Global LNG producers see cost risks looming over next wave of projects

Chiyoda

20/06/2019 06:42

* Race on to sanction $200-bln worth of new projects
    * Cost control key to competing with cheap U.S. gas
    * Santos targets $7-$9/mmBtu LNG delivered to Asia

    By Sonali Paul
    SYDNEY, June 20 (Reuters) - Construction delays and cost
blowouts could hit the next wave of liquefied natural gas (LNG)
projects as there are a limited number of contractors able to
handle the huge projects, three developers said on Wednesday. 
    Around $200 billion in projects across the globe from
Australia to the United States are racing to be approved over
the next two years, vying to provide around 65 million tonnes of
new annual supplies that are needed by 2025, according to
estimates by consultants Wood Mackenzie. 
    The race is not just to make final investment decisions
(FIDs) on projects, but to enter front end engineering and
design (FEED) work to lock in contractors before others snap
them up, the three developers said at Credit Suisse's Australian
Energy Conference. 
    "Unless you're in FEED in the next six to nine months,
unless you're in FID in the next two years, there's going to be
no one to build your project," Oil Search  OSH.AX  Executive
General Manager Ian Munro told the conference. 
    Oil Search aims to enter FEED in the next few months with
its major partners Exxon Mobil Corp  XOM.N  and Total SA
 TOTF.PA  on a $13 billion expansion of the PNG LNG plant in
Papua New Guinea.  urn:newsml:reuters.com:*:nL3N21R0ZT  urn:newsml:reuters.com:*:nL4N233137 
    Martin Houston, co-founder of Tellurian Inc  TELL.O , which
wants to make FID this year on a $30 billion LNG project in the
United States, said LNG developers who fail to sign major
contractors, such as Bechtel Corp or Chiyoda Corp  6366.T , who
can offer fixed price construction contracts are likely to
struggle to make much profit.  urn:newsml:reuters.com:*:nL2N22K0F3 
    Tellurian has lined up Bechtel for its 27.5
million-tonne-a-year project with a lump sum contract, which
Houston said gave it an advantage over rival projects. 
    "We can say to our customers this is exactly the price
you're going to pay. We're competing with second wave projects
that have absolutely no idea how they're pricing anything,"
Houston told the conference. 
    To win project approvals, developers are pushing to line up
long-term buyers, but with spot prices  LNG-AS  stuck at
three-year lows and a flood of cheap U.S. LNG, buyers are
holding out for lower prices from new projects worldwide.  LNG/ 
    Oil Search and Santos  STO.AX  played down that threat. 
    Santos is a stakeholder in PNG LNG and is also marketing gas
from the Barossa field off northern Australia that may feed the
Darwin LNG project run by ConocoPhillips  COP.N . 
    Santos' head of gas commercialisation, Jane Norman, said
Australia's and Papua New Guinea's locations gave their projects
an advantage in selling to Asian buyers, and also offered the
diversity and security of supply that buyers want. 
    Oil Search's Munro said the high heating value of Papua New
Guinea's gas, valued by Japan and South Korea, also meant that
its LNG is not competing directly with U.S. gas. 
    Despite those advantages, cheap U.S. gas prices are setting
a low bar for pricing, Norman said, with Santos focused on
trying to deliver LNG into Asia at $7 to $9 per million British
thermal units (mmBtu). 
    In contrast, five years ago, before the rapid rise in U.S.
output, the former CEO of Santos, David Knox, said new
Australian projects would be viable as long as they could
deliver gas to Tokyo for $14 per mmBtu. 
    "What we're seeing now with the U.S. LNG coming in is that
the whole market is focused on taking costs out of the system,"
Norman told the conference. 

 (Reporting by Sonali Paul; Editing by Tom Hogue)
 ((Sonali.Paul@thomsonreuters.com; +61 3 9286 1419; Reuters
Messaging: sonali.paul.thomsonreuters.com@reuters.net))