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Hard Pricing Technology Valuation Business Model

Pipeline Oil Technology

#Oil & Gas
ProHub Comment

This case requires candidates to value a proprietary technology by quantifying tangible benefits (transportation cost savings and pipeline longevity improvements) against implementation costs, while comparing alternative investments to establish a defensible pricing floor and ceiling. The complexity lies in multi-year demand forecasting, proportional cost analysis, and negotiation positioning between the university's break-even point ($1,200M R&D recovery) and the buyer's alternative investment threshold ($7,000M pipeline expansion).

Estimated Time 15 minutes
Difficulty Hard
Source IESE
50 / 100
Minerva’s University Fluids Research Lab has discovered a more efficient way to transport crude petroleum oil inside pipelines. This new technology can be used in midstream applications where the oil is acquired from the extraction plant and delivered to the refinery plant. The university invested $1,200M in this project during the last 12 years. The new technology mixes water and oil under certain conditions to reduce the loss of energy, caused by the friction between the oil and the pipeline surface while being transported. As a result, the transport between two given points gets 15% faster and the useful lifetime of the pipelines increases by 20%. Minerva’s University asked our help to determine the value at which they should sell the technology.

Clarifying Information

  1. What is the market? - Mexico.
  2. How big is the market? - 4,800 km of pipeline.
  3. Who are the competitors and market share? - National Oil Company (NOC) is the only player. However, the market is open for the last two years.
  4. Which are the potential buyers? - Primarily, NOC. However, the other two prospects are interested in entering the market.
  5. Does the University have a patent? How long does it last? - The University has already filed for a patent, which lasts for 20 years.
  6. What is NOC pipelines current capacity? - Full capacity. Surplus is transported by more expensive means such as rail car, barge and truck.
  7. How is the demand for crude oil? - NOC sells all the crude oil it buys. See Exhibit 2 for the next years’ forecast.
  8. Can NOC build more pipelines to substitute other means of transportation? - Yes, it is an alternative. However, there are costs involved. See “4. Given Data - Alternative: Expand Pipeline Network”
  9. How long does it take to implement this technology? - Minerva’s University estimates that the technology would be running in 100% of the pipelines in one year at $2,000 M installation cost.