How to Avoid Surprises in Capital Cost and Early Production Performance on North America LNG Projects

Geoff Emeigh

Motivated by abundant regional natural gas production that has altered the global energy landscape, independent energy companies and venture groups are rushing to enter the liquid natural gas (LNG) production and export business in North America. These entities are investing billions of dollars on complex megaprojects to design and construct LNG plants and export terminals across the region. The U.S. Energy Information Administration, in a January 2019 report, forecasts substantial LNG export growth in North America over the next 30 years.

Independent Project Analysis (IPA), Inc., has evaluated the development, execution, and production performance of dozens of LNG capital projects, both in North America and globally. Notably, IPA’s research shows that new LNG trains struggle to achieve planned production capacity for many months after startup. These early production shortfalls threaten a company’s ability to meet near-term contractual commitments for LNG deliveries. The risk of missing early production targets may be under appreciated by fit-for-purpose entities formed to take advantage of the North America natural gas marketplace. By their nature, many of these energy independents lack mature project organizations and competencies of resources for delivering complex megaprojects. Even for major energy companies with established capital project systems, organizations, and teams, delivering a megaproject like an LNG plant is fraught with risk. IPA finds that, globally, over 53 percent of LNG projects fail to meet business objectives.

Energy independents investing in North America are likely sponsoring a one-and-done project team for their LNG plant project. However, their project team still should be empowered to follow Best Practices that promote capital stewardship—i.e., capital effectiveness—during the development and execution of capital projects. Among these Best Practices are validating project cost estimates and staffing a functionally integrated project team. But such Best Practices are difficult to follow without guidance. For instance, like their industry peers, independents with their sights set on entering the North American LNG market need actual regional project cost data to validate cost estimates and provide lenders and other stakeholders a reliable project cost range. It is not uncommon for companies to rely on LNG plant and terminal construction cost information provided by contractors with experience on past projects. This is not independent project cost information that owner companies should use to validate their own project estimates. Under certain contracting arrangements, conflicts of interest may arise.

How IPA Can Help Improve LNG Project Outcomes

IPA provides capital project assessment and research services that independent energy groups can use to validate cost information and apply lessons learned from previous LNG projects to increase the likelihood that their new plant’s LNG production ramp-up expectations are realized. IPA can also help leanly staffed groups identify functional expertise and staffing weaknesses that, if resolved, can increase project performance outcomes. Here are a few ways in which IPA can help.

Cost Metric Validation

Contained in IPA’s database of detailed cost information from more than 20,000 capital projects are cost data from more than 50 LNG plants in North America and around the world. IPA possesses cost-capacity models, office and field labor productivity metrics, and other information that can be used to validate project costs and ensure contractor bids are appropriate.

Readiness Reviews and Ramp-Up Observations

One reason projects fail to achieve their operational performance targets, such as LNG plant production capacity targets, is the lack of production readiness. As previously mentioned, IPA has conducted research that shows problematic ramp-up profiles for greenfield LNG projects that should give investors pause. A Production Readiness Assessment provides company leaders and project leaders with critical project status insights. Effective implementation of production readiness practices can improve the transition to operations and maintain project value. IPA can measure whether important production readiness practices have been completed before LNG trains are operational.

Staffing Analysis

Without a project organization or project management organization to turn to for support, knowing whether the right number and mix of project professionals are on board to support effective project execution will be difficult. IPA has conducted team staffing assessments of LNG projects to ensure owner company personnel can effectively oversee contractor work during construction. Staffing benchmarks have also been created, allowing a company to compare its staffing arrangement with arrangements used on other similar LNG projects.

The Race to Market

As of late January 2019, construction had started on 5 of 10 LNG export terminals approved by the U.S. Federal Energy Regulatory Commission. The commission has received proposals from companies to build over a dozen more export terminals, almost exclusively along the U.S. Gulf Coast. Some of those proposals are expected to be approved in 2019. The field of LNG producers may soon get crowded. Independents owe it to their stakeholders to ensure their projects are on track to spend capital effectively and achieve LNG production targets to establish their position in the marketplace as fast as possible.

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