Tank and Pipeline Valuation

Work

Valuation approach

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.

Methodology

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:

• Tanks: diameter, height, wall thickness, material, roof type;
• Pipelines: length, material, wall thickness and other issues such as lagging, location, valves and bridges; and
• Bund walls and floors: construction material, wall height and thickness.

The calculation of total useful lives and remaining useful lives for DRC calculations of tanks and pipelines requires more detailed information, research and analysis:

• UK operators are required to inspect assets regularly and report to the Heath & Safety Executive on condition including tank floor and wall thickness. This determines when the refurbishment of tank walls and floors needs to be performed, which extends the physical life of the asset – typically past the next inspection date; and
• The speed of erosion is predicated by engineering data that determines the rate of corrosion, which is based upon the properties of the material contained in the tank or pipeline.

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.

Outcome

The following must be considered when valuing tanks and pipelines using the DRC approach:

• Consider and balance the relatively short periods (8–15 years) between inspections and the material extension of the remaining useful life of the assets as a result of the refurbishment (25–40 years); and
•           Recognise the potential impacts of Buncefield may have in calculating any technical obsolescence penalty, in respect of bund walls.