Related Articles
Forward article link
Share PDF with colleagues

Mega-LNG projects will be forced to cut costs by over 20%

Chief operating officer at BG Group has said the cuts will need to be made to tempt buyers back

With the cost of liquefied natural gas (LNG) production still rising – there has been a four-fold increase between 2006 and 2014 - the days of mega-LNG projects are over.

These proposed large scale high-cost developments, which can cost as much as $2,000-3,000 per installed tonne, are falling by the wayside, and will need to slash costs by over 20% to tempt buyers to back them, Martin Houston, former chief operating officer at BG Group, told Petroleum Economist

Houston, who worked at BG for more than 30 years and has set up US-focused Parallax Energy to focus on mid-scale LNG schemes, typically ranging from 1.5 million to 2m tonnes per year (t/y) in size, said the key for producers is to listen to the market.

“If you can produce smaller tranches of LNG that can clear the market at $12 per million British thermal unit (Btu) then you should be fine,” he added.

With the days of high-cost mega projects over, smaller companies like Parallax are planning to offer smaller-scale innovative solutions, with the key being “not over-engineering projects”, Houston said. 

“An LNG plant is, at its simplest, just a giant refrigerator. Therefore the technology can be – and should be – really simple. Over-complicating these projects just adds costs and we are not going to do that,” said Houston, who has two US projects on the drawing board.

As the LNG market evolves over the next decade, smaller and more capital-efficient projects look set to carve out a sizeable space in the market.

Houston believes smaller tranches of LNG, below 1m t/y, on shorter tenor, will become the new norm.

The market will inevitably become more liquid as contract terms evolve, many experts believe. This improved flexibility will have value for both producers and consumers. However, it will take time to establish. “LNG is a different animal to oil, and it will be a gradual shift to a more flexible market,” Houston said.

For now, the market appears over supplied as new projects, particularly in Australia, start to come online. But with buyers reluctant to commit to new LNG developments, it’s only a matter of time before the market tightens again.

Tony Regan, principal consultant at Tri-Zen International predicts a shortfall of some 50m t/y between 2018 and 2020. 

Houston agrees that the market is structurally short. Qatar, the world’s largest LNG producer, has no plans to lift its production moratorium, East Africa is entering the game, but from a standing start, western Canada’s projects face delays, new Australian LNG is uncertain due to costs, while Russian sanctions are creating obstacles, while politically challenging circumstances have hampered development in the eastern Mediterranean. So, US Gulf, eastern Canada, Trinidad and Tobago and perhaps Mexico are more likely supply options.

Still, buyers feel they have the upper hand and appear unwilling to call the market long, instead preferring smaller tranches of LNG, pitching the market into a state of inertia. 

The danger is that buyers are using the putative US LNG supply as leverage, but they have picked the wrong time to do so, reckons Houston. 

Regan expects few final investment decisions this year, save for in the US, where three schemes might move forward, and possibly train three at BP’s Tangguh plant in Indonesia. But the latter would mostly supply the domestic market.

With Japan, the world’s largest LNG buyer, over-contracted, South Korea comfortably supplied and China on target with its supply deals, Regan does not expect many supply contracts to be nailed this year. Although Japan may consider renegotiating some Malaysian and Australian legacy supply agreements. 

Back in the US, where emerging developers generally sell supplies based on tolling agreements tied to domestic gas prices, which look increasingly volatile, it might not be smooth sailing either. 

“Many of the new US exporters are neophytes to the game – and will not know how to manage that (price) volatility,” said Houston, who is also setting up a gas supply and trading business to seize opportunities created by rising gas demand and price volatility. 

Also in this section
Cyprus pursues LNG import and export options
11 October 2019
In early 2020, the Cypriot government will award LNG supply contracts, while revisiting LNG export plans
Gas ‘essential’ to the energy transition: Dudley
10 October 2019
Hitting net-zero carbon emissions is impossible without natural gas, CCS and hydrogen, says departing BP leader
Infrastrata buys Titanic builder
9 October 2019
Gas storage developer takes the unusual step of purchasing a heavy engineering firm to work on its proposed UK project