LNG Plant Cost Escalation

The Oxford Institute for Energy Studies has recently published a paper which examines the rapid unit cost increases exhibited by the LNG industry since the turn of the century. Between 2004 and 2009 the economic growth of the BRICS and their commodity import and investment requirements increased the price of oil and other commodities but also the unit investment costs in capital intensive industries.  These costs almost doubled in real terms during this period. On the face of it the impact on liquefaction plant costs appeared to be significantly more pronounced.

Since 2010 regional natural gas prices have diverged and the prevailing assumption in the oil and gas industry has been that at present levels of liquefaction costs, only Asia represents a viable market for new LNG projects.  With the prospect of US LNG exports, where existing re-gasification terminals are to be converted into export facilities through the incremental investment in liquefaction plant, it is plausible that LNG trading and arbitrage could yield sustainable hub prices (at today’s development cost levels) of US: $5-6/mmbtu; Europe $10 – 11/mmbtu and Asian LNG $12 – 13/mmbtu.

In addition to the significant competitive advantage for the US deriving from these lower gas prices, the ability for gas to compete with coal in power generation in Europe and Asia is doubtful without robust policy support, with obvious implications for CO2 emissions. Such regional gas price differentials in such a scenario are directly influenced by the assumption of the continuation of today’s liquefaction (and to a lesser extent shipping) costs.

In this paper Brian Songhurst assesses the reasons for the liquefaction cost level increases in the last decade by placing the available data into a framework in which an objective comparative analysis is possible.  He also discusses trends in the LNG project construction and execution sector which should lead to cost reductions over time.

By: Brian Songhurst