WoodMac: LNG industry heading into $200 bln Capex boom

Over the next two years, almost 90 million tonnes per annum (mtpa) of LNG is expected to take final investment decision (FID) and start construction.

New research from the consultancy group Wood Mackenzie shows that capital expenditure – for both LNG plant and upstream infrastructure – will total more than $200 billion between 2019 and 2025, showing that the LNG book is back.

This will provide a major boost to engineering, procurement and construction (EPC) contractors and other providers along the supply chain.

However, the LNG industry is notorious for cost overruns and project delays – just 10 percent of all LNG projects have been constructed under budget, while 60 percent have experienced delays, WoodMac said.

LNG projects expected to face delays

The consultancy’s Liam Kelleher, 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 canceled, Wood Mackenzie believes the risk to new LNG supply development is low and we see considerable upside supply potential.”

He added that in WoodMac’s high case, a further 70 mtpa could be sanctioned in the next three years. Should even some of this materialize, 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.

Steps taken to limit inflation

“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,” Kelleher said.

Lower raw materials 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.

“While LNG operators have enjoyed a return to profits in recent years, many LNG EPC contractors remain firmly in the red,” he said.

EPC contractors see potential for recovery

“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,” Kelleher noted.

Other parts of the value chain are also likely to see an increase in workload and with it, costs, according to Wood Mackenzie.

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.

Kelleher added, “Cost overruns in the previous boom averaged 33 percent, with Australian projects overrunning by 40 percent. While Wood Mackenzie does not expect similar increases this time, the potential for operators and contractors to drop the ball on project delivery remains.”

He further noted this risk will only be heightened if more projects go ahead than the consultancy’s base case forecast.

“Only time will tell whether LNG will start to shrug off its difficult delivery reputation,” Kelleher concluded.