American Oil and Gas Reporter - March 2023 - 49

SpecialReport: Natural Gas Infrastructure
es capacity close to the 190 mmtpa
range, Wood Mackenzie calculates that
FIDs may lead to an investment of
more than $100 billion in U.S. LNG
production during the next five years.
Three-quarters of that total is expected
to be invested in pre-FID projects, the
firm says, adding that the figure is
based on bottom-up estimates of existing
engineering, procurement and construction
costs and project facilities, as well
as cost inflation.
It notes that major EPC player Bechtel
already has contracts for numerous advanced
pre-FID projects. Wood Mackenzie
says further contract wins are likely for
the company, assuming it can resource
them effectively.
Other EPC providers, including McDermott,
Kiewit, Zachary and JGC, are
eyeing developments but remain cautious,
having suffered from major cost overruns
in the past, the firm says. Meanwhile, it
adds, equipment manufacturers such as
Baker Hughes and Chart both have multiple
orders for various plant components. " These
include liquefaction trains and turbines,
as well as other plant items, " Wood Mackenzie
says. " If projected investment goes
ahead, they and other selected service
providers could further benefit. "
Risks To Growth
According to Wood Mackenzie, the
potential for cost increases is challenging
developers as they move forward, particularly
through supply-chain-triggered inflation
and competition for resources.
" Our benchmarking analysis indicates
we have already seen inflation of over
20% on the U.S. Gulf Coast, compared
with projects which were built in the last
five years, " reports Sean Harrison, research
analyst, gas and LNG for Wood Mackenzie.
" As developers continue to push more
projects forward, competition for service
contracts will rise, creating a squeeze on
both workforce and material prices. This
could cause further cost inflation, along
with delays to some projects. "
He adds that, despite rising costs,
competition for customers is challenging
profitability by keeping liquefaction fees
low, potentially between $2.0 million and
$2.5 million an MMBtu for fixed price
long-term agreements.
" The combination of low fees and increasing
costs mean we estimate unlevered
internal rates of return as low as 5%-6%
for some projects. Based on these returns,
some projects are finding it challenging
to secure finance, particularly via equity
raises, " Harrison relates. " Projects are
looking for ways to create additional
value for developers and equity investors.
Ways they might find upside include
procuring feedgas efficiently, securing
good prices for uncontracted LNG sales,
debottlenecking and re-rating of trains
and the sale of pre-commercial volumes.
Charging customers for additional services
to reduce project emissions could also
deliver additional returns. "
According to Wood MacKenzie, developers
facing thin profit margins will
seek opportunities to generate upside and
make projects more attractive to equity
investors and customers.
" Re-rating trains for higher capacity,
debottlenecking and adding further trains
should provide opportunities to increase
production in the future, " the firm illustrates.
" Further revenue could come via
efficient feedgas procurement and sale of
pre-commercial volumes. Another source
of additional returns could be through retaining
access to the potential upside from
high global commodity prices. "
It notes that developers also are looking
at ways to mitigate value chain emissions,
which may make projects' emissions
characteristics more attractive and allow
those facilities to improve returns by
charging premiums to customers.
" Options include reducing liquefaction
emissions by either using electric
drive (with renewable power) or hydrogen-fueled
turbines, or installing
carbon capture, utilization and storage
on gas-powered turbines, " Wood
Mackenzie describes. " Developers are
also focusing on sourcing feedgas from
projects with certifiably low upstream
emissions (responsibly procured gas)
and from renewable natural gas sources
as well. "
Wood Mackenzie's full North American
LNG benchmarking report is featured in
the firm's LNG Service, and compares
U.S. LNG facilities across value, cost
and contract metrics, including internal
rates of return, net present value,
breakeven, liquefaction fees, EPC terms
and commercial structures. For information,
visit woodmac.com.
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MARCH 2023 49
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American Oil and Gas Reporter - March 2023

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