Majors Torpedoed by High LNG Project Costs

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Rising costs 'biggest challenge' for global LNG

(Who would have thought that IOC's PRL15 negative delivered to the plant gas cost would attract any interest all?)

Costs: Browse LNG project in Australia among those torpedoed by high costs

By Noah Brenner

 08 May 2013 20:41 GMT

The rapidly rising costs of construction for export terminals are the biggest challenge facing global LNG players but at least one executive sees the potential for those costs to moderate in the future as global construction capacity catches up with demand.

A spate of project sanctions in places like Qatar and Australia led to a five- to ten-fold increase in construction costs in the last 10 years, ConocoPhillips' manager of global LNG marketing Chip Shuppert said at the Offshore Technology Conference in Houston.

“It is imperative that industry finds a way to manage the escalation in capital costs,” Shuppert said of the runaway cost increases.

The increasing number of projects have had to rely on the limited number of engineering procurement and construction (EPC) contractors that can handle the complex work of creating a liquefaction terminal.

“Only a handful” of contractors work on LNG plants, Shuppert said, and “the risks of going outside that envelope are too great.”

Demand has trickled down from EPC contractors to equipment suppliers, but Shuppert sees an entire LNG industry that is better equipped to handle the increasing demand.

“Now you have an LNG EPC community whose capacity used to be at this level and is now at this level,” he said raising his hand.

Despite dire headlines about the potential fate of some of those Australian projects, Shuppert believes costs may have peaked and be ready to decline a bit as the number of new projects sanctioned each year declines.

“It’s all a supply-demand situation,” he said. “I think you could see a situation where one of the natural attenuating factors on capital costs is EPC companies have built up their capacity and if sanction rates start to drop then they are not stressed as much and pricing gets more competitive.”

Shuppert warned that such a dynamic is only possible if his estimates of future contracting are accurate.

“It’s impossible to predict, but there is a scenario out there where that could happen,” he said.

Furthermore, one area that could lead in the number of future project sanctions – the US – has a highly developed labour force and could be somewhat insulated from a rush to build LNG export terminals even if US government policies allow a large number of projects to enter the market, Shuppert said.

“I would expect some labour rates to go up, but you’ve got the whole Gulf Coast region – pipe-fitters, welders – you’ve got a wealth of skilled labour down there,” he said. “I don’t think you’d see the same sort of response that we had in Australia.”