Considering the cost of recently completed projects, and the need for new projects to be cost competitive, the question is: can project developers and engineering, procurement, and construction contractors (EPCs) meet the current expectations of the LNG industry? For brevity, this article will focus on new projects in North America, a region for which there is a lot of discussion of the viability of new LNG projects.

Recently, several projects have been completed for which the final investment decisions (FIDs) were taken during the upturn of activity around 2010. These projects have brought into operation a new wave of LNG production capacity and have drastically affected the value of LNG in the spot market and the ability of new projects to sign LNG supply contracts at historical prices and margins. Soon after this flurry of FIDs, the industry experienced a pullback in project sanctions, due to an expectation of future oversupply, which resulted in very few FIDs being taken in the last few years.

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The current period of limited project sanctions has resulted in intense cost pressure to configure new projects that must align with the current commercial spread between the cost of feed gas supply plus liquefaction (sometimes monetized as a tolling fee in dollars per million Btu [British thermal units]) and the projected LNG sales value. If new projects do not meet these aggressive commercial targets, they will have difficulty competing against existing supply.

From the perspective of a contractor who only has influence over one part of the LNG value chain’s cost—the capital expense (capex) of the liquefaction plant—the source gas cost and LNG price volatility are obvious major risks in sanctioning new projects. Even the most well—configured projects with the least technical and execution risk at the lowest offered cost are challenged by today’s economics.

Examples of natural gas and LNG pricing, 2014–2018

The table above shows intense volatility within each year and over the five-year period. Robust price spreads between feed gas supply cost and regional value to support new projects was present as recently as 2014, but the volatility among the highs and lows shows how difficult it is to sanction projects that have to purchase feed gas with so much uncertainty. When these spreads are thin, as they are today, the capital cost (CAPEX) of LNG projects is often seen as the main area to apply pressure.

Contractors see only two ways to overcome these challenges—either through low-cost projects (resulting in lower tolling fees) or through a shift in the economics back to higher sales prices and less drastic volatility. Since the contractors want to do something positive but have no influence over gas markets, the pressure has been on driving down CAPEX, also measured as a unit cost or US$/tonne of production.

When cost competitiveness is questioned, a common reaction from contractors is: competitive with what? Does CAPEX need to be competitive with the lowest price spreads shown in Table 1 or does it need to be competitive among EPCs who are skilled in the engineering and construction of projects? In a perfect world, both would be in balance—the CAPEX of new capacity would fit the expected rate of return in every supply/demand pricing scenario.

Many published analyses have focused on the concept of unit cost and the difficulties in comparing projects to each other solely based on unit cost.2 While US$500/tonne is an aggressive target, a simple target based only on CAPEX and capacity is truly aspirational if site-specific factors are seen as irrelevant. Simply put, you cannot deliver an LNG project at a challenging site for US$500/tonne, no matter what a developer or contractor does.

As the years have gone by and few projects have been sanctioned, the constant rhythmic beat of US$500/tonne has permeated the marketplace, regardless of region. Since the recent downturn or ‘LNG glut’, buyers have become used to low LNG tolling fees, which must correlate to low CAPEX liquefaction projects. When viewed from the bottom (details) up, there is not much room to manoeuvre to cut cost. Have our design margins become so tight or our projects so complex that we penalize the projects before they even start?

Over time, the aspiration has become an expectation, but expectations are always seen in a specific lens or from the top-down point of view. Even though most projects have not been delivered at this aspirational cost, the industry may be suffering from the malaise of ‘price addiction’3—addicted to low unit costs and setting targets well below the aspirational cost regardless of the certainty of outcome. Through basic human interaction, we will continue to manipulate each other, based primarily on the lure of low price and less on high value, service, or the strength of working relationships.

While LNG unit cost targets are aggressive, the industry has still evolved to try to meet these targets. In the previous wave of North American FIDs, which all embraced conventional plant configurations and technologies, commercial project results were a mixed bag. Even the most commercially successful facilities did not achieve US$500/tonne. It is well beyond the scope of this article to analyse what combination of technical and commercial factors contributed to the success or challenges of individual projects; however, it is clear that the combination of aggressive lump sum turnkey pricing and optimistic schedules put considerable risk on projects.

In the pause of FIDs mentioned previously, owners and contractors had to look to new ways to achieve low-cost projects that could be delivered successfully. In one approach, projects have looked at size and scale (e.g. small and mid-scale LNG) as a way to build large facilities with multiple LNG trains. Permutations within these configurations (e.g. liquefaction technology choices and modular strategies) added new options to investigate. As a result, these initiatives—such as flipping to economies of unit scale over economies of scale—have resulted in many projects that appear competitive with the ‘design one, build many’ strategy.4

Even as the LNG world evolves to match the changing economic climate, the industry is pushing towards the goal of commoditizing LNG project delivery in North America faster than the project execution community can deliver. Is the LNG industry destined to become a commodity-based industry, as we have told ourselves in publications, conferences, and forums? Commoditization is based on the simplicity and reliability of US$/tonne and ignores many other important factors.

Commoditization takes a great deal of work through successful iterations of manufacturing and delivery. Is the LNG industry commoditized to the degree of cellular phone service or electricity supply?

Through talk only, and not the delivery of actual projects, we have attempted to commoditize the LNG industry into a tightly defined band of cost and value. A good bit of work has resulted in moving LNG to a commoditized space; the premise and impending execution of economies of unit scale for large LNG plant capacities is a move to commoditize the design and supply of the in-plant scope of an LNG facility.

Unfortunately, there are no project results that support the new configuration theories and the current unit cost targets. This is not to say that success will not happen—it may even happen sooner than we expect, but it is not without execution risk. There are limited LNG EPC project data points spread across 50 years since the first baseload projects in Algeria. While 50 years is a long time, there are not enough data points even since 2000 to assure the outcome of these new aggressive targets. For today’s projects, site advantages are the factors most able to reduce unit costs. Period.