As the world’s energy markets look to transition from the high carbon emitting sources of coal and oil to low carbon and eventually no carbon energy supplies, the importance of natural gas in this journey cannot be overestimated. In its recent Energy Outlook for 2018, BP laid out the argument for the increased influence of gas in the energy mix. Looking as far out as 2040, BP forecasted gas consumption will grow at a much faster rate than oil or coal, to just under 30 per cent of the total energy share.
This growth will be supported by broad-based demand, strong increases in low-cost supplies and continuing expansion of supplies of liquefied natural gas (LNG) increasing the availability of gas globally. According to BP’s forecast, in a market driven by increased industrialisation, fuel switching and low cost supplies, the U.S. will provide almost one quarter of the world’s gas production, while global supplies of LNG will more than double, with approximately 40 per cent of that expansion occurring over the next five years.
Shell has an even more optimistic view of the growth of gas. In its LNG Outlook for 2018, Shell expects gas to make up more than 40 per cent of energy demand growth over the next two decades, with demand for LNG to increase at an average of 4 per cent a year.
Much has been made of the role of gas as an enabler or a transition fuel to facilitate the move to a lower carbon environment. However, with BP forecasting that wind and solar will still make up only 14 per cent of the world’s primary energy consumption by 2040, that transition could take a generation. With the added context of the Paris Climate Agreement (COP21), by focusing on the importance of gas in laying the path for a brighter tomorrow, we run the risk of losing sight of the significant impact and influence gas is having now.
Rather than being exclusively the fuel of the future, gas is the fuel of today - its golden age has arrived. The gas economy is with us, driven by its relative cleanliness, stability, abundance and low cost. It’s time for gas to take centre stage.
The growth of gas
Recent well-publicised developments provide justification for recognition of the importance of gas and the desire to get it to market as soon as possible. In the Mediterranean Sea, for example, huge and well publicised discoveries have been made at the Zohr and Leviathan fields. Egypt’s Zohr field is estimated to contain 30 trillion cubic feet of gas, almost double the amount estimated to be held within Israel’s sizeable Leviathan field.
Elsewhere, notable discoveries have been made in many locations, including offshore East Africa, in Mozambique and Tanzania. Onshore, the growth of the North American shale gas industry has been one of the greatest industrial success stories of the 21st century while impressive projects continue to develop in many other parts of the world.
However, the global gas industry will only be able to reach its potential if the infrastructure is in place to facilitate moving the molecules to realise such growth. The U.S. Energy Information Administration recently estimated gas output would increase by 24 billion cubic feet, or 32 per cent, through 2025.
However, there are concerns infrastructure construction is not progressing quickly enough to meet this punishing pace. It has been suggested, for example, that to support such growth, the country’s gas industry needs to spend US$170 billion over the next seven years on pipelines, compressor stations, export terminals and other related infrastructure. In the LNG market, the number of LNG project sanctions or final investment decisions (FIDs) since 2010 has meant the market is awash with new LNG production capacity.
In addition, the remaining projects still in in engineering, procurement and construction (EPC) are slated to come on-stream before 2020. Many call this period of supply and demand an “LNG glut” while others see the market absorbing the new LNG capacity with ease, albeit at lower sales prices than seen just a few years ago.
Simultaneously, North America has a plentiful amount of low-cost natural gas with flat regional demand and no specific export destination for sale. These conditions result in a number of LNG export opportunities vying for customers.
This combination of low cost North American supply and a near term “LNG glut” results in a drastic change in mind-set from the historically predictable increase in annual LNG demand where new supply was only built when correlated with new demand.
If we agree that there is a current oversupply of LNG, forecasters look to the years beyond 2022 as the time when the “LNG glut” will have been absorbed by the market and future demand growth returns to predictable levels.
Therefore, it may be only after 2022 when the world requires new LNG production capacity. While plant expansions are normally the lowest cost of incremental supply, natural gas owners, pipeline companies and LNG project developers will look for opportunities to implement grassroots projects to capture the value of this low cost resource in this era of uncertain LNG pricing and overall project economics.
However, with global demand predicted to continue growing after the middle of the next decade, there is a concern that a gas supply shortage is likely to occur unless investments in new facilities and infrastructure are made now to feed such an increase.
To start up an LNG facility as early as 2022, new FIDs should occur at least four years earlier (ie this year). The challenges facing grassroots project opportunities is that the most recent slate of projects have been characterised as involving a high capital expenditure (capex) and taking longer than expected to complete. For many developers reviewing project economics, building new projects at these recent capex and schedule trends makes future projects unfeasible at current market conditions.
The cost question
The decision on whether or not an operator decides to advance a project through the project development process is primarily determined by the estimated cost (capex). Currently, the reaction to current project cost and schedule estimates, including how to improve them, is often polarised. Since 2014, the capex of LNG projects has generally been considered radically expensive. This view is because projects in completion had experienced cost growth while proposed projects are viewed as unsustainable at current costs and LNG sale prices.
In addition, the industry retains strong memories of cost trends from the 1990s and 2000s where unit costs (US$/ tonne) were targeted at $200 per tonne and below. Therefore, there is a desire to reverse the trend of high capex projects based not on current experience, but on recent memory. New project developers, operating on the LNG tolling model, require low-cost facilities when they don’t control the gas supply.
Experienced project developers, regardless of their LNG sales strategy, desire the previous rates of return when project costs were low and LNG sales prices were high. Banks require cost certainly and often lump sum turnkey (LSTK) EPC contracts while the EPC contractors must evaluate the risk associated with multi-billion dollar projects that may overrun their cost or schedule estimates.
The points of view from different stakeholders of the project development community often lead to several questions:
- Are the costs of recent and future LNG projects expensive or are they reasonable?
- Does the cost have more to do with where we locate the projects and how we develop and execute them, or are they inherently “good or bad”?
- Will recent project results become the new cost and schedule benchmarks?
- Will capex, and/or $US/tonne, go significantly down in the foreseeable future?
KBR’s recent LNG publications focus on both technology and execution. A common theme when comparing one project to another is: Not All LNG Plants are Created Equal (3,4) In short, the site-specific elements of every project (technical, commercial, and execution-related) heavily influence project capex and schedule.
When reviewed over time, comparing recent project results to historic project results leads to the misleading use of $US/tonne (unit cost) as a means to judge the past as well as the feasibility of future LNG projects.
In reality, projects in the earliest stage of development may not know their sites specific impacts to capex and schedule, and there can be a considerable gap between the aspirations and expectations of the operator or site owner versus the capabilities and execution plan of the contractor.
The continuing dialogue over what an LNG project should cost can lead to an implacable position between the two sides.
In the context of technical or commercial LNG issues, implacable positions can result in an awkward stalemate on how to best develop a project. In LNG design and execution, there are many decision points that often form polarising positions.
In some cases, the positions are based on core beliefs or on the interpretation of limited data. However, there simply aren’t enough project cost and schedule data points to know the best possible way of configuring an LNG plant in every location without detailed study.
The lack of clear and consistent historical data leads to an understanding on how different teams will arrive at different conclusions on how to develop a project, including projects that are very close to each other. Even with detailed study, historical data is mostly site-specific and often cannot be used as a universal answer for subsequent projects.
Contractors regularly pursue how technology and execution can reduce capex, life cycle costs and improve performance and reliability. Examples of design issues facing many projects are shown below. In addition to the examples above, the public debate about LNG project unit cost continues to escalate.
With the current LNG glut and the lack of project FIDs, the debate is reactionary and completely natural; project CAPEX when viewed over time is seen as too high – the reaction is that project cost must come down or new projects cannot be sanctioned. If we can agree that lower costs are good for projects, how does capex or $US/tonne simply ‘come down’, especially when most innovations affect only the LNG trains, which represents a fraction of the overall facility cost?
A way ahead
As with many other sectors in the oil and gas industry, LNG has the potential to be the victim of its own success. After decades of successful projects, many regions are now awash in low-cost natural gas. In order to grow LNG, there is a widespread push for changes in project capex to develop new projects in the current economic climate. The reformers have a new vision of LNG unit cost and are leading the push for change.
While they believe their vision will set the path for change, change does not come easily. Recent history has shown that project costs are increasing without insight as to how to revert the trend. Based on analysis from groups such as IPA, projects are shown not only to have cost growth but many other flaws which lead to undesirable outcomes.
The traditionalists look back to history and rigorous project development planning in order to return to predictable results. They see predictability as the key to keeping projects on track from feasibility through to execution. With all the debate about how to develop projects suitable for sanction, is there instability in the project development world or is there a revolution on the horizon? No, there is no such revolution coming.
A revolution will cause undue discomfort to one side of the discussion, and history indicates it will be the traditionalists who feel the discomfort. The signals from both sides indicate that a correction is necessary, but an immediate or radical correction is impossible based on recent history and the natural behaviour of thousands of people on project teams executing megaprojects.
What we have today is a turning point in the LNG timeline.
Lower unit costs will lead to more projects in the future, but a higher assurance of outcome would be an equally positive correction in LNG megaproject delivery. The sustained growth of the industry depends on fully developing projects pre-FID and reliably estimating costs and schedules in order to gain assurances on the project outcome. In order to make a correction, top-down and bottom-up thinking must meet in the middle.
Projects should start with stretch goals and a top-down vision, but one that is supported by economic analysis of what range of costs can make a project viable. Once project feasibility is assured, strive for low capex for a given site, but pay attention to the site-specific details; paying attention means to seriously take on the lessons from recent projects (and the people who executed them) and evaluate site factors during the front-end engineering and design (FEED) stage.
While in FEED, it is important to develop project estimates with a bottom-up collaborative approach and allow the proper time for contractors and suppliers to provide the necessary estimate and schedule information without adding unnecessary cost risk or contingency. By working together and establishing a greater common understanding of ambitions and achievements, the gas industry can ensure its golden age lasts for many years to come.
At the heart of the conversation
The future direction for the expanding gas and LNG markets will be a key theme at the 2018 Gastech Exhibition and Conference in Barcelona. This year’s Gastech, the global exhibition and conference at the forefront of the international gas, LNG and energy industries, will bring together professionals from across the industry to exchange strategies for driving forward the ever-evolving global gas industry.
Held from 17 – 20 September at the Fira Gran Via, Barcelona, the event is uniquely placed at the heart of the conversation, navigating the next steps the industry takes amongst discussion and debate around advances in technology, efficiency and market fluidity and the competitiveness of natural gas.