Demand for liquefied natural gas (LNG) will continue to rise in the foreseeable future as global natural gas demand will grow exponentially with major emerging economies raising the share of gas in their energy mix.
LNG plant developers are already planning the next wave of a new investment boom in the industry, following the first global LNG development surge at the beginning of this decade.
But as the new wave of project approvals and investments is set to sweep the market over the next few years, one question is on analysts’ minds—will the new LNG projects avoid the fate of the previous wave of LNG development, when cost overruns and delays were the rule rather than the exception.
This year could be the biggest year yet in terms of LNG volumes of projects given the go-ahead, analysts say.
This year is likely to set a record for volume of new project approvals, Michael Stoppard, Vice President and Chief Strategist for Global Gas at IHS Markit, wrote in March this year.
“The projects first out of the gates seem likely to serve as a “firing pistol” to initiate a new phase of development,” he said, noting that IHS Markit sees LNG demand rising from 320 million tons (mt) in 2018 to 465 mt by the mid-2020s, and exceeding 630 mt by the mid-2030s.
In this new wave of investment, LNG suppliers and developers will be facing demons of the past, Simon Flowers, Chief Analyst and Chairman for Wood Mackenzie, wrote in the article in Forbes.
Many major projects from the start of this decade were delivered behind schedule and over budget because they were too complex in design and scope, and some of them were developed in high-cost areas in often remote locations where labor shortages also pushed up costs, Flowers says.
Wood Mackenzie expects the new wave of investment in LNG supply to see a total of US$215 billion in expenditure between 2019 and 2025 on greenfield and brownfield projects, and backfill and finishing construction on projects already under construction. Related: IEA: CO2 Levels Hit Another Record High
The projects expected to be developed over the next five years will add 50 percent to global LNG supply, and annual spending on those developments could hit as much as US$70 billion early into the next decade, just shy of the 2013 peak and more than double the current low of below US$30 billion, WoodMac’s Flowers says.
However, the energy consultancy warns that some of the latest projects coming online continue to show cost overruns, such as the Cameron project on the U.S. Gulf Coast, which entered the commissioning phase a year behind schedule and with costs 23 percent over budget.
Still, there are several factors that make WoodMac more optimistic that the notorious behind-schedule and over-budget demons will not possess the next wave of LNG supply developments.
According to Giles Farrer, Director, Global LNG at Wood Mackenzie, LNG developers could better manage and deliver projects this time around because operators continue to stick to strict capital discipline, which could prevent upstream cost inflation in LNG projects compared to a decade ago.
Next, the geographical diversity of the new LNG projects means that local inflation pressure would be less than the one in the previous investment cycle in Australia and the U.S., especially in manpower, when projects were more geographically concentrated. Related: Oil Majors Are Missing The Renewable Boom In Asia
Third, developers try to modularize projects and components manufacturing in order to save costs and commission components at sites different from the actual location of the planned LNG facility.
Last but not least, raw material prices are expected to be subdued due to the current global economic slowdown, according to WoodMac.
In the previous LNG investment boom, cost overruns averaged 33 percent, while Australian projects saw costs above budgets at 40 percent, Farrer wrote in an article last month.
“While Wood Mackenzie 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,” Farrer said.
According to WoodMac’s Flowers, if the LNG industry exorcises the demons of the past, it will not only reap more resilient returns with projects on schedule and within budget, but it will also give stakeholders renewed confidence in investing in LNG which will only grow from now on.
By Tsvetana Paraskova for Oilprice.com
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