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The end of the LNG megaproject

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EY presented at the 22 World Petroleum Congress, focusing on the impact of the lower oil price on LNG megaprojects, the opportunities and challenges to adopt new practices to make megaprojects more cost effective.

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The end of the LNG megaproject

  1. 1. The end of the LNG megaproject Chris Pateman-Jones Director Oil & Gas | Ernst & Young LLP Andrea Teasdale | EY Lead Analyst
  2. 2. Page 2 The End of the LNG Mega-Project Industry forecasts — market for LNG will rebalance by early to mid-2020’s But is the equation behind forecasts fully understood or even accurate? Supply side certainty Demand side uncertainty Global LNG export capacity forecast to increase by one-third by 2021, based solely on projects currently under construction. Cheap coal and policy-supported renewable energy are displacing gas in the energy mix. As of April 2017, a little over 100mtpa of new liquefaction capacity was under construction. Short-term forecasts of gas demand growth are less optimistic than those generated just a couple of years ago. A further 400mtpa of unsanctioned liquefaction projects are at varying stages of development, half of which is in the US. Uncertainty around demand growth in emerging markets.
  3. 3. Page 3 The End of the LNG Mega-Project Industry forecasts — market for LNG will rebalance by early to mid-2020’s (continued) But is the equation behind forecasts fully understood or even accurate? Can the market absorb all this extra capacity … If you build it, they may not come! Demand side uncertainty poses the question
  4. 4. Page 4 The End of the LNG Mega-Project Demand side uncertainty and a low price environment Immediate Implications for project investment decisions 1 2 3 A total of 128mtpa of liquefaction capacity, equivalent to eight Gorgon-sized projects, has been delayed or cancelled since the beginning of 2015. Canada has 17 proposed export projects with an aggregate output of more than 150mtpa but none have reached final investment decision (FID) and three have been delayed indefinitely. In fact, an FID was taken on just one major project in 2016, the addition of a third train at the Tangguh LNG plant in Indonesia.
  5. 5. Page 5 The End of the LNG Mega-Project Demand side uncertainty and a low price environment (continued) Immediate Implications for project investment decisions Why have there been so few FIDs for new LNG projects? 1 Convergence of regional gas prices has eroded the premium for LNG in some markets. 2 Supply surplus has strengthened the negotiating power of buyers. 3 Industry-wide examples of cost and schedule overruns on greenfield LNG projects. 4 Price downturn has increased rigor in capital allocation and reduced near-term capital expenditure budgets. 5 Energy investment directed to short-cycle projects with capital flexibility and projects outside the industry.
  6. 6. Page 6 The End of the LNG Mega-Project Demand side uncertainty and a low price environment Implications for future investment decisions Future investment decisions will depend on whether the industry is able to develop greater certainty of forecasts and critically forecasts that show clear demand growth. Their ability to deliver this will be dependent upon: Competing energy sources Energy consumption cycles and new nuclear Sustained price recovery Project performance issues Project cost relative to alternative investment options the rise of renewables and storage technology. how will energy demand growth be met? how quickly will prices recover and for how long? can endemic performance issues be overcome to increase delivery efficiency? increasing competition for capital investment.
  7. 7. Page 7 The End of the LNG Mega-Project Investor/industry expectations Project delivery performance Market pressure/oil price volatility Adopting forecast assumptions When should future projects aim to achieve FID? ► If forecast consumption growth projections are adopted, based on development timelines, new projects should be moving through FID in 2019 onward. ► So what needs to change on future projects to ensure they are approved at FID … and are able to deliver against FID targets? Project performance — An industry wide challenge Productivity over past 10 years: The Conundrum: To be approved, projects must reach FID with lower costs and with greater certainty of delivery to target — All from the same teams and using similar/the same technology. + + of projects overbudget Average cost overrun projects overschedule %%% Oil and gas Industry 64 73 59 -55% +50% Source: EY – Spotlight on oil and gas megaprojects Source: Wages and salaries, employment and productivity, by industry, Table 09174 Statistics Norway and EY research
  8. 8. Page 8 The End of the LNG Mega-Project How to ensure sufficient oversight over project targets and performance? ► How to increase transparency over key decisions and project performance for board, investors and partners? ► How to improve operated and non-operated project/program performance through effective assurance? ► How to effectively govern project portfolio to manage risk and select the best projects to progress. How to build and maintain appropriate capability to develop and execute projects? ► How to ensure sufficient capacity, expertise and challenge to manage contractors and deliver project? ► How to meet peak man-hour needs across portfolio without unnecessary expense? ► How to maintain consistency in delivery of projects in a market where the workforce is mobile and not retained? How to develop and execute projects in as efficient a method as possible? ► How to reduce project cost to meet more stringent hurdle rates and continue to drive cost efficiency over time? ► How to reduce inefficiency in interactions with key contractors and suppliers through more effective collaboration? ► How to drive consistency of equipment and common units (trains, utilities etc.) across projects? Transforming project planning and delivery performance Three Strategic themes ► Important to recognize that there is unlikely to be a silver-bullet solution to the industry’s problems. ► Oil and gas organizations need to look to the cumulative effect of many additive efficiency opportunities that exist in existing processes and behaviours. Project oversight Project capability Project efficiency
  9. 9. Page 9 The End of the LNG Mega-Project Conclusions
  10. 10. Page 10 The End of the LNG Mega-Project The world has changed — the LNG industry needs to respond/adapt to survive Demand creation Increase understanding of potential consumers of gas and actively engage in demand creation to create a market for products. Fossil fuel dominance? Fossil fuels may be around for a while to come, but fossil fuel growth may be a thing of the past … so does it make sense to build projects with such long life-spans? Accuracy of industry forecasts? Are industry forecasts too inward focused and do they give enough weight to advances in renewables and storage technology … specifically in developing markets? Does LNG make sense? In a market where gas is abundant, does LNG transportation make sense or should we seek to further develop pipeline options? Recognizing the winds of change Don’t overlook the potential impact of renewables — Despite the US withdrawing from Paris agreement, other states are hardening stance on investment in green tech. Step change in project delivery Explore new ways of developing smaller, more flexible projects to reduce costs and minimize the risk of project overruns. Three Questions for the industry to consider: Industry next steps: 1 2 3
  11. 11. Page 11 The End of the LNG Mega-Project Visit our capital projects page for more information ey.com/oilandgas/capitalprojects
  12. 12. Page 12 The End of the LNG Mega-Project Chris Pateman-Jones Director Oil & Gas Ernst & Young LLP, UK Author Chris is a director within EY’s global Oil & Gas service, focusing on the development of major capital projects. After completing his PhD, Chris started his career at Bechtel Corporation, one of the world’s major EPC companies. Then seven years ago, after working across the UK and Middle East with Bechtel, Chris joined EY Global, based from the UK. Chris now splits his time between client engagements on projects around the world and continuing his authorship of the EY Megaprojects Series.
  13. 13. EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. How EY’s Global Oil & Gas Sector can help your business The oil and gas sector is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. EY’s Global Oil & Gas Sector supports a global network of more than 10,000 oil and gas professionals with extensive experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oil field subsectors. The Sector team works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant sector issues. With our deep sector focus, we can help your organization drive down costs and compete more effectively. © 2017 EYGM Limited. All Rights Reserved. EYG no. 04497-174GBL BMC Agency GA 1005401 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com

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