lng liquefaction costs outlook for competitive lng supply

LNG Liquefaction CostsOutlook for Competitive LNG Supply for Brazil

Claudio H. Steuer

NATURAL GAS PROGRAMMEBrazil Energy Future Summit – Rio de Janeiro, 3 September 2018

Senior Visiting Research Fellow

LNG Liquefaction Costs - Outlook for Competitive LNG Supply for Brazil

• LNG is nearly 55

• LNG technology evolution

• Commodity, capital and operating costs

• LNG liquefaction costs 1967 - 2017

• LNG liquefaction plant cost drivers

• LNG liquefaction cost reduction ?

• Global LNG pricing – long term and spot market

• Outlook for competitive LNG supply for Brazil

• LNG changing commercial dynamics and FID challenge

• In conclusion…

Brazil Energy Future Summit – Rio de Janeiro, 3 September 2018 2

LNG is nearly 55

Source: Methane Princess, Wood Mackenzie, Wartsila


LNG technology evolution

Source: IGU, IHS Markit


FLNG becomes a viable alternative


Source: Petronas, Golar/Perenco, Shell, Douglas Westwood

Cameroon: Hilli Episeyo (2.4 Mtpa)Malaysia: PFLNG Satu (1.2 Mtpa)

Australia: Prelude (5.3 Mtpa)

Commodity, capital and operating costs

Source: MetalMiner, IHS Markit


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LNG Plant Liquefaction Costs at Final Investment Decision ($/tonne MOD)

$/Tonne FID MoD Oil ($/barrel)

$/Tonne MOD Oil ($/barrel)

LNG liquefaction costs at FID 1967 - 2017

Source: Author’s research, analysis and interpretation of data from Wood Mackenzie, World Bank, EIA, and SyEnergy


Period: 1967 - 2017

Average Oil ($/barrel) : < $ 55 $ 55 $ 55 <

MTPA reached FID : 260 490 230

Average $/ton US$ MoD : $ 460 $ 804 $1,150

Average $/ton US$ 2018 : $ 690 $ 1,004 $1,322

0.005.0010.0015.0020.0025.0030.0035.0040.0045.0050.0055.0060.0065.0070.0075.0080.0085.0090.0095.00100.00105.00110.00115.00120.00125.00130.00135.00140.00145.00

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LNG Plant Liquefaction Costs at FID Cummulative Moving Average ($/tonne US$ 2018)

Cum $/Tonne US$ 2018 Oil ($/barrel)

$/Tonne US$ 2018 Oil ($/barrel)

LNG liquefaction costs cumulative average 1967 - 2017

Source: Author’s research, analysis and interpretation of data from Wood Mackenzie, World Bank, EIA, and SyEnergy


Period MTPA FID Comment

1967 - 1999 140 Realtively stable with some gains in efficiency

2000 - 2010 204 Rise in remote location LNG (Snohvit, Darwin, Sakhalin, Yemen, Peru, Pluto, Angola, Gorgon, Papua New Guinea

2011 - 2013 77 Most Australian projects, Yamal and 3 FLNG

2014 - 2017 68 66 MTPA of US LNG projects utilizing existing regasification infrastructure. Tolling model.

Source: Author’s research

LNG liquefaction cost drivers

• Site Specific– Gas field location, transportation to shore, composition, NGL processing & storage– Soil conditions, geology and metocean conditions – LNG tanks and marine facilities– Available infrastructure, skilled labour, and local content requirements

• Business Development Specific– Project design criteria (bespoke or standard) and scope, equipment count, and change orders– Sponsor/MRH procurement strategy, commercial, financial and political issues– Project management and execution– Additional infrastructure and domestic gas & power requests from host government

• Market Specific– Material related cost – equipment, piping, electrical, structural steel, concrete, etc.– Competition from refineries / petrochemicals projects – engineering contractors– Limited sources of “technically proven / bankable” liquefaction process technologies – Availability and cost of project finance– Inflation and energy prices


y = 296.65e0.0164x

R² = 0.7197

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$/Tonne FID MoD vs. Oil Price $/bbl - Higher Cost Locations

LNG liquefaction drivers – location and oil price matter

Source: Author’s research, analysis and interpretation of data from Wood Mackenzie, World Bank, EIA, SyEnergy, and KBR

y = 270.2e0.0148x

R² = 0.5173

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$/Tonne FID MoD vs. Oil Price $/bbl - All Locations

y = 231.95e0.0108x

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$/Tonne FID MoD vs. Oil Price $/bbl - Lower Cost Locations


• Remote locations normally require complex scope, aim for maximum liquid recovery and LNG capacity to maximize revenue and achieve competitive DAT cost.

• High energy prices tend to influence various elements of a complex project scope, equipment, and labour.

LNGPlantType(4.5Mtpa&HigherLaborCosts) CapexFactor1)Minimumfeedgastreatmentandimportedutilities 1.002)Plant1plusallutilitysystems 1.253)Plant2plusacidgasremoval,dehydration,mercury 1.644)Plant3plusLPGprocessing,storageandloading 1.995)Plant4plushighCO2treatmentandsequestering 2.446)Plant5plusmaxLPGrecoveryandsulphurrecovery 2.93

LNG liquefaction cost reduction ?

• Standard functional specification vs. bespoke - increase equipment supply competition

• Careful site selection - natural deep-water ports – avoid dredging and environmental risks

• Consider initial capacity and expansion – costs are not linear and grow in steps

• Repeat designs in same site – “carbon copy project”, common O&M and equipment sparing

• Consider one lead contractor – manage overall risk, smaller owner team, project finance

• FLNG for offshore gas – capex savings and possibility of leased/operated FPSO

• Multiple LNG trains of smaller capacities (Black & Veatch, Chart Industries, GE and Linde)

• Maximize stick built on location and pre-fabrication of modules closer to site

Cost reduction opportunities outside LNG plant

• Promote greater synergy / integration between oil development and gas / LNG project

• Extra infrastructure requests from host Governments provided from taxes and dividends

• Careful remote location selection driven by commercial market netback to LNG plant

Source: Author’s research, OIES/Kapsarc LNG Markets in Transition: The Great Reconfiguration, OIES LNG Plant Cost Reduction and Outlook for Competitive Supply


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Global Energy Prices 2000 - 2018 and Estimates to 2030

UK NBP ($/MMbtu)

Cont EU Gas Price ($/MMbtu)

JKTC Gas Price ($/MMbtu)

US LNG EU Price ($/MMbtu)

US LNG JKTC Price ($MMbtu)

Henry Hub Gas Price ($/MMbtu)

Brent Spot Price FOB ($/MMbtu)

$/MMbtu $/bbl

Estimates

Global LNG pricing – benchmarks outlook

Source: Author’s research and estimates, SyEnergy, Argusmedia, ICIS, CME Group, The Intercontinental Exchange, and Energy Information Agency, Forward curves as at 25/07/18


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Competitiveness of US LNG 2000 - 2018 and Estimates to 2030

Cont EU Gas Price - US LNG EU Price ($/MMbtu)

JKTC Gas Price - US LNG JKTC Price ($/MMbtu)

Brent Spot Price FOB ($/MMbtu)

$/MMbtu $/bbl

Estimates

Oil price rose 57% in a year –fundamentals or geopolitics ?

Oil price forward curve in backwardation for last 18 months

– ~$60 - 65/bbl.

Global LNG pricing – long term pricing outlook



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JKM - HH

TTF - HH

JKM - TTF

Estimates

Spot Price Intra-Basin Spread$/MMbtu

Global LNG pricing – spot price outlook



Spot PriceArbitrage < 12/22 > 12/22 < 12/22 > 12/22

$/MMBtu 6.23 4.53 4.49 3.3115% of Henry Hub 0.40 0.44 0.40 0.44LNG Shipping 2.47 2.47 1.20 1.20US LNG Tolling 3.25 3.25 3.25 3.25Tot Xtra Costs 6.13 6.16 4.85 4.89% Recovered 102% 73% 92% 68%

JKM - HH TTF - HH

• Premises:• Indicative LNG supply

competitiveness in relation to TTF 01/25

• TTF netback ($/MMBtu) to plant = TTF minus LNG shipping and feedgas cost estimate

• TTF netback ($/MMBtu) to plant is available to cover liquefaction and financing costs, and margin

• DAT $/MMBtu to Brazil (RJ/SP) assumes LNG shipping cost 145K cbm @$65K TC, $ 375/mt bunkers, $7.5 mmbtu boil gas, and $ 300k of port fees per RT voyage.

Outlook for competitive LNG supply - Brazil 01/25

Source: Author’s research and estimates, SyEnergy, Argusmedia, ICIS, CME Group, ICE, and EIA, Forward curves as at 25/07/18. Wood Mackenzie, Google Earth, sea-distances.org


$4.37

$3.62

$3.67$4.61

$4.74

$2.60

$7.32

DAT RJ/SP $/MMBtu Jan 2025TTF Rotterdam $7.32East Africa $6.82West Africa $7.12Trinidad & Tobago $7.13USA Gulf of Mexico $7.38Arabian Gulf $7.51Mediterranean $7.92Arctic (Snohvit/Yamal) $8.43

$5.00

$4.44

LNG changing commercial dynamics

Source: Cheniere/WoodMac, Shell/IHS Markit

Contract Duration Contract ACQ Volume (Mtpa)

Credit Risk of New ContractsFSRU Growth (Mtpa) Supplier of New Contracts


LNG liquefaction commercial challenge to FID

Source: SyEnergy

LNG Buyers:• End Users / Utilities• Portfolio Players• Traders• Shareholders

FID5 Mtpa

Marketing MoU / LoI HoA Negotiated SPAs* * *

~40 - 50 ~25 ~15 ~8 ~5

Key Issues:• Take-or-Pay• Operational & Commercial Flexibility• Price, Indexation, Price Review, Dispute Resolution• Credit Support & Project Finance Bankability

* Decision Making Process:• Functional Committees• Company Board • Government• Shareholders


In conclusion…• In 55 years… liquefaction trains grew ~5x in size… and LNG ships grew ~10x in size

• FLNG solutions unlock stranded offshore gas reserves with leased/operated FPSOs

• LNG liquefaction cost @ FID 1967 – 2017 average ~$1,004/tpa with oil at ~$55/bbl

• High LNG liquefaction cost @ FID (2007– 13) – remote sites, Australia, 3 FLNG with oil at ~$96/bbl

• Liquefaction cost driven by site, scope and market factors and less by technology choices

• Remote location LNG plants are significantly more exposed to cost inflation from high oil prices

• LNG cost reduction : scale, standard functional spec, careful site selection, base plan + expansions

• Under current LT contractual price environment, existing US LNG lose competitiveness from 2025

• Under current spot price environment, positive intra-basin LNG arbitrage ends ~12/22

• Competitive LNG supply for Brazil in 01/25 : East/West Africa, Trinidad, Arabian Gulf and USA

• Challenging commercial dynamics – shorter duration SPAs, smaller volumes and riskier clients

• Greater optionality for LNG buyers / sellers increase negotiation complexity + delay FID decisions

• LNG commercial & financial complexity has greater value at risk than technical complexity

“It’s attention to detail that makes the difference between average and stunning”(Francis Atterbury, English man of letters, politician and bishop, 1663-1732)


In conclusion…


Source: Strato

LNG project development and FIDs are more like a three dimensional chess game…

Project / Site Plan

Market / Clients / Pricing

Shareholders / Project Finance

Thank You !

** New OIES Paper in Q4 : “LNG Plant Cost Reduction and Outlook for Competitive Supply” **

[email protected]/in/claudiosteuer/

May the LNG Force be with You…


mailto:[email protected]

lng liquefaction costs outlook for competitive lng supply

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