Challenges and Opportunities facing today’s LNG projects
Don Hill, Principal & Owner DKH LNG Consultants LLC
Don Hill is probably one of the most known and respected figures in the LNG industry. He started his liquefaction journey with Pullman Kellogg on the GNL2 project in Arzew, Algeria, the place where I started my career decades later.
Don was at KBR for over 29 years and held the position of director of LNG technology. He was senior vice president for LNG operations at CB&I for 11 years, and most recently the global vice president and LNG product line executive at McDermott until 2020.
Don, You have been involved in pre-FEED, FEED, EPC, and commissioning, startup, and testing of many LNG projects: Arzew, Skikda, North West Shelf, Petronas MLNG, Qatargas, Oman LNG, Nigeria LNG, Yemen, Segas Damietta, Gorgon, Angola, Yamal, Peru, Mozambique, Tanzania, Golden Pass, Freeport, Cove Point, Cameron LNG, Alaska LNG, Rio Grande, Woodfibre, Vaca Muerta,...and the list goes on.
The topic of our discussion today is the Challenges and Opportunities facing today’s LNG projects.
Q: My first question is, “What do you consider the greatest challenges facing today’s LNG projects?”
A: Getting to an FID, and then executing the project.
These are not new challenges.
Next year marks the 60th anniversary of the start of the first export project for LNG. Each of the many projects executed has had to deal with these same two challenges.
However, the world we live in and the conditions and constraints we must operate in today are different. It’s important we recognize and address these changes if we want to be successful.
Getting to an FID or Final Investment Decision involves satisfying all the requirements to enable the start of project implementation. I believe this phase of a project to be the most challenging.
Q: Why is that?
A: First there are many more unknowns, it involves a lot of parallel and interdependent activities, and involves multiple parties with diverse interests. This phase of the project is the most difficult because so many things are outside the project sponsor’s control.
A few of the crucial activities include:
Risk assessment and mitigation
Decision-making and approvals
Many of these activities can be iterative and if the project sponsor is made up of multiple parties the decision making and approval process can be very challenging.
The task of developing the physical project definition is a substantial and important activity needed to support many of the others. However, while technology and execution issues must be addressed during this phase, it is important that the technical solution doesn’t get too far ahead of the other pre-FID tasks.
LNG liquefaction technology is very flexible and can be designed to cope with many different constraints. It’s best to start with functional specifications that focus on the desired outcome and use those until many of the external constraints are identified. At that point specific technology decisions can be made.
Q: You mentioned Market assessment as a crucial pre-FID activity. Where do you see the LNG market today?
A: In a word – uncertain – but optimistic.
The market assessment is a critical activity because it influences so many other activities and decisions like project commercial structure, the capacity and timing of LNG train installation, and probably most importantly the financing of the project.
The past few years has demonstrated how volatile the LNG market can be. We were experiencing significant growth up through 2019, with that year seeing a record number of liquefaction projects take FID. Then in 2020 we saw a massive demand reduction due to the global pandemic which led to expectations of an over supplied market with downward pressure on prices. In that environment only projects with the lowest cost, namely Qatar, was positioned to take FID.
Fast forward to 2022. Russia’s invasion of Ukraine sparked a global energy crisis and has had two major impacts on the demand for natural gas and LNG. The shutdown of virtually all Russian pipeline supply to Europe have generated significant new demand in Europe for LNG with a corresponding rise in the price of natural gas on the global market. The resulting energy crisis with extreme price volatility combined with renewed environmental concerns has caused significant switching away from natural gas to coal for power generation in some developing countries and to clean or renewable energy in developed countries.
Today’s volatile and high energy costs are making clean energy look more secure, sustainable, and affordable. The net result in some forecasts is a decrease in global natural gas demand within the next decade.
I’ve always considered LNG an energy delivery business competing with pipelines to move natural gas long distances from locations where supply exceeds demand to markets with inadequate supply. The shutdown of virtually all Russian pipeline supply to Europe have generated significant new demand opportunity for LNG delivery based only on existing European energy consumption.
Significant infrastructure investment in import terminals and shipping have already been made and North America is well positioned to provide this additional LNG if sufficient long term offtake contracts can be negotiated to backstop the project financing needed.
While there may be reluctance among potential buyers to commit to new LNG contracts in the face of long-term demand uncertainty, elevated pricing, and decarbonization objectives. Growth opportunities exist.
Our challenge will be to figure out how to make delivering LNG projects less expensive and quicker and with lower risks so that they can be financed based on shorter term contracts.
Q: What are some of the Project Delivery challenges and opportunities?
A: I would say “Change” and “Resources”.
As noted earlier, LNG projects need to change to make them easier to market and finance. From a macro sense, we need to find ways to reduce capital requirements, shorten delivery times, and reduce execution and performance risks.
You could say we have always been striving to do this. However, much of the decisions for what and how we execute projects have been justified by “That’s the way we always do it”. This applies across all disciplines from process engineering to civil engineering, from material selection to construction methodology.
Years ago I implemented a rule in our engineering disciplines that everyone should know why they did what they did.
My rule is everyone needs to understand why they do what they do and when asked there are four unacceptable answers:
That’s the way we always do it.
That’s the way I did it last time.
That’s the way it was done on project X. and
I don’t know.
There is a difference between standardization and blindly copying what has been done before. A catalogue of documented standard designs, processes, and procedures defined bases and limitations are necessary.
An example of delivery model change that is currently being adopted is the move from stick-built construction to modular construction. There are many references that list the advantages of this change, but to be effective, the change must be initiated from at the earliest stages of design so all aspects can be identified and incorporated.
With stick-built construction, economies of scale drove the economic optimum to higher and higher capacity. That approach was effective if it did not result in additional equipment being required or sizes that limited procurement to single sources or requirements for larger construction equipment for single lifts.
Regarding LNG liquefaction trains, the minimum cost per unit throughput is likely smaller when all aspects are considered. This is especially true when all the logistics are considered and material sourcing and movements to fabrication yards. Just taking a design for a stick-built facility, cutting it up and building frames around it is not effective. The approach must consider the limitations of multiple fabrication facilities and the experience and work process of the labor force.
Q: What about Resources?
A: This is one of my favorite topics. People and their experiences make a difference.
The other day I was asked where the most industry experience was.
It was a trick question. The answer was “in the graveyard”.
The point was the industry has a problem with age demographics.
The industry has always been very conservative, and the industry development was concentrated in a few E&P companies and a limited number of EPC contractors for over 40 years. The rate of project awards was such that the members of the LNG “club” were able to roll their project teams over from project to project.
While the LNG industry did not suffer the same “boom and bust” cycles that the petrochemicals industry did, it still went through a few minor expansion periods followed by reductions that tended to trim the younger people. This development resulted in much of the industry experience being concentrated in a few people and they tended to be older.
This situation was recognized as a real problem back in the early 2000’s and a joint industry study was undertaken in 2005 with the objective to answer the core question “whether sufficient technical resources existed to build the needed LNG facilities to meet the medium-term global demand?”.
One of the conclusions was the quality and size of the process-oriented contractors' LNG staffs was in decline. There were only 5 or 6 top level “A” teams available to handle multibillion dollar liquefaction projects. The reasons for the decline were demographic "A" level LNG staff members are in their late fifties or sixties in age and retiring. The other reason for the decline was that contractor teams are being depleted by headhunters poaching key personnel for operators and other contractors trying to enter the LNG industry.
In the current market most of our companies are seeing an increasing workload and owner/operators are continuing to (re)build their own engineering teams causing a lot of competition for a shrinking pool of experienced talent.
Demographics are working against the industry with the pool of experienced people shrinking at the time when more are needed. The large increase in project developers along with new companies desiring to enter the LNG contracting business are diluting this pool of experienced resources.
The challenge we face is to attract new talent into the industry whose reputation needs to be improved to attract younger people. We need to ensure that the older and younger generations collaborate with the specific intent of sharing experience. We need experience to avoid repeating mistakes or reinventing the wheel, and we need fresh ideas and challenges to avoid “this is the way we always do it” response to “Why?”.
Q: I believe we’ve run out of time so we will have to ask you back to discuss LNG technology, which I know is another one of your favorite topics.
A: I’ve always said the question in the LNG business was not “if”, but “when”. I think this shift in perspective applies to the evolution of fuels to satisfy the global need for safe, secure, sustainable, and affordable energy. Energy markets and policies have changed because of the Russia’s invasion of Ukraine. The economic, environmental, and security of supply arguments for competitive clean technologies is strong.
The talent and problem-solving experience of individuals in the LNG industry remain essential even as the industry evolves. Their adaptability, transferable skills, deep understanding, industry insight, complex problem-solving abilities, and leadership qualities contribute significantly to driving innovation and successfully navigating the coming changes.
Mehdy: We want to quickly acknowledge the sponsor of today’s podcast, Solaris Management Consultants Inc, a leader in LNG project delivery bringing 30 years of success and expertise. To learn more about Solaris MCI and its breadth of services, please visit solaris-mci.com.
Event Director - LNG Export Operations, Maintenance & Turnarounds