How does one accurately value tank and pipeline assets? Asset valuation company Hickman Shearer offers a guide
Oil and gas downstream capital assets are complex and long-life. The valuation of tanks and pipelines requires the consideration of additional discrete factors to ensure accurate valuations.
Valuations of tanks and pipelines are typically undertaken for a wide range of purposes that can include; IFRS financial reporting, purchase price allocation, tax purposes, loan collateral or insurance.
Given that the market or income approaches cannot be used in valuing these bespoke assets, the Depreciated Replacement Cost (DRC) approach is applied, requiring accurate calculations and analysis of the new cost, total useful life and residual value before considering any obsolescence penalties.
The new cost of tanks, pipes and bunds are calculated by applying a cost build-up based on professional engineering cost indices, key dimensions and asset specification such as:
The calculation of total useful lives and remaining useful lives for DRC calculations of tanks and pipelines requires more detailed information, research and analysis:
Adding to the complexity of the analysis, the total useful life of a tank not containing any corrosive material could be over 100 years potentially beyond the life of the operator or Cash Generating Unit and hence, not applicable in valuation.
Finally, post-Buncefield, updated and more rigorous regulations were put in place to specify bund wall material and dimensions.
The following must be considered when valuing tanks and pipelines using the DRC approach: