The document discusses the challenges facing the LNG industry due to rising costs and price volatility. It notes that LNG project costs escalated dramatically between 2004-2010 due to increased demand for contractors and materials. This was exacerbated by projects being awarded as lump-sum contracts, forcing contractors to add risk premiums to cover uncertainties. Additionally, contractors significantly increased profit margins during this period. The document outlines factors driving recent oil and LNG price declines, creating difficulties for many producer countries and companies.

1. LNG
Industry:
Opera2ng
Under
Price
Shock
Environment
Presented
by:
Abdelrahman
Mohamed
Contracts
Engineer/Supply
Department

2. Background
• LNG
industry
has
witnessed
remarkable
booming
throughout
the
last
20
years.
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LNG Industry: Operating Under Shock Environment

3. Background
• Prices
were
very
sa2sfactory
to
the
producers.
• Market
situa2on
encouraged
new
players
to
join
the
LNG
game.
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LNG Industry: Operating Under Shock Environment

4. Background
• Due
to
this,
cost
of
new
LNG
projects
escalated.
• At
a
certain
point
,
prices
dipped
due
to
improved
technology.
• But
then,
cost
significantly
increased:
v Contractor’s
demand
(i.e.,
profit
margin
and
risk
con8ngencies).
v Rise
in
cost
of
Materials/Equipment.
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LNG Industry: Operating Under Shock Environment

5.
Cost
Escala2on
• According
to
P&P
(Poten
&
Partners):
v In
2004,
cost
of
Greenfield
LNG
plant
was
approximately
$210
t/yr
v In
less
than
2
years,
the
price
jumped
to
$250-­‐$350
t/yr
v 6
years
later,
price
exceeded
the
level
of
$500
t/yr
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LNG Industry: Operating Under Shock Environment

6.
Cost
Escala2on
• Cost
of
some
LNG
projects:
Ø Ras
Gas
III
(early
2009):
$256
t/yr
Ø Yemen
LNG
(late
2009):
$300
t/yr
Ø Tangguh
LNG
(Indonesia/BP):
18
month
delay
in
investment
decision
led
to
an
increase
from
$1.4
B
to
$1.8
B.
Ø Woodside
Petroleum
(Australia):
$571
t/yr
(total
cost
jumped
from
$2B
to
$2.4B)
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LNG Industry: Operating Under Shock Environment

7.
New
LNG
Projects:
Case
Study
• According
to
Project
Cost
Analysis
(By
SPE
Founda=on)
o Projects
Surveyed:
118
(from
year
2002
and
forward)
o Project
Cost
Range:
$0.340
billion
to
$6.8
billion
o Project
Loca=on:
North
America
(5%);
Middle
East
(22%);
Asia
(19%);
West
Africa
(25%);
South
America
(16%);
Europe
(5%);
South
Africa
(5%);
Mexico
(3%).
o Type
of
Projects:
LNG
(17%);
Mineral
(17%);
Chemical
(14%);
Oil
Refining
(7%);
Oil
and
Gas
Field
Develop.
(45%)
o Contrac=ng
Strategy:
EPC
lump
sum
(71%);
Reimbursable
EPC
(7%);
Reimbursable
EPCM
(17%);
and
Other
(5%)
o Contractor
Selec=on:
Bid
(61%);
sole
source
(10%);
preferred
(29%)
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LNG Industry: Operating Under Shock Environment

8.
New
LNG
Projects:
Case
Study
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LNG Industry: Operating Under Shock Environment

9.
New
LNG
Projects:
Case
Study
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LNG Industry: Operating Under Shock Environment

10.
New
LNG
Projects:
Case
Study
Reasons
for
sudden
rise
in
prices
§ Increase
in
LNG
projects
Vs
limited
LNG
experienced
Contractors
(Supply
&
Demand
mechanism).
§ Significant
boost
in
raw
material
prices
(steel,
cement).
§ Most
of
the
LNG
projects
have
been
awarded
as
EPC
Lump
Sum.
Contractors
have
a
hard
8me
holding
prices,
the
only
way
to
hedge
their
posi8on
is
by
charging
risk
premium.
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LNG Industry: Operating Under Shock Environment

11.
Oilfield
&
Contractor’s
Profit
Margin
• Even
though
Oilfield
services
(construc2on,
drilling,
maintenance,
etc.)
have
become
easier
and
more
efficient,
yet
Oil
produc2on
costs
have
gone
through
the
roof.
•
When
oil
service
firms
nego2ate
contracts
with
produc2on
companies,
they
usually
take
the
oil
price
into
considera2on.
• Significant
increase
in
Contractor’s
profit
margins
q 2%
to
5%
from
1990
-­‐2002
q 9%
to
12%
from
2004
and
2005
• When
you
add
the
Risk
Premium
(5%
to
7%)
,
Contractor’s
profit
margin
can
easily
hit
the
level
of
20%.
But
as
the
oil
price
drops,
do
we
expect
reduc2on
in
service
costs
(bringing
the
“break-­‐even”
price
down)?
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LNG Industry: Operating Under Shock Environment

12.
The
Slump
in
Global
Oil
&
Gas
Prices
• World
Bank:
“In
2015,
crude
oil
will
average
around
$96/bbl”.
• In
January
2015
oil
traded
around
$49/bbl.
(lowest
price
since
2009).
• Asian
LNG
spot
price
dropped
from
$20
to
$10/
mBtu
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LNG Industry: Operating Under Shock Environment

13. The
Slump
in
Global
Oil
&
Gas
Price
• With
this
low
price,
many
producer/countries
can’t
survive.
• Although
the
produc2on
price
is
extremely
important,
but
for
some
countries
Budgetary
Price
is
equally
important.
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LNG Industry: Operating Under Shock Environment

14. What
is
Driving
the
Oil/LNG
Price
Plunge?
• Cocktail
of
supply,
demand,
and
geopoli2cal
condi2ons
have
created
a
surplus
of
crude
oil
which
has
driven
down
the
price.
o Significant
increase
of
US
crude
oil
due
to
shale
oil
boom.
• Demand
slowdown
in
Europe,
Japan,
and
China.
• Decision
of
Saudi
Arabia
to
protect
market
share
rather
than
act
as
a
swing
producer
of
oil.
• LNG
price
is
well
correlated
with
Oil
price.
o On
average,
price
of
one
million
Btu
is
16%
of
a
barrel
of
oil.
o $50
to
$60
of
Oil
pushes
LNG
price
down
to
around
$8
to
$9.6
(on
contract).
o Spot
prices
might
even
be
lower.
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15. 15
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16. Will
the
current
oil
price
affect
the
oilfield
service?
• E&P
companies
have
been
under
large
pressure
due
to
massive
reduc8on
in
revenues.
• They
reacted
by
:
delay/cancel
projects,
downsize
their
capacity,
and
reduce
their
investment
commitments.
• In
a
recent
study
prepared
by
Rystad
Energy
Corpora=on
Ø The
combined
OFS
purchases
are
expected
to
grow
with
an
average
annual
rate
of
4.5%
towards
2020
(at
$110
oil
price).
Ø The
expected
annual
growth
rate
is
3.5%
(at
$80
oil
price).
But
the
current
oil
price
is
lower
than
$80!
Ø In
total,
there
is
about
$400
billion
of
OFS
purchases
that
can
be
shaved
from
the
2014-­‐2020
market,
70%
of
which
in
offshore.
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17. Will
the
current
oil
price
affect
the
oilfield
service?
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18. Will
the
current
oil
price
affect
the
oilfield
service?
• Petroleum
Services
Associa8on
of
Canada
(PSAC)
expects
a
drop
in
oilfield
service
ac8vity
including:
drilling,
construc8on,
fracking
services,
and
manufacturing.
• According
to
PSAC,
new
wells
that
will
be
drilled
in
2015
might
drop
by
32%.
• “There
is
enormous
pressure
on
service
companies
to
cut
costs
even
in
the
face
of
slim
margins.”
• Major
Oil
&
Gas
Companies
have
been
approaching
oilfield
companies
asking
for
breaks
on
service
prices.
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19. CONCLUSION
• As
oil
price
drops,
Opex/Capex
of
E&P
Companies
should
also
drop
in
order
to
bring
the
“break-­‐even”
price
down.
• E&P
Companies
will
probably
renego8ate
the
service
cost
in
different
ways
(like
bargaining
at
a
Turkish
Bazaar).
• The
Service
Cost
reduc8on
rate
probably
won’t
match
the
drop
in
Oil/LNG
price
,
but
“something
is
be`er
than
nothing”.
• In
Qatargas,
we
managed
to
reduce
the
margin
of
Manpower
Service
Companies
from
15%
to
10%.
• Other
companies
(QP
&
Rasgas)
are
trying
to
apply
our
model.
• Awarding
contracts
in
Euro,
GBP,
or
Yen
will
probably
be
of
benefit.
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