.7 122 I .25 < 0.5 385 0.29 2.10 1.1
2112 0.9020 628 78.7 124 I .05 0.5 310 0.39 2.16 1.7
2113 0.9080 657 78.9 119 1.26 < 0.5 180 0.78 3.20 5.0
2114 0.9075 721 84.7 124 1.21 < 0.5 340 0.19 2.10 1.6
2115 0.9035 634 78.6 123 I .22 0.8 300 0.21 2.20 2.6
2116 0.9030 635 78.3 122 1.26 0.6 310 0.25 2.45 I .4
2117 0.9100 761 84.3 116 1.17 2.0 370 0.42 1.75 1.2
2118 0.9020 657 82.3 130 1.14 < 0.5 340 0.10 1.10 1.5
2119 0.9065 691 78.6 119 1.29 < 0.5 345 0.15 I .50 I.5
2120 0.9080 696 82.4 122 1.28 < 0.5 350 0.24 2.72 I .4
2252 0.9032 568 75.9 129 1.12 < 0.5 305 0.10 0.95 1.8
2253 0.9067 658 80.1 123 1.20 < 0.5 355 0.12 0.95 1.2
2254 0.9062 650 78.5 119 1.06 < 0.5 330 0.09 I .20 I .6
2255 0.9057 616 76.6 120 0.95 < 0.5 340 0.09 0.95 I .4
2256 0.9047 646 72.2 100 I .35 0.8 180 0.13 1.30 4.2
2257 0.9032 685 79.4 118 0.85 < 0.5 315 0.08 0.84 1.7
2258 0.9057 550 73.6 126 0.78 < 0.5 335 0.08 0.89 1.6
2259 0.9047 561 72.8 123 0.95 < 0.5 315 0.09 I.15 1.7
2260 0.9050 655 77.0 113 1.10 < 0.5 380 0.11 1.12 0.9
2261 0.9040 659 74.0 119 1.06 < 0.5 300 0.11 1.15 1.9
 M. F. Ali et al. /ht. J. Production Economics 42 (1995) 263-273 265

Table 2
Trace elements in used oil samples (ppm)

Sample No. Fe Cr CU Mg Ni Pb Zn Ca Ba

2111 538 41 2.5 225 7.0 3125 775 1070 4.9

2112 350 40 3.5 230 5.0 3250 905 2625 5.0
2113 800 44 2.0 204 3.5 6225 725 675 5.0
2114 700 46 2.0 262 6.5 3375 750 1312 5.0
2115 150 54 2.0 405 7.5 5375 812 2250 5.0
2116 912 70 2.5 187 5.0 4375 770 1162 5.0
2117 462 48 2.0 450 4.0 4750 950 1750 6.3
2118 700 53 3.0 225 5.0 4625 938 2375 7.8
2119 650 54 3.0 225 4.0 4500 962 2500 6.3
2120 500 54 2.5 375 4.5 2625 925 2250 6.2
2252 310 35 1.5 245 3.5 3750 820 1650 3.0
2253 320 34 1.5 240 3.5 3800 800 1700 3.5
2254 580 45 2.0 290 3.0 4100 850 2050 3.5
2255 420 40 1.5 240 3.5 3700 820 1600 3.0
2256 655 50 2.5 410 4.0 5050 960 2650 4.5
2257 180 24 1.5 185 2.5 3100 745 1150 2.0
2258 195 30 1.5 220 3.0 3450 780 1450 2.5
2259 560 40 1.5 310 3.0 4100 750 1650 3.0
2260 530 42 1.5 315 3.0 4050 780 1750 3.0
2261 520 40 1.5 320 2.5 4050 800 1700 3.0

is directly proportional to the contamination of the 3. Process technologies

oil as represented by either the pentane insolubles
or total acid number (TAN). 3.1. Meinken process
The following five patented rerefining processes
were duplicated on a laboratory bench scale to pro- The used oil is supplied to the rerefinery by rail-
duce adequate samples for comparison with new way tankers, road tankers or in barrels. Before the
(virgin) oils. The five samples obtained by the used oil flows into the waste oil storage tanks, it
different treatment processes were in general com- passes through the filters to remove solid impuri-
parable in quality to the virgin base oils indicating ties. A block flow diagram of rerefining process is
that the commercial processes will restore used shown in Fig. 1.
lube oils to its original quality for reuse as a lubri- Meinken process is based on chemical pretreat-
cant. The five processes used were: ment [l]. The dewatered oil is treated with sulfu-
(a) the acidxlay treatment process ric acid (96%) and the acid refined oil is vacuum
(b) the caustic treatment process distilled to separate lube base oil from the low boil-
(c) the aliphatic alcohol-acid process ing spindle oil and gas oil. With sulfuric acid
(d) Bureau of Mines distillation-clay process treatment it is necessary to dehydrate the feedstock
(e) Bureau of Mines solventxlarification process completely before subjecting it to acid treatment
From the above discussions it is quite evident to prevent dilution of the concentrated sulfuric
that although contaminant levels varied among acid. On the other hand, there is no need to remove
used oil samples, however, the rerefining technol- crankcase “dilution” or fuel components ahead of
ogy is directed toward the removal of these mate- the acid-treating step, since these could be conve-
rials such that their effect upon final product niently stripped from the hot oil in the subsequent
quality is not significant. Process technology of clay contacting step. Their presence during acid
Meinken, Mohawk and KTI were selected for the treatment reduces the viscosity of the oil and
techno-economic feasibility study for the rerefining thereby increase the ease of separating the acid
used oil in Saudi Arabia. sludge. However, the sulfuric acid treatment and
266 A4.F. Ali et al. /ht. J. Production Economics 42 (1995) 263-273

I USED OIL 1 USED LUBE

OIL

1
MOHAWK
PRETREATMENT

DEHYDFlATK)N 6 1

DEHYDRATION

DEFUELlNG

FUEL
rl

EVAPORATION

1
HYDROGEN RESIDUE
1
HYDROTREATMENT
t
WASTE

GASTT ,

LUBE BASE OIL

Fig. 2. Block flow diagram of rerefining of used oil by Mohawk-

REFINED OIL STORAGE CEP process.

Fig. 1. Block flow diagram of rerefining of used oil by Meinken

process. technology has been licensed to Chemical
Engineering Partners, a private chemical engineer-
ing design company based in California, USA.
clay addition produce waste streams like acid tar
The first stage of the process removes water from
and spent clay resulting in a problem of waste dis-
the feedstock [23. The second stage of the process is
posal. Inspite of the disposal problem associated
distillation, at this step light hydrocarbons are
with Meinken process, the Meinken technology
removed resulting in a marketable fuel by-product.
appears to be very popular. At present, there are
The third stage, evaporation, vaporizes the base oil,
about 60 such refiners around the world using the
same system. New refineries of this type are in var- separating it from the additives, leaving behind a
ious stages of construction and planning in by-product called residue. This residue is used in
Kuwait, Saudi Arabia, UAE, Oman and India asphalt industry. The final processing stage is hydro-
manifesting the technology to be well proven and treatment which results in a high-quality base oil.
widely accepted. The Mohawk process features continuous oper-
ation, low maintenance, longer catalyst life span,
3.2. Mohawk process reduced corrosion, and proven technology.

A simplified block flow diagram of the Mohawk- 3.3. KTI process

CEP process is shown in Fig. 2. This is claimed
by the licensers to be the newest and yet proven Kinetic Technology International (KTI) of the
high-efficiency rerefining technology. Mohawk Netherlands, in close cooperation with Gulf
 M.F. Ali et al.lInt. J. Production Economics 42 (1995) 263-273 267

Science and Technology Co. (Pittsburgh, PA) has The next step is hydrofinishing of lube oil.
developed a new rerefining process for all types of Hydrogen rich gas is mixed with the oil and heated
waste lubricating oils [3]. before passing through the reactor. The treated oil
The KTI waste lube oil rerefining process is then steam stripped or fractionated into cuts
involves a series of proprietary engineering tech- using a vacuum in order to obtain the right
nologies that affords high economic returns with- specification.
out resulting in environmental loads. The main
features of the KTI process include : (a) high recov-
ery yield up to 95% of the contained lube oil; (b) 4. Economic evaluation
excellent product quality; (c) flexible operation
with wide turndown capability; (d) no requirement 4.1. Capital investment
for discharging chemicals or treating agents; (e)
absence of non commercial by-products; and (f) The total fixed capital investment to process
reliable, inexpensive treatment of waste water con- 50000 TPA of waste oil was obtained from
tained in the wasted lube oil. Meinken [l] and Mohawk [2] in 1991. Location
The important steps of this process are shown factor of 1.25 was used to estimate the fixed capi-
in Fig. 3. Atmospheric distillation removes water tal costs for Saudi location [4]. Table 3 lists the
and gasoline. Vacuum distillation using special total fixed capital investment estimated for both
wiped film evaporators separates lube oil from the technologies. Working capital for the rerefinery
heavy residue containing metals and asphaltenes. was estimated by itemizing the production costs
components [5]. It varies with changes in raw mate-
rial prices, product selling price and so on.
Economic evaluation of KTI process could not
be carried out because of non-availability of com-
plete cost data.
DEWATERING
Details of the cost-estimation procedure are
given in Appendix A.

4.2. Production costs

Production costs consists of direct costs, indirect

costs and general expenses.
Direct cost includes expenses incurred directly
from the production operation. These expenses
are : raw materials (including delivery), catalysts
HYDROGEN
REilDUE and solvents, utilities, operating labor, operating
supervision, maintenance and repairs, operating
I HYDROFINISHING supplies, royalties and patents.
Raw material prices were estimated from FOB
prices in Germany in September 1991 [l, 61 and

Table 3
Capital investment of 50 000 TPA waste oil rerefining plant in

1 UGHT NiUlRALS Saudi Arabia

Process technology Total fixed capital in 1991

1 LUBE OIL 1 (Million US $)

Meinken, Germany 28.8

Fig. 3. Block flow diagram of rerefining of used oil by KTI
Mohawk, Canada 17.7
process.
268 M.F. Ali et al. / Int. J. Proclucrion Econon~ics 42 (1995) 263-273

includes $90.0 per ton for shipping. Local price was Table 5
used for sulfuric acid. Collection cost of waste oil Raw materials, utilities and manpower costs in Saudi Arabia
in Jeddah [I], Saudi Arabia was estimated as
Item Cost ($/unit)
$53.52 per ton. By-product(gas oil) price $110 per
ton was taken from Petroleum Economist, for RUN, Muirrids
Caltex, Bahrain location [7]. By-product asphalt Waste oil, ton 53.5
Sulfuric Acid, ton 160
price $130 per ton was taken from CMR [6], but
Activated sludge, ton 673
reduced by 15% as it needs some more processing. Lime, ton 316
If the asphalt residue cannot be sold at interna- Ammonia water, (23%) ton 387
tional price due to low demand in this region, its Catalyst, kg 3.41
price has to be further reduced. For economic Utililirs
analysis purposes, the price of asphalt residue was Fuel oil, ton 110
still lowered by 50”/0. This is an approximation and Cooling water, ton 0.019
the price used finally in the calculations is $55 per Process water, ton 0.803
Electricity, ton 0.015
ton of asphalt residue. Hydrogen, ton 65
The raw materials, utilities, and manpower Steam, ton 4.63
requirements are given in Table 4 which were
Manpower
obtained from Meinken [1] and Mohawk [8]. One man year ($/yr) 18000
Table 5 lists raw materials, utilities and manpower
costs estimated for Saudi Arabian location [2,9]. Source: [I. 2, 3,9].
Natural gas price was taken as $0.50 per million
Btu [4] and the benefit of low price of natural gas
is reflected in utilities costs such as electricity and Saudi Arabia because it is produced from desali-
steam. However, process water is expensive in nation plants.
Operating costs which includes operating labor,
supervision, maintenance and repairs and indirect
Table 4
Raw materials utilities and manpower requirements per ton of costs which includes overheads, storage and insur-
product ance, and general expenses were estimated accord-
ing to the standard procedures [lo-121.
Component Meinken Mohawk
Summation of all direct costs, indirect costs and
process process
general expenses results in a production cost. Table
RUN, mureriuis 6 illustrates production cost of rerefining waste oil
Waste oil, ton 1.27 1.34 resulted from the two technologies. The estimated
Sulfuric acid, ton 0.095 _
production cost for Meinken process was $348.8
Activated clay, ton 0.049
Lime, ton 0.214 _ per ton and for Mohawk process it is $198.4 per
Ammonia water, ton (23%) 0.008 _ ton of rerefined oil.
Catalyst, kg 3.76

31’-pFYdKY,~
Table 6
Gas oil, ton -0.060 -0.135
_ Production cost data
Asphalt -0.176

Utilities Parameter Meinken Mohawk

Fuel oil, ton 0.075 0.116 process process
Cooling water, ton 2.003
Process water, ton 75.00 97.00 Ditwi UJS~S
Hydrogen, ton 0.003 Raw materials 188 84.7
Steam, ton 0.667 By-products -6.6 -24.5
Operating Cost 70.6 63.1
Munpowrr
Indirect cost 71.0 50.3
Total men for 3 shifts 33 31 General expenses 25.6 24.8
Total production cost 349 198
Note: Negative sign indicates by-product.
 M.F. Ali et al. /ht. J. Production Economics 42 (lW5) 263-273 269

For Meinken process the raw materials cost is were performed for 15 % lower and 15 %I higher raw
about 54% of the production cost. Utilities is materials prices than prevalent in September 1991.
3.0%, operating cost is 17.2%, total indirect costs Since the rerefined oil is not segregated into
is 20.4% and general expenses about 7.4”/0 of the different neutral oils and bright stock, following
total product cost. The share of raw materials cost typical composition was assumed: 10% 300 SN,
in the total product cost is dominant. 80% 500 SN and 10% bright stock. Based on
In case of Mohawk process the raw materials LUBREF, Jeddah [13] base oil prices of various
cost is about 42.7% of the total product cost. By- grades, an estimated selling price of $415.60 per
products are 12.40/o, utilities are 8.8%, operating ton is used in the financial analysis.
cost 23.0%, total indirect costs are 25.4% and gen- The year-by-year cash flow analysis for interna-
eral expenses are 12.5% of the total product cost. tional raw materials prices (base case) in
So, the production cost will be sensitive to raw September 199 1 and for 15% lower and 15%
materials prices and sensitivity analysis was per- higher raw materials prices have been carried out.
formed for different raw materials price. The results of cash flow analysis are summarized
in Table 8. Fig. 4 shows the effect of raw materi-
als prices on internal rate of return (IRR).
5. Profitability analysis The total fixed capital investment is very high
for Meinken process ($28.8 million) as compared
The profitability of an industrial opportunity is to Mohawk process ($17.7 million). The working
a function of major economic variables such as capital amounts to a high value of 5.0 million US
product selling price, raw materials prices, capital Dollars for Meinken as compared to relatively low
investment, energy prices and so on. Year-by-year value of 3.0 million Dollars for Mohawk.
cash flow analysis has been carried out using The payback period (PBP) and break-even-point
assumptions and financial arrangements described (BEP) for Meinken Process are high as expected
in Table 7. compared to Mohawk process, which are 8.16 yr
From the analysis of production costs (Table 6) and 53.8% of the full production. The PBP for
components, it is obvious that the raw materials Mohawk is 1.40 yr, and BEP is 28 %. The IRR for
cost is the dominant item. So, sensitivity analyses Meinken and Mohawk are estimated to be 11.24%
and 45.36%. Thus, the total positive annual cash
Table 7
flow for Mohawk process appears to be more
Basis of financial calculations attractive than that for Meinken. The high
profitabilities of Mohawk process are due to lower
Item Calculated basis capital costs as a result of (i) excluding hydrogen
plant and (ii) possibly due to relatively not
Project life 20 yr
Construction period 3 yr
Depreciation method Straight line Table 8
Salvage value Zero Profitability of rerefining 50000 TPA waste oil in Saudi Arabia
Equity/SIDF loan 50% each (I000 S)
SIDF loan fee 3%
Loan payment 7 equal instalments starting Meinken Mohawk
2 years after plant start-up process process
Tax rate 2.5%
Inflation 0.0% Total fixed capital 28 750 17713
Capital expenditure: Working capital 4999 3111
1st year 20% of fixed capital SIDF loan 16 875 I I 356
2nd year 45% of fixed capital Annual variable expenses 7587 2873
3rd year 35% of fixed capital plus Annual fixed expenses 4746 3852
working capital Annual sales 16410 15377
Capacity utilization: Payback period (yr) 8.2 1.4
1st year 60% Break-even-point (‘XI capacity) 53.8 28.7
2nd and subsequent years 100% IRR (%/yr) 11.2 45.4
270 M.F. Ali et al. IInt. J. Prochtion Economics 42 (1995) 263-273

mercial processes will restore used lube oils to its

original quality for reuse as a lubricant.
(3) Technologies for rerefining used lubricating
oil are available from a number of US and
European Companies. Three such technologies
namely Meinken, Mohawk and KTI were selected
for the techno-economic feasibility study for the
rerefining used lubricating oils in Saudi Arabia.
Complete economic evaluation and profitability
analysis for Meinken and Mohawk processes
showed that both processes are economically
viable. Meinken process appears to be more
popular commercially but profitability was found
to be lower than that of Mohawk. Integration of
Mohawk plant in an existing petrochemical com-
plex will optimize the profitability of Mohawk
process.
(4) It can be concluded from this feasibility
study that the profitability of a Mohawk re-
Fig. 4. Effect of raw material prices on IRR
refining plant with a pay back period of 1.4 yr is
very interesting for investors.
well established technology as compared to (5) This study was conducted in 1991 and the
Meinken process. prices of raw-material/products used were preva-
The main disadvantage of Mohawk process is lent in September 1991. The August 1995 prices for
that, the plant has to be located near a refinery or the raw-material/products were checked by us and
petrochemical plant (because of hydrogen supply) these were found to be in the range of 3~11%
to be able to realize such high profitabilities. If the higher. Since the sensitivity analysis performed for
facilities are to be provided with an independent this study covers 15% higher raw-material prices
hydrogen plant, then the capital costs may go up than prevalent in September 1991, this change in
significantly and subsequently profitabilities will be prices will not effect any of the above conclusions.
dropped.

Acknowledgements
6. Conclusions
The investigators wish to acknowledge King
(1) The present yearly consumption of automo- Abdul Aziz City for Science and Technology
tive lubricating oils have exceeded 80 million gal- (KACST) for funding this Research Project (AR-
lons in Saudi Arabia. Most of this oil is wasted 10-60). The facilities and support provided by
because no suitable refining industry exists in the the Research Institute and Oil Testing Center of
country to utilize the waste lube oils. Therefore, King Fahd University of Petroleum and Minerals
rerefining of waste lube oil warrants the country’s (KFUPM) is also gratefully acknowledged.
urgent attention in order to solve the increasing
menace of environmental pollution.
(2) Five patented rerefining processes were Appendix A. Cost estimation procedure
duplicated on a laboratory bench scale to produce
adequate samples of lube oils for comparison with A.1. Investment costs
new (virgin) oils. The study proved that the
rerefined oils were in general comparable in qual- Fixed upital: The total fixed capital investment
ity to the virgin base oils indicating that the com- to build a waste lube oil rerefining plant in Saudi
 M.F. Ali et al./Int. J. Production Economics 42 (1995) 263-273 211

Arabia was obtained from Meinken and Mohawk. Table 9

Utilities costs in Saudi Arabia
The installed cost of equipment at a hypothetical
plant built on the US Gulf Coast and Western Utility cost
Europe was adjusted to October 1989 using
SRI’s Process Economics Program (PEP) cost Natural gas $O.SO/milhon BTU
Cooling water $0.07/m’
indexes.
Steam $6SO/ton
Locution fuctor: The total fixed capital invest- Process water $1.064/m’
ment cost for a plant in the Kingdom was obtained Electricity $0.0133/k W h
by using location factors of 1.2 for the US Gulf Inert gas $0.012/N m3
Coast and 1.25 for Western Europe.
Working capital: The working capital estimate
was based on 30% of the total annual sales of prod-
a list of utilities and costs in Saudi Arabia in US
ucts and byproducts.
dollars for 1989.
Operating costs: Direct operating costs consist
of costs for operating labor, maintenance labor,
A.2. Production costs maintenance materials, operating
supervision,
materials and supplies, control laboratory, patents,
The product costs in this study were calculated
and royalties.
on the basis of US dollars per ton of product in
The basis for estimation of other components of
September 1991 at a Saudi Arabian location with
operating costs is given in Table 10.
an on-stream time of 330 days per year. The total
product cost is the sum of direct production costs,
A.2.2. Indirect cost
indirect production costs, and general expenses.
The indirect costs of production include plant
The total direct cost consists of costs of raw mate- overhead, insurance, interest on working capital,
rials, by-product credits, if any, utilities, and oper- and depreciation. Plant overhead for a Saudi
ating expenses. The total indirect cost consists of Arabian location is usually slightly higher than for
plant overhead, insurance, depreciation, and inter- a US location; therefore, a 100% of total labor
est on working capital. General expenses consist of costs was charged to overhead compared to 80%
administrative, distribution, and marketing used in US locations. Plant insurance for fixed
expenses.

A.2.1. Direct production costs Table 10

Raw material and by-products: The cost of raw Basis for estimation of individual components of operating
materials was estimated from FOB prices on the costs, indirect cost, and general expenses
US Gulf Coast in September 1991 and include $90
Component Basis of Estimation
for shipping cost. The cost of raw materials are
expected to remain relatively constant and the Maintenance labor 2% of total fixed capital
cost variations will probably be within f 15% Supervision 20% operating and maintenance
labor
for 1995. The effect of the variations on the prod-
Material supplies 2.6% total fixed capital
uct costs and cash flows were studied and Control laboratory 15% operting labor
discussed. Patents and royalties 2% total direct cost
Utilities: At present, the energy cost in Saudi Plant overhead 100% total labor and supervision
Insurance I ‘%Itotal fixed capital
Arabia is $0.50/million BTU from natural gas.
Depreciation I5 year straight-line depreciation
This low energy cost compared to USA, Europe, Interest on working 10% working capital
and Japan is reflected in the low cost of utilities capital
such as steam and electricity. However, process Administration 25% plant overhead
water in Saudi Arabia is expensive, because it is Distributions and 5% total product price
sales
produced from desalination plants. Table 9 gives
272 M.F. Ali et al. /ht. J. Production Economics 42 (1995) 263-273

assets is usually fixed at 1% of the total fixed- 9. the SIDF charges no interest but a fee of 3%
capital cost. All plant equipment, buildings and of the total loan is deducted from the loan;
utility and service facilities were depreciated over 10. the disbursement of the loan is based on 50%
15 y using straight-line depreciation at an annual of the actual expenditure of the capital cost;
rate of 6.67%. An interest rate of 10% was applied 11. repayment of the SIDF loan starts in the third
to the working capital. Three percent fee was year of production, since a 2 yr grace period is
applied to Saudi Industrial Development Fund allowed;
(SIDF) loan. The SIDF loan was considered to be 12. the repayment is effected over 7 yr with equal
50% of the total investment cost. annual repayments (actually 14 equal semi-
The basis for estimation of these components of annual repayments);
indirect costs is summarized in Table 10. 13. the fixed capital expenditure is assumed to be
20% for the first year, 45 % for the second year,
A.2.3. General expenses and 35% for the third year. The working cap-
The general expenses of a plant include costs for ital expenditure occurs in the third year; and
top-management and administrative activities, dis- 14. production capacities are assumed to be 60%
tribution and marketing costs. In this study only for the first year, 80% for the second year, and
administrative costs at 25% of plant overhead and 100% for the years remaining.
distribution and sales cost at 5% of product value Analysis methods: The common contemporary
methods of estimating profitabilities : discounted
(excluding by-products credits) were taken into
cash flow rate of return (DCFRR) and the net pre-
account in general expenses.
sent value (NPV) were used in this study.
The basis of administration, distributions, and
Comparisons of projects based on time are the pay-
sale costs is given in Table 10.
back period (PBP) which is defined as the number
of years required after start up to recover the
undiscounted total fixed capital.
A.3. Financial evaluation

Plant size: For each opportunity, a plant size

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