Determining the Best Alternatives Between Buy or Lease Option of Hydraulic Pumping Unit (HPU) by Evaluating Cost Performance and Project Evaluation

Abstract

The year 2020 was one of the darkest times for world oil and gas companies, because world oil prices had touched their lowest point in the last 15 years. In 2022, it is started to show a change. The recovery of the world economy and coupled with the Russian oil embargo is predicted to make world oil prices will be at a high position for at least the next 5 years. And this is a good momentum and opportunity for all the world's oil companies.Unfortunately, PT Pertamina EP JTB Field was having problems with not achieving its oil production target. It was found that one of the problems is HPU rental artificial lift showing a decreasing performance in recent years. Because the HPU lease contract will expire in July 2023. Two alternatives are proposed to improve the production performance. There is conduct another lease contract with tightened specification and the other is to buy SRP.The results of the buy vs lease analysis found that the HPU rental price was 7.96% more expensive when compared to the purchase of SRP. The fair value was IDR 3,099.394. If the company exercise the SRP buy option, it will result in an NPV of IDR 108,791,789,979 and an IRR of 217%. Based on the results of the risk analysis, the probability of failure of this purchase project was quite low. The probability of NPV < IDR 5 billion is only 0.93%, while the highest probability in the range of IDR 60-160 billion.

Keywords: Buy vs Lease Analysis, Project Economic Analysis, Risk Analysis

DOI: 10.7176/EJBM/14-16-06

Publication date:August 31^st 2022