LNG EPC Costs are Manageable despite Boom: WoodMac
Over the next two years, almost 90mn mt/yr of LNG is expected to take final investment decision (FID) and start building, according to new research by consultancy Wood Mackenzie.
This will cost over $200bn on upstream and midstream facilities between 2019 and 2025, giving a big boost to engineering, procurement and construction (EPC) contractors and other providers along the supply chain, but bringing also the risk of delay and cost overruns.
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"Just 10% of all LNG projects have been constructed under budget, while 60% have experienced delays," Woodmac's LNG analyst Liam Kelleher said April 25. “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."
However the demand is spread globally, and so the chokepoints that hit Australian and US projects in the last cycle should be avoidable.
Also, he said, developers are more cautious about LNG development solutions, opting for modularisation and capex phasing. Raw materials are also cheaper than last time as steel prices are set to ease from their 2018 peak. And new players entering the EPC market mean that competition for construction contracts is strong.
Kelleher 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 [in Australia], Cameron and Freeport [both in US]. With an increase in workload, there is the potential for a recovery in project revenues for EPC contractors.”
Cost overruns in the previous boom averaged 33%, with Australian projects overrunning by 40%. While Woodmac 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,” he said. In Woodmac's high case, a further 70mn mt/yr could be sanctioned in the next three years. "Should even some of this materialise, construction would be stretched beyond the height of the 2010-14 boom,” he said.