Wood Mackenzie study shows LNG sector acting to curb cost inflation

Wood Mackenzie claims that it this will provide a major boost to engineering, procurement and construction (EPC) contractors and other providers along the supply chain.

Nonetheless, the consultancy argues that the LNG industry is infamous for both project delays and cost overruns, highlighting the fact that just 10% of all LNG projects have been built under budget, and that 60% have experienced delays.

Liam Kelleher, senior global LNG research analyst, 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.

“In our high case, we anticipate that a further 70 million tpy could be sanctioned in the next three years. Should even some of this materialise, construction would be stretched beyond the height of the 2010 – 2014 boom.”

Nonetheless, Wood Mackenzie states that this does not mean that the next cycle is destined to repeat the last cycle. Instead, Kelleher argues that there are numerous key differences this time.

He 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.”

In addition to this, Wood Mackenzie points out that the lower cost of raw materials should also help to keep expenditure down, as global steel prices are set to decrease from the heights of last year.

Kelleher added that new players entering the EPC market means that competition for construction contracts is growing.

He 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.”

The consultancy goes on to say that other parts of the value chain are also likely to see an increase in workload and, with that, costs. In the statement, Wood Mackenzie claims that a lean time for upstream subcontractors has led to a 25% decrease in workload capacity across the sector. An uptick in activity is expected to bring higher rates and subsea costs, a risk for major integrated projects in both Qatar and Mozambique.

Kelleher concluded: “Cost overruns in the previous boom averaged 33%, 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.”

Read the article online at: https://www.lngindustry.com/liquid-natural-gas/25042019/wood-mackenzie-study-shows-lng-sector-acting-to-curb-cost-inflation/