IHS CERAWeek 2016: LNG Costs and Innovation

Rafael McDonald, Director, Global Gas & LNG, IHS, chaired a Wednesday morning "LNG Costs and Innovation" Strategic Dialogue, which focused on the well-known but less frequently addressed issue of liquefaction cost escalation and the ways to mitigate it in the current challenging global environment.

Maurice Brand, Managing Director and CEO, Liquefied Natural Gas Ltd., stated that his company thinks the best way to develop LNG is by adopting innovations from other industries, such as power generation, unlike traditional LNG development. He said that mid-scale LNG plants are the right approach to today's highly dynamic global market and that project simplicity, from using proven equipment to clear design execution, is key to minimizing costs. Mr. Brand added that 85-87% of the trains his company is envisioning for Magnolia LNG in Louisiana and Bear Head LNG in Canada is modularized with just five modules, which greatly reduces onsite work and saves money. In addition, he said, choosing the right location for the proposed LNG plant is critical-Magnolia LNG benefitted from having the Kinder Morgan Louisiana Pipeline crossing its property, which facilitated necessary permit approvals, and Bear Head LNG uses site improvements done by Anadarko in the past. Mr. Brand said that their costs at Magnolia are around $500 per metric ton but could be lower going forward.

Samuel Thomas, Chairman, CEO and President, Chart Industries, shared his insights from the perspective of an equipment provider for liquefaction plants. Mr. Thomas said his company has experience in standard small-scale LNG plants (between 100,000 and 450,000 gallons per day), which have many common elements and very high offsite fabrication, and much bigger, mid-scale modular plants with capacity between 0.5 and 1.5 MMtpa. He said that by building repeatable plant designs, standardizing components, and rotating equipment from a variety of vendors, Chart Industries presents a low-risk value proposition, which yields measurable savings. Mr. Thomas pointed out that their modules for mid-scale LNG plants are optimized for transport and installation by a qualified labor force, such as that typically available in the US Gulf Coast, which could shave off 12 months from the typical construction period. He said this lowers the financing threshold for the project and allows it to generate cash quickly.

Patrick Mullen, Executive Vice President and Operating Group President of Engineering & Construction for CB&I, began his remarks by reminding the audience about the LNG industry's historical cost trends from an EPC perspective. Until the 1990s/early 2000s, he said, significant cost reductions had been achieved over time owing to design improvements, scalability of operations, and manufacturing innovation. He said that with new demand outlets opening in the mid to late 2000s, sizeable LNG capacity additions were slated to happen. Yet, this construction wave coincided with a dramatic rise in costs as increasingly remote locations for projects, difficult logistics, labor shortages, and high commodity prices converged to drive costs up. Mr. Mullen expects that costs will be abating now as there is downward pressure in commodities and a focus on repurposing brownfield plants versus building new greenfield capacity (especially in the US Gulf Coast). He acknowledged that much of an LNG plant's cost is beyond the scope of the design engineers' work, but they should nonetheless be pursuing "fit for purpose" designs, which will lower costs. In addition, he said that CB&I's operating principle has been to "self-perform" by hiring fewer subcontractors and directly training the workforce, which not only gives CB&I more flexibility and reliability but also drives down costs.

The Q&A session began by discussing whether the cost per metric ton is still a relevant criterion for evaluating the competitiveness of LNG projects. Mr. Mullen said that this is still the case as a low-cost quote helps build confidence in offtakers, who sign up for capacity and facilitate project financing. Regarding lump-sum turnkey contracts, he said that CB&I typically works with customers for 1-2 years prior to signing the agreement to develop the proper scope of the contract and emphasized again that the company's self-perform model gives it an edge in negotiations. When asked about the future of costs, Mr. Brand stated that in the US Gulf Coast, we can see $400 per metric ton with continued work on efficiencies and optimization. He also commented that he sees the LNG industry evolving, as gas becomes a globally traded commodity, by building different size plants for different purposes, similar to refineries.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.