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Wood Mackenzie has stated that the LNG boom is back – predicting that capital spending on both the LNG plant and upstream infrastructure will total more than US$200bn in 2019-2025

44499016842 cb2a844731 zWood Mackenzie stated that LNG industry is notorious for cost overruns and project delays. (Image source: Jnzl's Photos/Flickr)

Wood Mackenzie’s new research forecasts that nearly 90 mmtpa are expected to take final investment decision (FID) and start construction over the next two years. This will provide a major boost to contractors in engineering, procurement and construction (EPC) and other suppliers along the supply chain, the report added.

The research and consultancy group stated that the LNG industry is notorious for cost overruns and project delays – 10 per cent of all LNG projects were built under budget, while 60 per cent experienced delays.

Liam Kelleher, a senior global LNG research analyst, 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 cancelled, Wood Mackenzie believes the risk to new LNG supply development is low and we see considerable upside supply potential,” he added.

“In our high case, we anticipate that a further 70 mmtpa 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 explained.

Kelleher declared that the upcoming cycle may not be a replay of the last, citing vital differences this time around.

“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.

“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.”

He indicated that lower costs of raw materials should also help to keep the expenditure ceiling as global steel prices are set to ease from their peak in 2018. He further added that new players entering the EPC market mean strong competition for construction contracts.

“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, Cameron and Freeport. With an increase in workload, there is the potential for a recovery in project revenues for EPC contractors,” he noted.

He concluded that an increase in activity is expected to bring higher rig rates and subsea costs, a risk for major integrated projects in Mozambique and Qatar.