Under pressure: economics of liquefied natural gas (LNG) projects
New Delhi, April 22, 2015 -- The liquefied natural gas (LNG) industry is facing massive challenges in today’s unprecedented wave of expansion. LNG developers are facing the challenges of lower oil and gas prices, and consequent reductions in capital expenditure, along with more remote and challenging projects.And, according to a new report from the KPMG Global Energy Institute entitled “Unlocking the supply chain for LNG project success”, to ensure that new LNG projects are viable and successful, and to extract maximum value from existing projects, proponents and operators have to unlock their supply chain.
Based on insights gained in interviews with senior executives from some of the largest oil and gas companies in the world, the KPMG Global Energy Institute identifies the three major challenges LNG supply chains are facing. These are: the size and complexity of projects; the remoteness and other challenges (for instance political and environmental) of the new wave of projects; and the construction of multiple plants in contiguous locations, leading to bottlenecks and sharply-rising costs of labour and materials.
“Optimizing the supply chain, both during construction and operations, is key to reducing costs and speeding time to market for LNG projects,” says Gaurav Moda, Head, Oil & Gas Practice, KPMG in India.“Those companies that proactively address supply chain now will be best-placed both to deliver their existing projects successfully, and to launch new ones ahead of the competition.”
The third in a series of LNG reports from the KPMG Global Energy Institute, this report includes candid commentary from the executives interviewed and provides 10 ways to address supply chain challenges:
KPMG’s Hilda Mulock Houwer comments: “Appropriate use of these approaches can cut costs, reduce construction times, speed start-up and cut environmental impact. In a world in which the economics of new LNG ventures are seriously challenged, projects with the most competitive supply chains have the best prospects for going ahead successfully.”
As a key locus of LNG supply and demand, Asia Pacific (ASPAC) is a geographically huge and diverse region. Moreover, the supply chain to LNG plants itself comprises many components. Nonetheless, ASPAC’s energy and natural resources (ENR) supply chain is generally considered underdeveloped and high cost1.
Gaurav Moda, notes “Currently the main challenges/ problems faced in LNG supply chain in countries like India are:
In addition Gaurav also adds “Developing the local supply chain is as much a concern in India & Africa as it is in Australia and Western Canada. LNG proponents can turn this expectation to their advantage. Providing local economic opportunities helps win support from communities, governments and indigenous people. At the same time – at the cost of some up-front investment – it can deliver more robust, timely and cost-effective supply chains.”
Gaurav further says, “KPMG’s analysis and client experience across global geographies and particularly India suggests that sustainable progress depends on Indian companies building on LNG-specific business capabilities. These capabilities include greater consolidated financial strength, gas trading, increased partnering, better marketing and distribution and improved management of margins especially through optimal supply planning. They also need to enhance project management, gas contract negotiations &management and increase their understanding of customer business models.”
Please visit www.kpmg.com/LNG for more information on LNG and to download your copy of the KPMGGlobal Energy Institute report “Unlocking the supply chain for LNG project success”.
Hilda Mulock Houwer, Partner and Global Advisory Leader of KPMG’s Energy & Natural Resources Practice
“The oil and gas industry has a long and proven history of operating in remote locations. Nevertheless, other industries may offer valuable learning. The mining industry has vast experience in operating large capital projects in remote locations in Australia, Canada and Africa. This may bring knowledge of local weather conditions, appropriate shift patterns, how to set up camps and make them attractive in a harsh environment, as well as how to keep staff happy and motivated.”
Prepare for environmental, ethical and local content supply chain requirements
Gaurav Moda, Head of Oil & Gas Practice, KPMG in India says
“Although there are good examples of major oil and gas companies working with local suppliers to develop capabilities to a level where they are an integral part of business operations, local content compliance remains an obstacle many companies have to overcome. Local governments have been observed to be more accommodating initially on core equipment that has to come from the original equipment manufacturer, but do push for high local labour content.”
“Growing public scrutiny of large companies includes environmental and ethical issues – including attention to sustainable sourcing, human rights and labour conditions. The growing complexity of international and US-led sanctions presents another complex area for supply chain compliance. Such factors demand more rigorous auditing and certification of subcontractors. Specific environment requirements have to be planned for in advance”
About the KPMG Global Energy Institute report, “Unlocking the supply chain for LNG project success”
The KPMG Global Energy Institute (kpmg.com/energy) report, “Unlocking the supply chain for LNG project success” is the third in a series of LNG reports from KPMG International’s Global Energy & NaturalResources (ENR) practice.
The content in the report is based on insights gained in interviews with senior executives from some of thel argest oil and gas companies in the world, as well as KPMG ENR specialists. It provides deep insights on improving project economics and certainty through better project management, cost transparency,governance, jurisdiction engagement, stakeholders and opportunity selection.
This report was written in collaboration with KPMG member firms and Robin Mills, energy strategist and economist.
About KPMG International
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