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200bn LNG Capex Boom Expected in 6yrs …Wood Mackenzie

-By Gideon Osaka

There is every likelihood that global liquefied natural gas, LNG, market will experience boom in the next six years, Wood Mackenzie, a research and consultancy group stated.

The group is of the view that capital spending on both the LNG plant and upstream infrastructure will total more than US$200bn in 2019-2025. Specifically, it stated that over the next two years, almost 90 million tonnes per annum (mmtpa) of LNG is expected to take final investment decision (FID) and start construction. This will provide a major boost to engineering, procurement and construction (EPC) contractors and other providers along the supply chain. Wood Mackenzie however took into cognizance the fact that the LNG industry is replete with cost overruns and project delays, as it noted that just 10 percent of all LNG projects have been constructed under budget, while 60 percent have experienced delays.

Though it did not mention the countries where these delays occurred, it could be recalled that Nigeria’s Brass LNG and Olokola LNG have been in abeyance more than 14 years due to lack of final investment decisions, FID. The $20bn Brass LNG project in Bayelsa State and the $9.8bn Olokola LNG project, located on the border town between Ogun and Ondo states, were initiated in 2003 and 2005 respectively. The Brass LNG project, which was designed to produce 10 million metric tonnes per annum, was to be built by the NNPC, Chevron, ConocoPhillips and Eni Group. But ConocoPhillips and Chevron have withdrawn from the project. OK LNG project, which was also designed to produce an initial 10 million metric tonnes per annum, was being built through a joint venture by the NNPC with Royal Dutch Shell, Chevron and BG Group. But all the international oil companies have pulled out of the project. Speaking on the expected boom in the LNG industry, Liam Kelleher, senior global LNG research analyst, Wood Mackenzie, said: “The many projects jostling for FID right now have low headline costs, but in light of the historical reality of LNG construction, some project delays are likely. “While there is a risk that current low LNG prices may see some proposed projects cancelled, Wood Mackenzie believes the risk to new LNG supply development is low and we see considerable upside supply potential.” He added: “In our high case, we anticipate that a further 70 mmtpa could be sanctioned in the next three years. Should even some of this materialise, construction would be stretched beyond the height of the 2010-14 boom.” But that does not mean the upcoming cycle is destined to be a replay of the last. There are a number of key differences this time round, Kelleher said.

“Firstly, the global spread of projects will mean that the local inflation pressure, particularly in terms of manpower, which hit Australia and the US in previous cycles, is lessened.

“Secondly, developers are also being more cautious about LNG development solutions, opting for modularisation and capex phasing. This, coupled with renewed caution with investment programmes across the upstream sector, should help limit global upstream inflation.” Lower raw material costs should also help keep a cap on expenditure, as global steel prices are set to ease from their 2018 peak. He added that new players entering the EPC market mean that competition for construction contracts is strong. Kelleher said: “While LNG operators have enjoyed a return to profits in recent years, many LNG EPC contractors remain firmly in the red. “Tough times bring tough contract conditions and EPC contractors have taken financial hits from project cost overruns as seen at Ichthys, Cameron and Freeport. “With an increase in workload, there is the potential for a recovery in project revenues for EPC contractors.” Other parts of the value chain are also likely to see an increase in workload and with it, costs. A lean time for upstream subcontractors has resulted in a 25 percent drop of workload capacity across the sector. An uptick in activity is expected to bring higher rig rates and subsea costs, a risk for major integrated projects in Mozambique and Qatar. He added: “Cost overruns in the previous boom averaged 33 percent, with Australian projects overrunning by 40%. 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. Only time will tell whether LNG will start to shrug off its difficult delivery reputation.”