LNG project costs surge, some relief seen in 2008

Wednesday, 09 May 2007

According to the latest index from Cambridge Energy Research Associates, the latest increase in prices means that since 2000 the index has risen 79 percent, with most of the increase in the past two years.

However, the latest increase in upstream projects such as LNG liquefaction is still a slowdown from the previous six-month period when the index rose 13 percent.

 

“This new point indicates an annual rate of project inflation of 14 percent, which is high, but this is the second consecutive period of deceleration in the rate of increase,” said Richard Ward, senior director for cost research at CERA.

 

“In 2006, the index measured annual rate of project inflation was 30 percent. This leads us to

think that if this deceleration trend continues, it is possible that a cost plateau may be reached in 2008,” Ward added.

“Capacity constraints in the markets continue to be the biggest factor behind the increases, with equipment and service suppliers struggling to meet demand,”  he said.

“Project delays and lengthening of project delivery schedules, often to accommodate later delivery of equipment is beginning to provide a natural balance. However, the shortage of experienced personnel is still a major factor.  Are we at the top of this period of costs increases?  The answer is, not yet. Based upon these trends, any significant relief on cost increases will not be seen until late 2008/09,” Ward said.

According to the CERA report, even with oil consistently above $50 per barrel providing a strong demand signal, the high cost levels are starting to have an effect on project announcements, scheduling, start-up delays, and, in one or two cases, outright cancellations. This effect is even more pronounced in natural gas projects.

Across the board all types of projects have seen a moderation in the rate of cost increases. Of the nine primary drivers of project capital development costs tracked by CERA on a global basis, all are continuing to respond to the high level of oil and natural gas activity.

 

In some regional markets, there has been a downturn for specific items such as rigs. Additionally, the continued strength of the global economy has maintained pressure on commodities and other generic equipment and services.

The impact of rising costs on people extends beyond design and project management personnel, as experienced workers are needed throughout the industry. The high number of complex, highly technical projects under construction demands top-flight, seasoned personnel. The market continues to see movement between companies and attempts to bring in staff from parallel industries such as refining and power.

 “Analyzing the projects already committed over the next two to three years, we can see that the demand for equipment and services will remain at these levels for the immediate future,” Ward added.

“Additional market capacity that is currently planned will not be sufficient in most markets to bring very much relief to high costs during this time period,” he said.