As reported on Rigzone.
Declaring that the “boom is back” for liquefied natural gas (LNG), Wood Mackenzie predicts that capital spending on LNG plant and upstream infrastructure will total more than $200 billion from 2019 to 2025.
In fact, a new Wood Mackenzie study anticipates that nearly 90 million tonnes per annum (mmtpa) of LNG capacity should take final investment decision (FID) and start construction in the next two years alone. Engineering, procurement and construction (EPC) contractors and others along the LNG supply chain should get a “major boost” as a result, the consultancy finds.
To be sure, Wood Mackenzie points out that the LNG industry is “notorious” when it comes to cost overruns and project delays. The firm points out that only 10 percent of all LNG projects have been constructed under budget and 60 percent have encountered delays.
“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,” Liam Kelleher, senior global LNG research analyst with Wood Mackenzie, said in a written statement emailed to Rigzone. “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.”
Kelleher also noted that, in Wood Mackenzie’s high case, the firm projects that an additional 70 mmtpa of capacity could be sanctioned in the next three years.
“Should even some of that materialize, construction would be stretched beyond the height of the 2010-14 boom,” said Kelleher, adding that the upcoming construction cycle will not necessarily be a replay of the last.
According to Kelleher, a number of factors have changed.
“Firstly, the global spread of projects will mean that the local inflation pressure, particularly in terms of manpower, which hit Australia and the U.S. in previous cycles is lessened,” Kelleher said. “Secondly, developers are also being more cautious about LNG development solutions, opting for modularization and capex phasing. This, coupled with renewed caution with investment programs across the upstream sector, should help limit global upstream inflation.”
Furthermore, Kelleher pointed out that cheaper raw materials costs – notably subsiding global steel prices – and the entrance of new EPC players translate into 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,” said Kelleher. “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.”