The challenges that will face LNG companies to operate under the current low price.

1. LNG
Industry:
Opera2ng
Under
Price
Shock
Environment
Presented
by:
Abdelrahman
Mohamed
Contracts
Engineer/Supply
Department

2. Background
• LNG
industry
has
witnessed
remarkable
booming
throughout
the
last
20
years.
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LNG Industry: Operating Under Shock Environment

3. Background
• Prices
were
very
sa2sfactory
to
the
producers.
• Market
situa2on
encouraged
new
players
to
join
the
LNG
game.
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LNG Industry: Operating Under Shock Environment

4. Background
• Due
to
this,
cost
of
new
LNG
projects
escalated.
• At
a
certain
point
,
prices
dipped
due
to
improved
technology.
• But
then,
cost
significantly
increased:
v Contractor’s
demand
(i.e.,
profit
margin
and
risk
con8ngencies).
v Rise
in
cost
of
Materials/Equipment.
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LNG Industry: Operating Under Shock Environment

5.
Cost
Escala2on
• According
to
P&P
(Poten
&
Partners):
v In
2004,
cost
of
Greenfield
LNG
plant
was
approximately
$210
t/yr
v In
less
than
2
years,
the
price
jumped
to
$250-­‐$350
t/yr
v 6
years
later,
price
exceeded
the
level
of
$500
t/yr
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LNG Industry: Operating Under Shock Environment

6.
Cost
Escala2on
• Cost
of
some
LNG
projects:
Ø Ras
Gas
III
(early
2009):
$256
t/yr
Ø Yemen
LNG
(late
2009):
$300
t/yr
Ø Tangguh
LNG
(Indonesia/BP):
18
month
delay
in
investment
decision
led
to
an
increase
from
$1.4
B
to
$1.8
B.
Ø Woodside
Petroleum
(Australia):
$571
t/yr
(total
cost
jumped
from
$2B
to
$2.4B)
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LNG Industry: Operating Under Shock Environment

7.
New
LNG
Projects:
Case
Study
• According
to
Project
Cost
Analysis
(By
SPE
Founda=on)
o Projects
Surveyed:
118
(from
year
2002
and
forward)
o Project
Cost
Range:
$0.340
billion
to
$6.8
billion
o Project
Loca=on:
North
America
(5%);
Middle
East
(22%);
Asia
(19%);
West
Africa
(25%);
South
America
(16%);
Europe
(5%);
South
Africa
(5%);
Mexico
(3%).
o Type
of
Projects:
LNG
(17%);
Mineral
(17%);
Chemical
(14%);
Oil
Refining
(7%);
Oil
and
Gas
Field
Develop.
(45%)
o Contrac=ng
Strategy:
EPC
lump
sum
(71%);
Reimbursable
EPC
(7%);
Reimbursable
EPCM
(17%);
and
Other
(5%)
o Contractor
Selec=on:
Bid
(61%);
sole
source
(10%);
preferred
(29%)
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LNG Industry: Operating Under Shock Environment

8.
New
LNG
Projects:
Case
Study
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LNG Industry: Operating Under Shock Environment

9.
New
LNG
Projects:
Case
Study
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LNG Industry: Operating Under Shock Environment

10.
New
LNG
Projects:
Case
Study
Reasons
for
sudden
rise
in
prices
§ Increase
in
LNG
projects
Vs
limited
LNG
experienced
Contractors
(Supply
&
Demand
mechanism).
§ Significant
boost
in
raw
material
prices
(steel,
cement).
§ Most
of
the
LNG
projects
have
been
awarded
as
EPC
Lump
Sum.
Contractors
have
a
hard
8me
holding
prices,
the
only
way
to
hedge
their
posi8on
is
by
charging
risk
premium.
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LNG Industry: Operating Under Shock Environment

11.
Oilfield
&
Contractor’s
Profit
Margin
• Even
though
Oilfield
services
(construc2on,
drilling,
maintenance,
etc.)
have
become
easier
and
more
efficient,
yet
Oil
produc2on
costs
have
gone
through
the
roof.
•
When
oil
service
firms
nego2ate
contracts
with
produc2on
companies,
they
usually
take
the
oil
price
into
considera2on.
• Significant
increase
in
Contractor’s
profit
margins
q 2%
to
5%
from
1990
-­‐2002
q 9%
to
12%
from
2004
and
2005
• When
you
add
the
Risk
Premium
(5%
to
7%)
,
Contractor’s
profit
margin
can
easily
hit
the
level
of
20%.
But
as
the
oil
price
drops,
do
we
expect
reduc2on
in
service
costs
(bringing
the
“break-­‐even”
price
down)?
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LNG Industry: Operating Under Shock Environment

12.
The
Slump
in
Global
Oil
&
Gas
Prices
• World
Bank:
“In
2015,
crude
oil
will
average
around
$96/bbl”.
• In
January
2015
oil
traded
around
$49/bbl.
(lowest
price
since
2009).
• Asian
LNG
spot
price
dropped
from
$20
to
$10/
mBtu
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LNG Industry: Operating Under Shock Environment

13. The
Slump
in
Global
Oil
&
Gas
Price
• With
this
low
price,
many
producer/countries
can’t
survive.
• Although
the
produc2on
price
is
extremely
important,
but
for
some
countries
Budgetary
Price
is
equally
important.
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LNG Industry: Operating Under Shock Environment

14. What
is
Driving
the
Oil/LNG
Price
Plunge?
• Cocktail
of
supply,
demand,
and
geopoli2cal
condi2ons
have
created
a
surplus
of
crude
oil
which
has
driven
down
the
price.
o Significant
increase
of
US
crude
oil
due
to
shale
oil
boom.
• Demand
slowdown
in
Europe,
Japan,
and
China.
• Decision
of
Saudi
Arabia
to
protect
market
share
rather
than
act
as
a
swing
producer
of
oil.
• LNG
price
is
well
correlated
with
Oil
price.
o On
average,
price
of
one
million
Btu
is
16%
of
a
barrel
of
oil.
o $50
to
$60
of
Oil
pushes
LNG
price
down
to
around
$8
to
$9.6
(on
contract).
o Spot
prices
might
even
be
lower.
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16. Will
the
current
oil
price
affect
the
oilfield
service?
• E&P
companies
have
been
under
large
pressure
due
to
massive
reduc8on
in
revenues.
• They
reacted
by
:
delay/cancel
projects,
downsize
their
capacity,
and
reduce
their
investment
commitments.
• In
a
recent
study
prepared
by
Rystad
Energy
Corpora=on
Ø The
combined
OFS
purchases
are
expected
to
grow
with
an
average
annual
rate
of
4.5%
towards
2020
(at
$110
oil
price).
Ø The
expected
annual
growth
rate
is
3.5%
(at
$80
oil
price).
But
the
current
oil
price
is
lower
than
$80!
Ø In
total,
there
is
about
$400
billion
of
OFS
purchases
that
can
be
shaved
from
the
2014-­‐2020
market,
70%
of
which
in
offshore.
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17. Will
the
current
oil
price
affect
the
oilfield
service?
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18. Will
the
current
oil
price
affect
the
oilfield
service?
• Petroleum
Services
Associa8on
of
Canada
(PSAC)
expects
a
drop
in
oilfield
service
ac8vity
including:
drilling,
construc8on,
fracking
services,
and
manufacturing.
• According
to
PSAC,
new
wells
that
will
be
drilled
in
2015
might
drop
by
32%.
• “There
is
enormous
pressure
on
service
companies
to
cut
costs
even
in
the
face
of
slim
margins.”
• Major
Oil
&
Gas
Companies
have
been
approaching
oilfield
companies
asking
for
breaks
on
service
prices.
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19. CONCLUSION
• As
oil
price
drops,
Opex/Capex
of
E&P
Companies
should
also
drop
in
order
to
bring
the
“break-­‐even”
price
down.
• E&P
Companies
will
probably
renego8ate
the
service
cost
in
different
ways
(like
bargaining
at
a
Turkish
Bazaar).
• The
Service
Cost
reduc8on
rate
probably
won’t
match
the
drop
in
Oil/LNG
price
,
but
“something
is
be`er
than
nothing”.
• In
Qatargas,
we
managed
to
reduce
the
margin
of
Manpower
Service
Companies
from
15%
to
10%.
• Other
companies
(QP
&
Rasgas)
are
trying
to
apply
our
model.
• Awarding
contracts
in
Euro,
GBP,
or
Yen
will
probably
be
of
benefit.
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