The Next LNG Boom Will Dwarf The Last

One
By Tsvetana Paraskova - May 28, 2019, 3:00 PM CDT

Demand for liquefied natural gas (LNG) will continue to rise in the
foreseeable future as global natural gas demand will grow
exponentially with major emerging economies raising the share of
gas in their energy mix.

LNG plant developers are already planning the next wave of a new
investment boom in the industry, following the first global LNG
development surge at the beginning of this decade.

But as the new wave of project approvals and investments is set to

sweep the market over the next few years, one question is on
analysts’ minds—will the new LNG projects avoid the fate of the
previous wave of LNG development, when cost overruns and delays
were the rule rather than the exception.

This year could be the biggest year yet in terms of LNG volumes of
projects given the go-ahead, analysts say.

This year is likely to set a record for volume of new project approvals,
Michael Stoppard, Vice President and Chief Strategist for Global Gas
at IHS Markit, wrote in March this year.

“The projects first out of the gates seem likely to serve as a “firing
pistol” to initiate a new phase of development,” he said, noting that
IHS Markit sees LNG demand rising from 320 million tons (mt) in
2018 to 465 mt by the mid-2020s, and exceeding 630 mt by the mid-
2030s.

In this new wave of investment, LNG suppliers and developers will be

facing demons of the past, Simon Flowers, Chief Analyst and
Chairman for Wood Mackenzie, wrote in the article in Forbes.

Many major projects from the start of this decade were delivered
behind schedule and over budget because they were too complex in
design and scope, and some of them were developed in high-cost
areas in often remote locations where labor shortages also pushed
up costs, Flowers says.
Wood Mackenzie expects the new wave of investment in LNG supply
to see a total of US$215 billion in expenditure between 2019 and
2025 on greenfield and brownfield projects, and backfill and finishing
construction on projects already under construction.Related: IEA:
CO2 Levels Hit Another Record High

The projects expected to be developed over the next five years will
add 50 percent to global LNG supply, and annual spending on those
developments could hit as much as US$70 billion early into the next
decade, just shy of the 2013 peak and more than double the current
low of below US$30 billion, WoodMac’s Flowers says.

However, the energy consultancy warns that some of the latest

projects coming online continue to show cost overruns, such as the
Cameron project on the U.S. Gulf Coast, which entered the
commissioning phase a year behind schedule and with costs 23
percent over budget.

Still, there are several factors that make WoodMac more optimistic
that the notorious behind-schedule and over-budget demons will not
possess the next wave of LNG supply developments.

According to Giles Farrer, Director, Global LNG at Wood Mackenzie,

LNG developers could better manage and deliver projects this time
around because operators continue to stick to strict capital discipline,
which could prevent upstream cost inflation in LNG projects
compared to a decade ago.

Next, the geographical diversity of the new LNG projects means that
local inflation pressure would be less than the one in the previous
investment cycle in Australia and the U.S., especially in manpower,
when projects were more geographically concentrated. Related: Oil
Majors Are Missing The Renewable Boom In Asia

Third, developers try to modularize projects and components

manufacturing in order to save costs and commission components at
sites different from the actual location of the planned LNG facility.

Last but not least, raw material prices are expected to be subdued
due to the current global economic slowdown, according to
WoodMac.

In the previous LNG investment boom, cost overruns averaged 33

percent, while Australian projects saw costs above budgets at 40
percent, Farrer wrote in an article last month.
“While Wood Mackenzie does not expect similar increases this time,
the potential for operators and contractors to drop the ball on project
delivery remains. This risk will only be heightened if more projects go
ahead than our base case forecast,” Farrer said.

According to WoodMac’s Flowers, if the LNG industry exorcises the

demons of the past, it will not only reap more resilient returns with
projects on schedule and within budget, but it will also give
stakeholders renewed confidence in investing in LNG which will only
grow from now on.

By Tsvetana Paraskova for Oilprice.com

In adjusted terms, $200 billion on LNG infrastructure over the next 6 years is about what it took
the US to put a man on the moon. 😳 I’m not convinced by the opinion on future projects likely to
come in at cost and schedule: firstly, operators are not developers, and developers (the EPCs)
have had to consolidate due to recent overruns which has now put more eggs into fewer
baskets; secondly, the return model and delivery incentive for these new facilities vary
enormously (Qatar is financing expansions with state money, Cameron is a tolling-based project
financing, whilst others - e.g. Driftwood - are equity-financing the entire value chain); thirdly,
upstream cost inflation is a red herring - dedicated coal-seam gas is nothing like a liquid shale
gas market; and fourthly, it makes no sense that more projects will automatically equal more
risk to individual projects. Frankly, it is possible to deliver ANY project on cost and budget as
long as they are realistically set and not optimism or stakeholder-biased at sign-off. In my
opinion it is essential to align investment objectives, project delivery, and project returns - by
bringing end-to-end insights to all stakeholders, BEFORE the same old failed capital project
stories are signed off again. What are members views?

Well said, Sailesh. The prior $200B+ construction boom saw cost increased from $1,000 per MT
to over $4,000 per MT in a few years. This number is even more astounding when you take into
account Atlantic LNG trains 2/3 cost was ~ $250 per MT. So between 2002 and 2014 we saw cost
increase 16x. This significantly impacts the full cost breakeven and offset the geographic
advantage that countries such as Australia had to Asian markets. Sadly, history has a tendency to
repeat itself.

Sailesh Patel

Sailesh Patel Authordirector at encap.consulting | energy capital, transformed |

strategy. deals. innovation.

Thanks Barry - we can adjust for technical differences in LNG facilities but more often the cost is
regionalised and market driven; Australia was a bad case of concurrent projects cannibalising
each other and suffering the consequences. I do believe that by looking to global/regional
judgements and forecasts, as well as “sentiment” analysis, the root causes will never really be
exposed and addressed. One of hashtag#encapconsulting’s core innovation efforts is to focus
on bringing realtime project control to capital project delivery - an area where i) operators (the
majors) have very limited understanding, simply being cost-driven buyers, and ii) the benefits
can be significant, but digitalisation efforts for suppliers (EPCs, etc) are fragmented and
misunderstood by corporate buyers inundated with data-first, value-later strategies. Happy to
take the discussion offline.