What will US$200 billion of investment do for the global LNG industry?

And will it drive cost inflation?

1 minute read

The LNG boom is back!

Over the next two years almost 90 mmtpa of liquefied natural gas (LNG) is expected to take Final Investment Decision (FID) and start construction. The capital expenditure – for both LNG plant and upstream infrastructure – will total more than US$200 billion between 2019 and 2025. 

This is a major boon for engineering, procurement and construction (EPC) contractors and other providers along the supply chain.

However, the LNG industry is notorious for cost overruns and project delays – only 10% of all LNG projects have been constructed under budget – while 60% have experienced delays. The many projects jostling for FID are presenting low project costs to woo potential partners, buyers and financiers. But, when we consider the historical reality of LNG construction, and the upcoming LNG construction boom, we think that these capex estimates should be viewed cautiously. At least some project delays are likely.

While there is a risk that current low LNG prices may cause some proposed projects to be cancelled, we think the risk to new LNG supply development is actually to the upside. In our high case we anticipate that an additional 70 mmtpa could be sanctioned in the next three years. Should even some of this materialise, construction would be stretched beyond the heights of the boom from 2010-2014.

  • US$200 billion

    capex between 2019 and 2025 in our base case

  • 10%

    Percentage of all LNG projects that have been constructed under budget

  • 60%

    Percentage of projects that have experienced delays

  • US$125 billion

    Additional capex in our high case

Does this mean the upcoming cycle is destined to suffer the same cost overruns and delays as the last cycle?

We don't think so. Here's why: 

  1. The global spread of projects this time will mean that the local inflation pressure, particularly in terms of manpower, which hit Australia and the US in previous cycles is less.

  2. Developers are being more cautious about LNG development solutions, with modularisation and capex phasing key themes.

  3. In the wider upstream industry, companies are still cautious about investment programmes and this will limit global upstream inflation.

  4. Raw materials should be reasonably priced, steel prices globally will ease from the recent 2018-peak.

  5. Competition for construction contracts is strong, with new EPC contractors entering the market.

Will increased investment drive cost inflation? 

After years of plummeting workloads, EPC contractors would of course welcome increase in spending. While LNG operators have enjoyed a return to profits in recent years, many LNG EPC contractors remain firmly in the red. Tough times bring tough contract conditions and EPC contractors have taken financial hits from project cost overruns as seen at Ichthys, Cameron and Freeport.  With an increase in workload, there is the potential for a recovery in project revenues for EPC contractors.

Other parts of the value chain are also likely to see an increase in workload and with it, costs. A lean time for upstream subcontractors has resulted in a 25% drop of workload capacity across the sector. An uptick in activity is expected to bring higher rig rates and subsea costs, a risk for major integrated projects in Mozambique and Qatar.

Cost overruns in the previous boom averaged 33%, with Australian projects overrunning by 40%. While Wood Mackenzie does not expect similar increases this time, the potential for operators and contractors to drop the ball on project delivery remains. This risk will only be heightened if more projects go ahead than our base case forecast.

Only time will tell whether LNG will start to shrug off its difficult delivery reputation.


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