Friday, December 11, 2009

Fully Burdened Cost of Fuel

Source: DiPetto 2008 (slides 7-9 merged)

When an article with a title $400 per gallon gas to drive debate over cost of war in Afghanistan appeared in the Hill in October 2009 it created a lot of noise. “The Pentagon pays an average of $400 to put a gallon of fuel into a combat vehicle or aircraft in Afghanistan,” the article said.

Dr. Kevin T. Geiss, program director for energy security in the Office of the Assistant Secretary of the Army for Installations and Environment, gives an even higher figure: in some places, analysts have estimated the fully burdened cost of fuel might even be as high as $1,000 per gallon.

The estimate for $400 per gallon figure you see all around comes from General Kern. In fact General Kern was throwing out a wide range as an answer to the question of What is the cost of a gallon of fuel? in his presentation at the 2002 Tactical Wheeled Vehicles Conference (January 27-29, 2002 Monterey, California). His answer was Cost with Delivery (1 - 400 US Dollars). But most people picked up the upper estimate.

Estimates of the fully burdened cost of fuel vary by scenario depending on how the fuel is delivered. Here are Some estimates: “Fuel Costs $13/Gal—Well to Tank—In Peacetime at Home,” Army Research Lab brief to Defense Science Board, October 1999; “$25 at FEBA+100 km,” Defense Science Board, 2001, p. 16; “Hundreds of Dollars [by air] . . . [600 km] Deep in the Battlespace,” or “At least $40–50 If Overland,” Defense Science Board, 2001, Executive Summary and p. 20; “$100–$600 In Theater Depending on ‘Front Line’ to ‘Back Line’ Separation in Distance, Terrain, Defense, Etc.,” JASON, Reducing DoD Fossil-Fuel Dependence, 2006, p. 30; “$26 By Inflight Tanker,” Defense Science Board, 2001. The fully burdened cost of a gallon of fuel delivered to an aircraft in flight is estimated to be around $20 per gallon.10/1[1]1 The complexity of measuring fuel use and costs is one of the many challenges DOD is facing.

Of these, Defense Science Board report in 2001[2] is very informative but rather outdated. The report estimated that it cost about $13 to deliver a gallon of fuel to the forward edge of a battle area, and the price escalated rapidly to hundreds of dollars per gallon as you move beyond the forward edge. Fuel delivered by helicopter can cost hundreds of dollars per gallon. In-flight tanker refueling costs about $26 a gallon to deliver fuel from an aerial refueling tanker if you assume the tankers are free. If you include the cost of recapitalizing the tankers, the cost is about $42 a gallon.
Source: DiPetto 2008

These estimates attracted much attention simply because the cost of a gallon of fuel generally ranges between $2 and $3 per gallon. The confusion arises from the use or not use of the term “fully burdened cost of fuel.” Here I will try to give some explanations based on information provided in official sources.

How energy is to be considered by the military, both in its use and in the acquisition of new systems.

What is fully burdened cost of fuel? In simplest way the fully burdened cost of fuel is the total ownership cost of buying, moving, and protecting fuel in systems during combat. But this is only one side of the story.

The earliest comprehensive DOD study on fuel use, conducted by the Defense Science Board in 2001, focused on the fuel efficiency of weapon systems and was the first to suggest that the true cost of fuel – the fully burdened cost – was not sufficiently understood by decision-makers.

Back on 10 April 2007 a USD(AT&L) memo stated that “Effectively immediately, it is DoD policy to include the fully burdened cost of delivered energy in trade-off analyses conducted for all tactical systems with end items that create a demand for energy and to improve the energy efficiency of those systems, consistent with mission requirements and cost effectiveness.”

The memo identified three major defense acquisition programs as pilot implementation to incorporate the fully burdened cost of energy into acquisition decisions: Joint Light Tactical Vehicle, CG(X) - Maritime Air and Missile Defense of Joint Forces alternative ship concepts, and Next Generation Long-Range Strike. Incorporating the “fully burdened cost of fuel” into acquisition analyses is a good step forward since energy efficiency starts with the Acquisition process.

A more realistic assessment of FBCF would consider the costs attributable to oil in protecting sea lanes, operating certain military bases and maintaining high levels of forward presence. Buying oil is expensive, but the cost of using it in the battlespace is far higher.

In November 2008, the DoD acquisition directive (5000.2) directed energy costs be included in calculations for total ownership costs, to include the fully burdened cost of fuel – the cost to deliver fuel the last “tactical mile”. The Office of the Under Secretary for Acquisition, Technology and Logistics is finalizing guidance on the methodology and requirements new acquisition programs should follow to calculate, report and glean insights from the fully burdened cost of fuel.

DUNCAN HUNTER NATIONAL DEFENSE AUTHORIZATION ACT FOR FISCAL YEAR 2009 (signed into law by President Bush on October 14, 2008) defines the term ‘‘fully burdened cost of fuel’’ as the commodity price for fuel plus the total cost of all personnel and assets required to move and, when necessary, protect the fuel from the point at which the fuel is received from the commercial supplier to the point of use.

Note that SEC32 of the Act mandates the use of the fully burdened cost of fuel in analysis and evaluation of technology in the acquisition process: “The Secretary of Defense shall require that the life-cycle cost analysis for new capabilities include the fully burdened cost of fuel during analysis of alternatives and evaluation of alternatives and acquisition program design trades.”

The Defense Acquisition Guidebook (DAG) defines a methodology for computing the Fully Burdened Cost of Fuel (FBCF) for acquisition purposes. In DAG Chapter 3 TOC FBCF - FINAL as of 5-22-09.doc the Fully Burdened Cost of Fuel is defined as the cost of the fuel itself (typically the Defense Energy Support Center (DESC) standard price) plus the apportioned cost of all of the fuel delivery logistics and related force protection required beyond the DESC point of sale to ensure refueling of this system. Estimates that include these logistics and protection costs may add from less than a dollar to over one hundred dollars to the per-gallon cost of the fuel. see also Fully Burdened Cost of Delivered Energy—Methodological Guidance for Analyses of Alternatives and Acquisition Tradespace Analysis. The DoD Directive 5000 describes how the FBCF is to be included in Total Lifecycle Cost estimates. These lay the foundation for how and when energy is integrated into the DoD requirements and acquisition processes.

In summary FBCF is an analytic construct for including both the commodity price of the fuel a system is expected to use in its projected missions, as well as the portion of the cost of the logistics "tail" (equipment, personnel and related expenses) that new platform will need for those missions to deliver the fuel to this platform or system in operations and training. The purpose is to more accurately reflect the true financial, operational and force structure implications of fuel demand of new systems within the acquisition tradespace.

The Army Environmental Policy Institute published a 2008 Sustain the Mission Project report (July 2008) providing a decision support tool methodology for calculating the fully burdened costs of fuel and water for missions in theaters of operation and training bases. This was a pilot project launched in an effort to give the management assistance in making decisions based on better energy and water efficiency.

For an example of Fully Burdened Cost of Fuel assessing Department of the Navy Major Defense Acquisition Programs see Masters thesis of Lieutenant Commander Robert M. Corley entitled EVALUATING THE IMPACT OF THE FULLY BURDENED COST OF FUEL in September 2009.



[1] Matthews, William, “DOD Seeks New Energy Sources.” Defense News, Vol. 22, No. 1, January 1, 2007.
11 Amory Lovins estimated in 2001 that the cost of a gallon of fuel delivered to a tank on the battlefield can reach $400 to $600 per gallon. See Amory B. Lovins, “Battling Fuel Waste in the Military” available on line at [http://www.rmi.org/sitepages/pid939.php].
[2] “More Fight—Less Fuel.” Report of the Defense Science Board Task Force on DoD Energy Strategy. February 2008.

1 Comments:

At 11:32 PM, Blogger Bob said...

Well done. Very informative. Balanced. Nice summary.

 

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