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Energy: LNG boom puts pressure on costs

Global demand for liquefied natural gas (LNG) had been gr owing even before the recent Ukraine crisis turned back the clock on the West’s relations with Russia. Even though the rhetoric about a new Cold War never actually caused the gas taps to be turned off, many European countries that had come to rely on Russian gas suddenly began to look for alternative sources of supply.

Later this month the European Union is due to publish a road map of how the eastern bloc can cut its reliance on Russia and boost the security of its gas supply. It’s likely that this will include plans to import more gas not through pipelines but in the form of LNG transported by ships.

LNG technology – which cools and condenses natural gas into liquid form for transportation – is redrawing the global energy map. For more than a decade, Qatar has been the world’s largest exporter of LNG, and it remains Britain’s biggest supplier of the product. But its dominance is now facing some tough challenges from other gas-producing nations. Australia is investing heavily in LNG technology, with no fewer than seven LNG projects currently under construction.

Even though its primary market – China – last month signed a reported £238bn deal to buy piped Russian gas, the Australians are still banking on leapfrogging Qatar as the world’s number one LNG exporter by the end of the decade. But competition is hotting up, with the United States – recently confirmed as the world’s biggest gas producer thanks to its hydraulic fracking boom – also looking to export via LNG.

In the longer term the map could be redrawn once again with the arrival of floating LNG (FLNG) facilities at sea – capable of producing, liquefying and shipping the gas without the need to bring it ashore to be processed. FLNG technology could be the key to unlocking the vast reserves of natural gas – 180 trillion cubic feet discovered so far – in the Rovuma Basin off the East coast of Africa.

But if East Africa is the new frontier of LNG, Australia remains the frontline. It currently has three LNG developments already in operation, and £110bn worth of projects under construction, according to the Australian Petroleum Production & Exploration Association.

But project costs have risen sharply in recent years as energy companies compete with iron ore and coal miners for construction workers and equipment. Of the six onshore green-field LNG liquefaction projects currently under construction in Australia, five have so far reported cost overruns, ranging from 16% to 46%.

In my view, such seemingly systemic cost problems often stem from the way the work is contracted. At present Australia’s oil and gas sector relies almost exclusively on competitive tendering – which can often lead to an adversarial supply chain once work begins.

I’ve seen fully negotiated partnership-based contract models on major projects in several other industries, and would encourage oil and gas sector clients to consider this approach.

They may not be a panacea, but the thinking behind such partnerships is compelling; by giving the contractor(s) an agreed percentage of overhead and profit, you can get on with delivering the job to schedule and budget rather than spending time fighting claims, or wasting effort and resources that could have been better spent on project delivery.

At the moment LNG projects tend to be highly technology driven. Given their complexity, this is understandable. Butcontract strategy in such challenging projects should not be left as an afterthought. Used right, partnership can be a very effective tool for project management, and used early it can establish a win-win delivery environment and a committed supply chain, minimising claims and cost overruns.

In the battle for future supremacy in the LNG export market America is a late arrival, but its good infrastructure and vast resources will make it a formidable competitor. Australia’s political stability and proximity to the energy-hungry economic giants China, Japan and South Korea all bode well for its LNG industry. But as it seeks to ramp up production it must not let its first mover advantage be eroded by high costs.

The world’s oil and gas industry is watching the progress of Australia’s LNG project building spree closely, but those responsible for delivering these vast and complex structures should consider looking further afield for the best way to contract their supply chain.

  • Andy Aston is Asia region director of natural resources at Turner & Townsend

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