LNG plant construction industry faces downturn after reaching peak in 2015

Wednesday, 18 November 2015

The warning came from energy consultants Wood Mackenzie, pointing to the global LNG market supply glut and the fact that there are fewer final investment decisions being made for new projects.

$200Bln spent

The Wood Mackenzie report said the LNG Engineering, Procurement and Construction (EPC) sector, which has generated over $200 billion of revenue in the last decade, will be facing its steepest decline in decades.

This will lead to heightened competition and downsizing. The etablished players will also face increased competition."The year 2015, will be recalled by the LNG EPC sector as the year in which their workload peaked," said Saul Kavonic, a research analyst for Wood Mackenzie.

Worldwide, there are presently 31 liquefaction Trains concurrently under construction with 138 million tonnes per annum (MTPA) of nominal LNG production capacity.

"We forecast a drop in LNG construction of a greater magnitude and duration than the sector has witnessed for decades, beginning outside North America in 2015, and extending to within North America from 2019, with only 10 to 15 Trains per year under construction globally between 2019 to 2021," the report claimed.

Noel Tomnay, Head of Global Gas research for Wood Mackenzie, explained how the gas market outlook impacts future LNG construction.

"The drop in demand for LNG construction is a result of the LNG market entering a period of oversupply, as LNG operators revaluate and postpone pre-FID projects in the light of lower demand," Tomnay said.

Faced with an imminent drop in workflow, the challenge for the sector isn't just about spare capacity, it's an increased number of competitors.

The report points out that the market has been dominated by five incumbent players: Chiyoda Corp. and JGC Corp. of Japan, Bechtel and KBR of the US and France's Technip.

While technical and political barriers to entry have been high, with unsuccessful attempts over the years by new players to establish a foothold, more recently, the scale and risk profile of upcoming LNG projects in the US have enabled new entrants to the sector.

“Ample spare EPC capacity and a greater number of contractors will be competing in a drastically diminished market,” the report said.

Wood Mackenzie said there would be significant competitive pressure on contractors to accept reduced margins and more onerous terms, and downsize their LNG teams.

“These impacts have already begun to be felt with highly competitive tenders being placed for the limited number of upcoming pre-FID projects,” the report said.

“Contractors' bottom lines will be increasingly affected as EPC demand declines over the rest of the decade.

“Some contractors will fare better than others, based upon the success of their tendering, particularly for projects in North America, which accounts for over half of future LNG workflow.

“Other contractors are looking to differentiate themselves in new LNG niches, such as FLNG,” the report stated.

Wood Mackenzie concluded that the heightened competition in the EPC sector will provide an opportunity for LNG operators, who do proceed with new LNG projects to achieve lower costs and better contracting terms going forward.