Appetite for LNG grows, Industry Struggles


Despite record low LNG prices, and the ever increasing capital costs of new production plants, there has been a significant amount of pressure on the industry to increase capacity by improving existing plant efficiencies and constructing more facilities. Demand for LNG as a carbon friendly energy source continues to grow in many regions. Before the end of the decade, when most of the current construction projects will reach completion and be in production, there will be a short period of oversupply, but not for long. By 2021, the world will need additional supply capacity – more output, more plants.

Given the current volatile economic climate and relatively long project construction timelines, investors are reluctant to commit to new LNG projects. However, there are engineering design solutions that can aid in mitigating the investment risk at a macro level, assist with optimizing design and lowering construction costs. These engineering design solutions can even improve efficiencies for existing production facilities.

LNG price decreases, while demand increases

Since the LNG price is indexed to the oil price, it is no surprise that the LNG supply prices are racing to the bottom as crude oil spot prices continue to fall. The impact is devastating for existing LNG plants, which mostly use offshore gas feeds. These plants are scrambling to find ways to improve efficiency and reduce operating costs (OPEX).

The quickest and most significant way to reduce OPEX is to optimize the existing plant, particularly focusing on the liquefaction process, which accounts for 40 percent of operating costs. Companies can improve efficiency and bolster plant reliability by implementing advanced process control (APC) solutions which result in greater yield and lower costs.

Looking forward to 2021 and beyond with a five- to ten-year construction timeline in mind, new LNG facilities would need to be in the planning stages or in development right now. While this seems like an obvious solution, there are many reasons why the industry is hesitant to develop new facilities. In addition to the long timeline, the construction costs (CAPEX) of LNG facilities have increased 20-30 percent since 2005, and 80 percent of the current projects are over budget and behind schedule.

As a result, for the first time in a decade, inefficient work processes have come under scrutiny and EPCs have dedicated some of their best talent and minds to use leading edge process plant design software to incorporate sophisticated capital cost estimating. Users can mitigate against inefficient upfront design, avoid over-engineering (and over-spending) and better manage project execution by implementing this software. This also allows companies to reduce the capital costs, project blow-outs and ultimately, reduce investor risk and uncertainty.

Modelling the market

To further reduce FID hesitation in the volatile LNG market, investors demand greater assurance than ever before that business scenarios are simulated and tested.

Economic strategists need to look at key economic scenarios such as future oil prices and demand, the impact of renewable energy sources, long-term contract viability in an over-supplied market and political stability at plant locations.

It is imperative to extensively model and test potential LNG projects, and that these take into account every conceivable scenario Including conceptual design, detailed design, project costing, anticipated throughput, planned efficiency, operations and maintenance and ROI.

Until recently, plant optimization software featuring a data historian and the ability to seamlessly interface multiple data formats has not been readily available. The latest process plant design software tools now incorporate the option to perform realistic and extensive technical simulations, ensuring investment risks are mitigated and worst/best case outcomes are considered during future plant operations.

Opportunities in gas

A LNG supply shortfall is expected in the next five to six years. With design and construction development taking five to ten years, it is critical for new projects to be “on the table,” if not already in initial building phase now. The current low oil/LNG prices will not continue for much longer, especially when demand outstrips supply. To minimize risk and maximize ROI it is critical that owners of existing and planned LNG facilities employ the latest engineering software tools to ensure reliable and “proven by simulation” design, efficient processes and optimized process control.