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Mining & Resources

Ready, aim aim aim, fire: How to keep the costs of LNG projects in control

16 Jun 2014, by Informa Insights

Cost blowouts in many Australian LNG Projects have been well documented. In recent months, there has been solid confirmation that Aussie resource projects are the most expensive in the world.

Geoffrey Cann, National Director of Oil and Gas at Deloitte
Geoffrey Cann, National Director of Oil and Gas at Deloitte

In the lead up to the 2014 South East Asia Australia Offshore & Onshore Conference (SEAAOC), taking place this August in Darwin, we had the chance to catch up with Geoffrey Cann, National Director of Oil and Gas at Deloitte. Here he shares with us some insight in how to keep the LNG project costs in control.

What strategies may be implemented to keep costs in control?

Geoffrey: Once a major capital project is underway (and Australia has 7 projects in construction), there is relatively little that companies can do to dramatically improve their cost position. Therefore, project set up is a most critical activity, and the 9 proposed projects for Australia are all carefully studying the portfolio of in-flight projects to understand what to do differently.

In my view, the dash for gas had led to a “ready fire aim” approach, whereas in hindsight a better strategy is “ready aim aim aim fire”. These projects are very complex and benefit from longer up front planning cycles. It’s also become clear that the interests of all of the participants in the projects (EPC firms, suppliers, employees) need to be aligned with project objectives. Performance management, KPIs and contract incentives have in general not promoted project success.

Australia has a very high social license to operate hurdle, and best in class projects integrate social license management practices deeply in the project rather than after the fact when change costs are much higher. It’s also clear that some non-technical factors need greater attention in project planning and decision-making. A good example is people logistics, camps and road transportation, which have imposed huge cost burdens on the projects. Finally, the projects have largely not considered eventual operating costs and efficient operations as part of the build effort. Best in class projects bring the future operations managers on board very early in the construction cycle so as to build towards an efficient future operation.

The large number of LNG projects being constructed at one time, all competing for expertise, have added to cost pressures. Once complete, do you see downward pressure on wages?

Geoffrey: I do not see any downward pressure on wages, merely a moderation in growth rates. Labour costs tend to go up like a rocket and down like a feather. There is still enough upward thermals (the general scarcity of labour, the demand from other sectors, the other 7 projects on the boil, the remoteness of the operations) to keep those feathers aloft for some time.

Modular construction and FLNG are two areas being optimised to minimise cost blowouts. Do you see increasing utilisation of these?

Geoffrey: I expect to see all LNG projects globally to vigourously pursue modular construction to take advantage of wage differentials. The economics are very compelling. FLNG will initially be aimed at stranded resources too far from shore, but current vessel designs look to be quite a bit smaller than what’s achievable with an onshore facility. That will change in time. But the advantages of FLNG are considerable.

Looking forward reducing capital and operational expenditure will be the next focus areas. What hints and tips can you provide?

Geoffrey: I see three significant cost improvement opportunities in the sector. First, the coal seam gas sector, which will be drilling thousands of wells, should rethink its operations along more of a factory model. Second, business managers looking for cost savings should look not just within discipline silos, but also across the disciplines (along process lines). Finally, the industry will need to adopt a mindset of continuous improvement, learning and innovation to protect margins in the future.

You will be speaking at the upcoming SEAAOC conference. What is the key message that you would like to bring to the event stakeholders?

Geoffrey: Oil and gas prices are set by global markets, but costs are set by the choices of domestic management. Australian LNG will forever be focused on operating cost management and needs to get started now so that future projects have a better chance to be sanctioned.

SEAAOC_2014 - LogoJoin Geoffrey and 900+ industry professionals at the coal seam gas conference – part of the Northern Territory Resources Week – for exclusive knowledge exchange and unmissable networking opportunities.  For more information on conference agenda and to register, please visit the SEAAOC website.


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