Hello everyone and welcome back to LNG Academy Episode 5.
I’m your host Mehdy Touil, and for any new listeners, I want to reiterate the vision of the LNG Academy podcast, which is simply to spread LNG education to the world.
Today we are excited to have our first guest on the show down here. Don, thank you very much for joining us and it’s an honor to have you here today.
Thank you for inviting me, Mehdy.
So, we want to quickly acknowledge the sponsor of today’s podcast, Solaris Management Consultants Inc., a leader in LNG project delivery, bringing 30 years of success and expertise. To learn more about Solaris MCI and its breadth of services, please visit solaris-mci.com.
Don Hill is probably one of the most known and respected figures in the LNG industry. You started your liquefaction journey with Pullman Kellogg on the GNL 2 project in Arzew, Algeria, the place where I started my career decades later.
Don, you have been involved in PRE-FEED, FEED, EPC, and commissioning, startup, and testing of many LNG projects: Arzew, Skikda, the North West Shelf, Petronas MLNG, Qatargas, Oman LNG, Nigeria LNG, Yemen, Segas Damietta, Gorgon LNG, Angola LNG, Yamal, Peru, Mozambique, Tanzania, Golden Pass, Freeport LNG, Cove Point LNG, Cameron LNG, Alaska, Rio Grande, Woodfibre, Vaca Muerta, and the list goes on.
The topic of our discussion today’s episode is the challenges and opportunities facing today’s energy projects. So, Don, my first question is what do you consider the greatest challenging challenges facing today’s LNG projects?
Getting into an FID, and then executing the project.
Next year represents the 60th anniversary of the start of the LNG industry export project. Each of the many projects executed has had to deal with these same two challenges.
Getting to FID or final investment decision involves satisfying all the requirements to enable the start of the project implementation and I believe this phase of the project to be the most challenging.
Why is that?
Well, first, there are many more unknowns.
It involves a lot of parallel and interdependent activities and involves multiple parties with diverse interests. This phase of the project is the most difficult because so many things are outside of the project sponsor’s control.
A few of the crucial activities include market assessment, environmental requirements, permitting, financing and there are many more, but these activities really are interdependent and they can also be iterated, and if the project sponsor is made-up of multiple parties, the decision making and approval process can also be very challenging.
The task of developing the physical project definition is substantial and important activity needed to support many of the others. While technology and execution issues must be addressed during this phase, it is important that the technical solution not get too far ahead of the FID test.
LNG liquefaction technology is very flexible and can be designed to cope with many different constraints, so. In my opinion, it’s best to start with functional specifications that focus on the desired outcome and use those until many of the external constraints are identified or resolved. At that point, specific technology decisions can be made.
You mentioned market assessments as a crucial Pre-FID activity. Where do you see the LNG Market today?
In a word – uncertain – but optimistic. I guess that’s three words.
The market assessment is a critical activity because it influences so many of the other activities and decisions like the project, commercial structure, the capacity, and timing of the LNG train installations and probably most importantly the financing of the project.
The past few years has demonstrated just how volatile the LNG market can be. We were experiencing significant growth up through 2019, with that year seeing a record number of liquefaction projects take FID. Then in 2020, we saw a massive demand reduction as a result of the global pandemic which led to a real expectation of an oversupplied market with downward pressure on prices and that environment only project with the lowest cost like the Qatar expansion, we’re positioned to take, and you fast forward to 2022 and Russia’s invasion of Ukraine has sparked a global energy crisis and has had major impacts on the demand for natural gas and LNG.
Today’s volatile and high energy costs are making clean energy look more secure, sustainable, and affordable, and that result in some forecasts is a decrease in global natural gas demand within the next decade. However, I’ve always considered LNG and energy delivery business, and it’s competing with pipelines to move natural gas long distances from locations where supply exceeds demand to markets with inadequate supply.
The shutdown of virtually all the Russian pipeline supply to Europe has generated significant new demand opportunity for LNG delivery based only on existing European energy consumption, so it doesn’t require growth.
Significant infrastructure investment has also been made to support this change, both in import terminals and in shipping capacity. This position North America to provide this additional LNG if sufficient long term offtake contracts can be negotiated to backstop the project financing need. While there may be reluctance among potential buyers to commit to new LNG contracts in the face of long-term demand uncertainty, elevated pricing, and decarbonization objectives, growth opportunities still exist.
Our challenge will be to figure out how to make delivering LNG projects less expensive and quicker with lower risk so that they can be financed based on shorter term contracts.
What are some of the project delivery challenges and opportunities?
I would say “Change” and “Resources”.
As I noted earlier, LNG projects need to change to make them easier to market and finance. From a macro sense, we need to find ways to reduce the capital requirements, shorten the delivery times, and reduce the execution and performance risk.
You could say we have always been striving to do this. However, much of the decisions for what and how we execute projects in the past and currently, have been justified by “that’s the way we always do it”. This applies across all disciplines, from process engineering to civil engineering and from material selection to construction methodology.
Years ago, I implemented a rule in our engineering disciplines when I was at CBNI and McDermott, that everyone should know “why they do what they did”. My rule to everyone was to understand why they do it, and then if they’re asked, they have to be able to explain.
But there are four unacceptable answers: “that’s the way we always do it”, “that’s the way I did it last time”, “that’s the way it was done on Project X”, and “I don’t know”.
I’m not saying that I’m against standardization, but I’m against blindly copying what’s been done before.
One example of a delivery model change that is currently being adopted in an entity is to move away from stick-built construction towards modular construction. There may references that list the advantages of this chain, but to be effective, the change must be initiated from the earliest stages of the design so that all aspects can be identified and incorporated.
With stick-built construction, economies of scale drove the economic optimum to higher and higher capacity. So, economy of scale I believe does have a limit. Now when we’re looking at the liquefaction trains in a modular execution or delivery mode, the minimum cost per unit throughput is likely going to be based on a smaller capacity, based on all the aspects, starting with the logistics, material sourcing, movements fabrication yards, taking into consideration the capability processes, experience in the fabrication yards, and the ability then to move those modules to the construction site.
What has driven a lot of project cost in the past has been construction and I guess a lot of people don’t appreciate that. Far from being a purely technology driven business, LNG project delivery is a major infrastructure project.
What about resources?
This past week I was asked a question where was the most industry experience? I was thinking about it and then they said it is a trick question. The answer was “in the graveyard”.
The point of the of the question was really that there is a problem with the age demographics in the industry. The industry is very conservative, and I would say probably for the first 40 years the development was concentrated in just a few E&P companies and limited to a number, a small number of EPC contracts. The rate of project awards was such that the members of this LNG “club” were able to roll their project teams over from project to project.
LNG projects take longer to deliver or execute than in a lot of other industries, so the industry the LNG industry did not suffer the same “boom and bust” cycles that say some of the petrochemical industries did, but it still went through minor expansion periods, followed by reductions, and those reductions tended to trim the younger people off the teams. This development resulted in much of the industry experience being concentrated in a few people, and they tended to be older.
There was a joint industry study undertaken around 2005 with the objective to answer the core question “whether sufficient technical resources existed to build the needed LNG facilities?”.
The conclusion from that study was that there was really a limitation that the industry in total could only support five or six teams, what they refer to as “A” teams available to handle multibillion dollar liquefaction projects, and the reasons for the decline was that a lot of the staff members in this concentrated group of companies were in their late 50s or 60s and already and we’re starting to retire. We’ve seen the experience teams redistributed amongst a greater number of companies. So, it looks like there’s more capacity, but the reality is the experience is still limited.
The challenge I think we’re really faced with right now is how do we expand that pool of experienced people and part of this is to address just the experience and part of it is to address the demographics. So, we got to get younger people or filled in that sort of age gaps, and we have to find a way to transfer that knowledge or that experience, because experience picked up in one job. If you’ve only worked on one job or you’ve only worked in one activity, you can’t appreciate the impact of what you do has on everybody downstream or what decisions made and these other interdependent activities has on your actions.
So, if you learn to do something only one way, then it’s easy to fall into the trap I talked before about doing it the way the way we always do it.
Thank you, Don. I believe we have run out of time, so we’ll have to ask you back to discuss LNG technology, which I know is another one of your favorite topics, so final thoughts?
I’ve always said the question in LNG was not “if”, but “when”.
I think this shift in perspective applies to the evolution of fuels to satisfy the global need for safe, secure, sustainable, and affordable energy.
The energy markets are going to continue to grow, but the policies have changed, and the Russian invasion of the Ukraine has driven us to really explore and look for different options. The talent and problem-solving experience of the people in the industry remain essential to driving innovation and successfully navigating the coming changes.
Thank you, Don. This has been really a great topic. So, thank you everyone for tuning in to Episode 5 and we’ll catch you on the next one.