Under pressure: economics of liquefied natural gas (LNG) projects

Under pressure: economics of liquefied natural gas...

10 ways to improve the supply chain: KPMG International addresses complicated LNG major projects.

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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 labor 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 Hilda Mulock Houwer, Partner and Global Advisory Leader of KPMG’s Energy & Natural Resources Practice. “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:

  1. Put human resources first
  2. Adapt learning from other industries
  3. Collaborate with other operators
  4. Re-think contractual relationships with suppliers
  5. Prepare for environmental, ethical and local content supply chain requirements
  6. Unlock the potential of modularization
  7. Consider floating LNG (FLNG)
  8. Understand the local environment
  9. Foresee the handover to operations
  10. Adapt maintenance policy to location.

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.

However, Hak Bin Pek, Partner and Head of Oil & Gas, Asia Pacific, KPMG in Singapore, suggests that, “The capabilities required to support the LNG infrastructure and commercial developments in Asia are growing rapidly in recent years. Geographically located at a strategic choke point in Asia, Singapore has a number of strong attributes to support its ambition to become the regional gas trading hub. In addition, it is also a central hub for LNG shipbuilding capabilities and engineering firms. So I see these developments as extremely helpful to any company developing LNG supply chain infrastructure.”

Please visit Liquefied Natural Gas (LNG) for more information on LNG and to download your copy of the KPMG Global Energy Institute report “Unlocking the supply chain for LNG project success”.

QUOTES

Put human resources first

"Most supply chain teams can manage logistics capably, but not optimize it".

- Mark Woods, Director and Global Lead Supply Chain, KPMG Australia

Adapt learning from other industries

“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.”

- Hilda Mulock Houwer, Partner and Global Advisory Leader of KPMG’s Energy & Natural Resources Practice

Collaborate with other operators

"A feature of today’s new wave of LNG is the emergence of clusters with numerous projects in close proximity. Such concentration creates problems for local infrastructure and scarce labor. But it is also an opportunity for operators to work together to optimize supply chains.”

- Mark Woods, Director and Global Lead, Supply Chain, Energy & Natural Resources, KPMG Australia 

Re-think contractual relationships with suppliers

"For the most effective supply chain, relationships with suppliers have to move beyond simple transactional approaches. Companies can think of innovative content strategies. Find non-traditional suppliers to consolidate demand and look for vertical integration opportunities to manage / control more of the critical components yourself.”

- Regina Mayor, Principal, Head of Oil & Gas, Americas, KPMG in the US

Prepare for environmental, ethical and local content supply chain requirements

“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 labor content.”

- Gaurav Moda, Partner, Head of Oil & Gas, KPMG in India

Unlock the potential of modularization

“Common standards are required. Fabrication is often in LNG buyer countries such as Japan, South Korea and China, which suggests the possibility of collaborative arrangements, flexible financing arrangements through government-driven export credit agencies (ECAs) and partnerships or potentially, alliance arrangements.”

- Mary Hemmingsen, Partner and National Sector Leader, LNG and Power and Utilities, KPMG in Canada

Consider floating LNG (FLNG)

“Floating LNG presents a configuration to mitigate labor and construction cost escalation.”

- Mary Hemmingsen, Partner and National Sector Leader, LNG and Power and Utilities, KPMG in Canada

Understand the local environment

“Environmentally-sensitive locations have restrictions on what material can be brought in, and where it can be quarantined and stored. This presents a challenge to highly modularized approaches.”

- Mary Hemmingsen, Partner and National Sector Leader, LNG and Power and Utilities, KPMG in Canada

Foresee the handover to operations

“Companies do not plan the handover of elementary documents properly. So the operations team is often provided with a heap of paper and computer files from which they can't find vital information or gradually realize that equipment does not perform to its original design specifications. It sometimes happens that the supply chain team for the construction phase is disbanded and a new operations team has to devise their own solutions to the same problems."

- Jonathan Smith, Partner, Energy and Natural Resources, Oil and Gas Sector Leader, KPMG Australia

Adapt maintenance policy to location

“Some recent LNG and oil projects, in non-traditional locations, have had severe problems during start up, requiring lengthy maintenance and rework. The supply chain issues have been a result of underestimating the complexity and scale of these mega projects.”

- Jonathan Smith, Partner, Energy and Natural Resources, Oil and Gas Sector Leader, KPMG Australia

For further information please contact:

Carolyn Forest

KPMG International

+1 416 777 3857

About the KPMG Global Energy Institute report “Unlocking the supply chain for LNG project success

The KPMG Global Energy Institute report, “Unlocking the supply chain for LNG project success” is the third in a series of LNG reports from KPMG International’s Global Energy & Natural Resources (ENR) practice.

The content in the report is based on insights gained in interviews with senior executives from some of the largest 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.

Foot Note

1‘Future of procurement in Asia Pacific: Keeping pace with change in the Energy and Natural Resources Sector’, KPMG Global Energy Institute, 2015.

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