concept & techniques for grassroot lng plant cost optimization - lng13 paper
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Concept & Techniques for Grassroot LNG Plant Cost Optimization - LNG13 PaperTRANSCRIPT
CONCEPT & TECHNIQUES FOR GRASSROOT LNG
PLANT COST OPTIMIZATION
Yoga P. Suprapto
Engineering Manager -Tangguh LNG Project
PERTAMINA
Paper presented at the LNG - 13 Conference
May 2000, Seoul – South Korea
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Abstract
How Grassroots LNG Plant Can Compete With Expansion Project Cost
Screening of LNG Liquefaction Process Technology
Contract Management of Front End Engineering Work for Multiple
Technology Competition
Case Discussion for Tangguh LNG Project
As the Asia Pacific LNG market experiences a sluggish demand in the last 5
years, the competition to find a niche market between LNG projects are getting
tighter and tighter. The new grassroots LNG projects are facing their biggest
challenge for survival unless they can compete head to head with the expansion
project, something that is not easily achieved due to the significant difference in
the project scope.
The changing supply demand balance of the Asia Pacific LNG forced the LNG
producer revisited the basic concept the way a LNG project is being developed.
This paper describes and analyzes the critical change drivers of the business in
order to appropriately address the best strategy to compete.
In the next section, this paper discuss how to put the cost optimization merits to
works in the real world in a grassroots LNG project, which include the
implementation of Multiple technology Front End Engineering Design
competition.
Further discussion focus on the implementation of Multiple FEED execution,
technology screening, and risk management and project coordination. Then, a
detailed discussion on the execution procedures follows, how a Multiple FEED
procedures and evaluation criteria should be properly designed to maintain fair
and equal competition between FEED Contractors. As an example, the Tangguh
LNG project Multiple FEED execution is used as the basis of case discussion.
A grassroots LNG project does have some inherent cost optimization merits,
which an expansion project does not always have. This paper analyzes the project
cost factors and identifies which are the cost optimization merits for a grassroots
LNG project.
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LES CONCEPTS & TECHNIQUES POUR OPTIMISATION
DES COUTS D‟UNE USINE DE GNL “GRASSROOT”
Yoga P. Suprapto
Engineering Manager – Tangguh LNG Project
Presentation pour la conference GNL 13
14 – 17 Mai, 2001, Seoul, Koree
Resume
Comment une unite de GNL “grassroots” peut elle etre competitive avec un projet
d‟extension.
Revue des technologies de procedes de liquefaction de GNL.
Comment specifier des conceptions competitives, niveau de detail et criteres d‟evaluation des
offres pour optimiser le cout du projet.
Discussion sur le projet GNL Tangguh.
A un moment ou le marche du GNL en Asie-Pacifique fait face y une demande lethargique depuis
cinq ans, la competition pour trouver une niche de marche entre les projets de GNL est de plus en
plus serree. Les nouveaux projets “grassroot” de GNL font face y leur plus grand defi pour
survivre, excepte s‟ils peuvent etre competitifs avec les projets d‟extension, ce n‟est pas facile y
realiser compte tenu de la difference significative des cahiers des charges.
Le changement de la balance de la production et de la demande de GNL en Asie- Pacifique force
les producteurs de GNL au revoir le concept de base et la maniere dont le projet de GNL est
developpe. Ce papier decrit et analyse les moteurs de changement critique de l„industrie pour
adresser correctement la meilleure strategie pour etre competitif.
La section suivante de ce papier discute les merites d‟optimisation des couts d‟un projet de GNL
en “grassroot”, qui inclut la mise en ouvre d‟etudes preliminaires qui mettent en comptition
plusieurs technologies et conceptions. (Multiple technology Front End Engineering Design
competition).
La suite de la discussion vise la realisation de plusieurs etudes preliminaires (Multiple FEED),
comparaison technologique, analyse des risques et coordination du projet. En suite il y aura une
discussion sur les procedures d‟execution, dans le cas d‟un “Mutiple FEED”, quelles procedures
et criteres d‟evaluation doivent etre elabores pour maintenir une juste et egale competition entre
les contracteurs pour un “FEED”. Comme exemple de “Mutiple FEED execution” le projet de
GNL Tangguh est utilise comme base de discussion.
Un projet de GNL “grassroot” contient des zones d‟optimisation de cout qu‟un projet d‟extension
n‟a pas toujours. Ce papier analyse les facteurs de cout du projet et identifie les avantages
d‟optimisation des couts d‟un projet de GNL “grassroot”.
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I. Introduction.
Asia Pacific without any doubt has been the center of the world LNG industry for
the last 30 years. Japan, Korea and Taiwan are the main LNG importer with
Indonesia, Malaysia, Australia and Brunei among others are the major LNG
supplier in the region. In the last decade, Qatar and Oman entered the prestigious
LNG Club and in the near future Yemen will join the club. Some other countries
have been trying hard to develop LNG project as the outlet of their large gas
finding but without much success, mainly due to the marginal project economics.
Even major LNG players such as Indonesia and Australia have not been very
successful in developing a new grassroots LNG project, such as Indonesia Natuna
and Australia Gorgon. On the other hand, the existing LNG Plants have been
continuously expanded which give a clear indication that despite the impact of the
recent economic turmoil in the region, there is some niche market that can always
be developed. The new Middle East LNG producers, especially Qatar is of
different case. Their huge gas reserve, the proximity of the gas reserve, and the
gas quality have made the development cost become quite competitive even with
the existing South East Asia LNG expansion project which have a comparative
shipping distance advantage and a competitive low capital for expansion.
As ia Pa ci fic L NG Su pp ly & D em an d Fo re ca st
0
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L O W D E M A N D F O R E C A S T
H I G H DE M A N D F O R E C A S T
L N G S U P P L Y F O R E C A S T
Figure - 1
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However, beside the issue of grassroots versus expansion competition, there is a
more fundamental issue in the current Asia Pacific LNG competition that is a
clear shift of the supply demand balance in the last decade. From the existing
plant in operation alone, there is at least 10 million-ton/annum excess LNG
production. LNG analyst believe that the situation is not going to be better in the
next 5 year and probably will approaching its supply demand balance later than
the year 2010. Some LNG producers have decided to implement a pre-emptive
marketing strategy by construction of a LNG Plant even before all of the design
capacity is committed. A new project financing strategy is required for this kind
of marketing scheme.
The fierce competition between LNG producing countries, or between projects in
a producing country, have forced Seller and the Buyer parties constantly revisited
the term and condition of a LNG Sales Agreement. A shorter LNG commitment is
not a new issue anymore, and some LNG producers offer a full business chain
development up to the power plant gate. China and India enter the LNG importer
club at this favorable time for LNG Buyers, with additional advantage of not
being severely impacted by the Asian economic crisis. While Indian LNG market
is more or less confined to the Middle East LNG producers, China LNG market is
more open for competition.
Notwithstanding with the importance of competitive LNG Sales contract terms
and comparative advantage of shipping distance, the question that is very
intriguing to be explored is: why some LNG producing countries still pursuing a
grassroots LNG project for a market before the year 2010? Will a 1-train
grassroots LNG plant be competitive with an expansion project? How to manage
the project cost competition while satisfying Buyer and Project Financier
investment risk. The Indonesia‟s Tangguh LNG Project will be used as a case
study for this discussion of optimization of grassroots LNG Plant cost.
It is worth to note that the whatever strategy a LNG producer is taking, the final
objective of a LNG project is to secure LNG Sales Agreement and the Project
Financing Agreement therefore LNG Buyers and Project Financier interest and
concern must become the underlying framework in every strategy discussion.
II. Change Drivers of Asia-Pacific LNG Industry
No LNG project are alike, uniqueness of each business chain contribute to a
complex factors of a LNG Project cost structure. Benchmarking of LNG Project
Cost must be done cautiously and sometime has misled Project Owner or their
Audit Team. However, at the end of the day what really matters to the LNG
Buyer and Project Financier is the Cost of Service of the LNG as received by the
Buyers at their gate or unloading flange. The cost of service gives a simplified
indication of LNG Project strength to return a capital investment. Low cost of
service is a warranty that a project is not only economically attractive but also
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more importantly it will make the project more resilient to any fluctuation in any
of the economics parameter. A very important issue for a long term „take or pay‟
LNG Sales Contract. However, higher cost of service does not necessarily means
the LNG Buyers or Project Financiers will not select that particular LNG project.
If the LNG producer is willing to absorb or share the impact of economics
fluctuation from their revenue then a LNG project with higher cost of service may
still be materialized.
The graph below showed a typical variation of cost of service of LNG in the Asia
Pacific region.
LNG cost of service will very much depend on the cost share of each business
element, starting from the upstream development, the LNG Plant, the LNG
transportation and the receiving & regasification terminal.
A typical cost share for each LNG business chain is as follows:
(1) Upstream Development 10%
(2) LNG Plant 40%
(3) LNG Transportation 30%
(4) Receiving & Regasification Terminal 20%
C os t o f S e r v ic e E x -s h ip To k y o H a r b ou r
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
$/M M B tu$/BBL Oil Equivalent
29 $/BBL
25 $/BBL
20 $/BBL
15 $/BBL
10 $/BBL
5 $/BBL
G R A S S R O O TSE X P A NS IO N
Figure - 2 Typical LNG Cost of Service
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In analyzing the potential cost optimization of a LNG project, one must consider
characteristic of each business chain in order to achieve the highest cost impact
items without sacrificing the basic safety, reliability and operability of the whole
system. Methods on Value Engineering are widely used for these purposes.
The cost of the upstream facilities is very much determined by the nature of the
gas reserve, such as the location of the reserve, the depth, and the gas quality, the
size and distances between reserves to the selected gathering station. In some
cases where the gas quality requires reinjection of CO2 to an underground
reservoir, the upstream development cost can become prohibitively high. Typical
process design for upstream facilities is not as complicated as the LNG plant,
unless a large CO2 or sulfur removal unit is required by the process design then it
may become a major cost item. Cost optimization may include a decision to
relocate some facilities from offshore to onshore at the expense of higher pipeline
cost or selection of multiphase single pipeline instead of single phase multiple
pipelines.
The LNG plant is a major cost item in a LNG business chain; its sophisticated
system has become the focus of cost optimization in recent LNG projects. Prior to
the recent cost reduction effort, the LNG plant cost level reflect the characteristic
of the LNG business during the initial stage of the Asia Pacific LNG trades back
in the 70‟s. The oil crisis has forced the Japanese energy users to secure a long
term and reliable energy supply as an alternative to oil. The keyword is security of
supply, safe and reliable LNG plant operation. This leads to conservatism in the
system design and project specification. For better or for worse, the design
philosophy had met its objectives and satisfies the LNG Buyers needs. Many of
plants achieve availability factor as high as 97%, an impressive record compare to
a typical refinery or gas plants. In other plants, the capacity had been
debottlenecked up to 30 – 40% higher than its name plate capacity. Both the LNG
Producers and Buyers had enjoyed this „cheap‟ cost of service of the LNG
produced by the plant capacity improvement or debottlenecking project.
Moreover, at that time, the market absorbed almost all of the excess capacity. The
demand of LNG also has pushed the capacity of the plant to the limit of available
process and rotating equipment technology. The design capacity of a LNG train
has quadruple within 30 years, as shown in Figure 3, below:
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As the LNG train size getting larger, we should expect that the specific costs of a
LNG project will tend to be lower and lower. However, as shown by the cost
trend chart below, that is not the general trend.
L N G Pla nt C ap ital - 1 9 98 U S $/T PA Gra ssro ot Pro ject
Ye ar of S ta rtup
100
1000
19 60 19 70 19 80 19 90 20 00
US
$/T
on
Pe
r Y
ea
r L
NG
Ca
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cit
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$2 00/T PY
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COST TARGE T OF NEW PROJ ECTS
Figure 4 - Trend of Grassroot LNG Plant Specific Cost
0
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Y ea r B ui lt
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ap
ac
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mm
Tp
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Figure 3 - Grassroot LNG Plant Cost Trend
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But not until the late 90‟s that the LNG plant cost become the attention of the
industry players, triggered by the LNG Buyers concern on the cost of service of
LNG as a result of extrapolation of the 70‟s LNG price structure. A structure that
was developed post oil crisis that consider LNG as a „premium‟ fuel, which
secure a long term reliable supply of an environmentally friendly energy. While
the premium attribute is still considered valid, especially from the environmental
point of view, the attribute on security of supply is being questioned more and
more frequently. The spring of new LNG producers and the never-ending
expansion of the existing LNG plants have made LNG slowly shift from a
premium fuel towards a fuel commodity. As in any other commodity trading, the
name of the game is product price differentiation, which is in this case, is the cost
of service of the whole LNG chain. Eventhough in some case quality
differentiation strategy such as providing an integrated energy supply up to the
customers gate may very well fit some customer needs.
Nowadays, the LNG Buyers will certainly give more attention to a LNG projects
that can offer lower LNG cost of service, shorter contract period, at smaller
contract quantity, attractive price structure and more flexible Sales Agreement
terms and conditions. However, without sacrificing the industry safety and
reliability standard as well as the selection of a reputable EPC Contractor to
ensure timely production of the constructed plant.
The changing balance of LNG supply and demand is one of the most important
driver for cost optimization. However, it is the extreme down fall of world oil
price in 1997/1998 which triggered owner to ensure that the cash flow of a LNG
project stay in the healthy side of the project economics. Eventhough the low oil
price affected the economics of all LNG projects, but the grassroots project
economics got the worst impact.
In the current LNG business environment, where the LNG supply is well in
excess of the demand, the LNG Buyers investment risk is in fact getting better by
the availability of alternate sources. More spot LNG sales is a clear indication that
alternative LNG is available in the open market.
Therefore, from the project economics perspective, the LNG project financiers
will face higher investment risk than ever before. Especially if the major portion
of the project is funded through non-recourse project financing. On the other
hand, in the case of equity financing, the burden shift to the Owner sides. Shorter
contract period at a smaller contract quantity work against the project economics,
above it all relaxation of the „take or pay‟ clause is a killer for the project
economics.
All this will make the project financiers execute a more stringent due diligent on
the project economics, the feasibility of the design and the technology used, the
EPC Contractor performance (technical and financial), political stability in the
producing country as well as the financial capability of the LNG Buyers. At the
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end of the day, the project financier‟s assessment will be reflected in financing
cost of the project.
All of the above change drivers set a perfect framework for the LNG industry that
a LNG project cost optimization is mandatory for the survival of many LNG
projects and the grassroots project has the highest priority to do so.
III. Cost Optimization Merits in a Grassroots and Expansion LNG Projects
Why a grassroots project? Some owners or producing countries have an option
either to build a grassroots plant or to expand the existing LNG plant. Beside the
project economics there are other consideration that a project owner, a producing
country or in some cases the LNG Buyers and the project financier will promote a
grassroots LNG project instead of an expansion project.
In a country like Indonesia where the state oil company are the single LNG Seller
and where the substantial gas findings are in distance apart, the development of
multiple LNG center will add strength to the security and reliability of supply
aspect. Any production and shipping problem can be conveniently covered by the
other LNG center, which ensure reliable supply to the Buyers and predictable
revenue to the Seller.
For the project financier multiple LNG center of a single Seller will dissipate the
risk of the investment as well as reducing the risk impact on the existing LNG
plant investment if portion of the existing plant is financed by different investor.
The next question will be can a grassroots LNG plant project compete with
expansion projects. There are several factors to be considered before we can
appropriately address this issue. It is generally accepted that a grassroots plant
will never be able to compete with an expansion project. However, since the LNG
cost of service and the LNG sales price are two different things, it is possible that
a project Owner offer a competitive LNG sales price even if the cost of service is
higher, such as for a grassroots plant. In this case, the project Owner is accepting
less revenue margin.
From a technical point of view, several factors may work in favor of a grassroots
LNG plant. The nature of the gas reserve may become the significant advantage
for a grassroots LNG plant, such as the proximity of the gas reserve, access to
deep sea waters, the depth of the reserve as well as the quality of the gas itself.
The existing LNG plant also impose an inherent disadvantage for the cost
optimization of the expansion project. Because of its modular train concept,
safety, operability and maintainability consideration, cause the expansion project
usually a mere duplicate of the existing trains. While this will reduce the design
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and operating cost, a duplicate design will limit the possibility of other potential
cost optimization for an expansion project as follows:
Duplicate capacity causes an expansion train could not enjoy the
economic of scale advantage of a larger train design.
For an expansion project done long after the first train, duplicate
design may find that some equipment or spare parts has become
obsolete and costly.
Duplicate design will limit the EPC Contractor opportunity for a
competitive bidding of each equipment and therefore reduce the
possibility for an optimized project cost.
Duplicate design will limit the opportunity for cost optimization
through latest technology development such as in advanced process
control; computer aided production as well as the newest application
of higher efficiency equipment and material.
Duplicate design may require a design retrofit to comply with the
latest environmental specification, which will be more efficiently done
in a grassroots design.
Figure 5 – Project Cost Optimization Opportunity
On the other hand, an expansion project does not require a new set of full-scale
infrastructures, LNG harbor and utilities, which is a major cost item for a project.
An expansion project with a duplicate design also could not easily enjoy the
opportunity of multiple technology competitive bidding as in a grassroots project.
All of the existing LNG plants have selected the same LNG liquefaction
technology for their expansion project. However, this concept is currently being
questioned by several Owners and a multiple technology trains in a single plant is
not an impossible concept to implement.
Also, a grassroots plant enjoy the possibility for a „fit for purpose‟ design with a
pre-set cost objective which can be determined to meet or exceed the cost
advantage of an expansion project. The following chart shows an estimated
project cost comparison of grassroots and expansion LNG projects.
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Therefore, competitiveness of a grassroots plant versus an expansion project
should be analyzed on a case by case basis and could not be simplistically
generalized. In fact, a recent grassroots LNG plant had successfully prove that a
grassroots plant can be constructed at a competitive cost compare to a typical
expansion project.
IV. Making Competition At Work for a Grassroots LNG Project Cost
Optimization
For many years, the practice in the LNG industry has been a competition in the
EPC (Construction) work. Project Owner pre-selected the main technology, which
include the LNG Liquefaction technology and the Process Driver technology.
Those are the technologies not much dependent on the feed gas composition or
other site-specific condition. In the Asia-Pacific region, the Propane Pre-cooled
Mixed Refrigerant LNG Liquefaction technology has led the market share. It has
a proven track record on safety and reliability, which was and is still the main
consideration of the Asia Pacific LNG Buyers. One LNG plant employs a
Cascade Refrigeration LNG Liquefaction technology, which has equal safety and
reliability records.
In line with the rapid growth of LNG market in Asia-Pacific in the 70‟s and 80‟s,
larger and larger plant capacity becoming a necessity to fulfill the economic of
scale. The process efficiency and the manufacturing flexibility of the main
equipment to match the higher plant capacity, makes the Propane Pre-cooled MR
the technology of choice in that booming LNG era. The demand for a larger LNG
plant also matched by the development of larger gas turbine technology, which
makes the gas turbine the technology of choice for the process system driver.
Despite the booming of the LNG market, it is quite surprising that the other LNG
O p t im iza t io n O p o rtu n ity - G ra s sro o ts & E x p a n s io n
L N G P ro je ct , 1 T ra in , 3 m m T p a
Gra ssro ots -Ba se Gra ssro ots - Optim ize d Expa nsion - Ba se Expa nsion - Optim ize d
Pr
oje
ct
Co
st
Liq u e fac t io n U t ilitie s
S & L M arine
In fra s tru c t ure EP C
Figure 5 - Optimization Opportunity of Grassroot & Expansion Project
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Liquefaction technology developer did not make significant attempt to advance
their technology for the large capacity LNG plant.
Not until recently that the other LNG Liquefaction, technology developer start to
realize that the LNG market seem to offer enough rooms for more than one
player. As has been described earlier, the key issue in the year 2000 era is a low
cost LNG plant, something that the previous LNG project which happen to apply
the Propane Pre-cooled MR, seem fail to address. Even for a larger capacity,
which could have improved the economic of scale, as shown in Figure 4?
LNG analysts have different assessment as to whether it is the LNG Liquefaction
technology or the other aspect of the plant design is the main factor for the high
LNG cost.
At the LNG 12 Conference in 1997, Shell presented a benchmarking study of
various LNG Liquefaction technologies. The study evaluated 3 LNG Liquefaction
technology which are currently being used in various LNG plant, i.e. the Single
Mixed Refrigerant; the Propane Pre-cooled Mixed Refrigerant and the Cascade
Refrigerant technologies, plus the other 2 newer technology which is the Dual
Mixed Refrigerant and the Nitrogen cycle technologies. The study concluded that
the LNG Liquefaction technology contributed only less than 3% to the specific
cost of a grassroots LNG plant. An excerpt of the study is presented in the table
below.
C3/MR Cascade SMR C3/MR SMR
Specific Power, kW/tpd 12.2 14.1 14.5 15.3 17.0
Fuel Efficiency, % 92.9 91.2 91.6 90.8 90.0
Indexed Capex 100 119 97 100 97
Plant Availability, sd/a 340 336 338 342 340
Indexed Specific Cost 100 143 103 100 101
Figure 6 - Benchmarking of LNG Liquefaction Technologies
Shell Study - 1998 Pertamina 1999
A similar study was done by PERTAMINA confirmed that the different in
specific cost between the Propane Pre-cooled MR and the Single MR
technologies are not more than 1% for the overall LNG project scope.
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However, it will be a misleading conclusion to say that the LNG Liquefaction
technology does not have a significant impact on the real-world LNG project cost
competition. As in any hypothetical study, the result of a study valid only if the
assumption used in the study is still being maintained in the real world. The
assumption are, but not limited to the following:
The same design philosophy, sizing criteria and project specification
are consistently applied for the evaluated technologies
A proven and perfect match of the process driver is available for each
of the technology
A proven and perfect match of main process equipment is available for
each of the technology.
The other process system such as the Acid Gas Removal; the cooling
medium; the heating medium, storage & harbor system are using the
same technology.
No consideration for the additional cost required to compensate
discrepancies on operational and maintenance features of each
technology, such as control or safety system complication
No consideration for the EPC competitiveness impact on cost such as
procurement efficiency and construction efficiency
No consideration or the EPC Contractor bidding strategy impact on
cost
Therefore, in the evaluation of the real world LNG project cost competition, it is
more important to put attention on assumptions and what is not considered in a
hypothetical studies than the hard number conclusion of the studies itself.
The only way to verify the assumption is by executing a Multiple technology
Front End Engineering Design. However, multiple FEED is not cheap and simple
to manage, requires not only technically competent Owner‟s project team but also
require a unique project management plan and control.
It is therefore very important that the selection of the LNG technology to be
involved in a Multiple FEED competition shall be put under the frame work of the
final project objective, that is to secure LNG Sales Contract and Financing
Agreement.
As has been discussed in the earlier section, with shorter contract term and
smaller quantity commitment the risk of a new LNG project lies more on the
project financier rather than on the LNG Buyers side. Therefore, unless a
technology has a clear technical and cost competitiveness that can be justified
later in front of the project financier and Buyer it would not be wise to carry out a
Multiple FEED.
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However, the problem is, the clear technical and cost competitiveness of a
technology can only be verified after the FEED. Unfortunately, even a FEED
cannot be used to verify the cost impact of EPC Contractor‟s procurement and
construction efficiency, and/or bidding strategy which will only be known after
the EPC work bids.
Requesting project financier and/or Buyer opinion prior to execution of Multiple
FEED is not a common practice since what their concern is not how a project
Owner implement the FEED but what is the outcome of the FEED work for the
proposed project and proposed financial plan. In the current LNG producer
competition, a project financier or a LNG Buyer will not have a difficulty to find
alternative LNG project, which fit their requirement or risk criteria.
Justification to include a technology in a Multiple FEED remains in the project
owner‟s hand, and can be addressed by one of the following strategy:
Include only the technology which have been well accepted by the
LNG project financier or Buyers in the region
Include as many viable technology as the FEED cost can be justified
and make decision after the EPC bids is received, evaluated and
offered to the LNG market.
Execution of a Multiple FEED is indeed a unique and challenging undertaking,
the LNG industry is yet to learn the whole process, the constraint and the
complication of doing a Multiple FEED work. However, the potential benefit is so
promising for a grassroots LNG project to simply ignore the concept. For them, it
is more a survival kits rather than great looking outfit.
V. LNG Liquefaction Technology, Is It The Real And The Only Issue On
Project Cost Competition?
As has been discussed briefly in the earlier section, the technology per se is not a
significant factor for the project cost optimization. This means, in theory the
optimization objective could still be achieved with design competition
implemented around a pre-selected LNG technology.
However, execution of a Multiple technology competition is still one of the best
practical ways to promote cost optimized LNG plant design:
Technology competition open the possibility for a performance based
design rather than a specification based design
Technology competition breaks the latent paradigm of outdated project
philosophies and promote design innovation
More Contractors and technology licensors involved, promote higher
level of competition
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In the evaluation of a multiple technology competition, there are several technical
issues that need to be addressed properly even if in the overall project cost
perspective those factors do not greatly impact the competition. Above all, the
basis of the competition shall be a technology that will really works in the real
world not in the process simulation print outs.
In principle, the nature of the LNG Liquefaction technology does not have much
rooms for efficiency difference compare to other process system such as in the oil
refineries or petrochemical industries, where an advanced catalyst can make a
significant difference in the process efficiency. Any LNG liquefaction technology
is based on a simple Carnot refrigeration cycle, which is consist of 4 basic
refrigeration steps: adiabatic compression, cooling & condensation, adiabatic
expansion and evaporation. A refrigeration cycle is a process of transferring heat
from the process side into a heat sink (air, seawater or a cooling tower system).
The process efficiency of a LNG liquefaction technology is therefore depend on
how a technology can closely fit the Carnot cycle, which is the ideal cycle (100%
efficiency). The technology developer approaches the idealistic Carnot cycle
curve in different ways, each with it‟s own merits and constraints:
E n t rop y
Te
mp
., d
eg
.C
F eed Gas In
L NG Out
C ar n ot C yc le I d ea l W or k
F or L N G L iq u e fa ct ion
Are
a o
f P
roce
ss
I ne
ffic
i en
cy
Id eal Carn ot Cycle vs. P u re
C om p on en t R efrigeration
Co
mp
re
ssio
n
D es up er he a t in g & C o n d en sa t i o n
E v ap ora tio n
Ex
pa
nsio
n
Figure 6 – Ideal Carnot Cycle vs. Pure Component Refrigeration
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Employs a multiple refrigeration cycles.
The more the refrigeration cycles the closer it gets to the feed gas
cooling curves. In this regards, a single pure refrigerant cycle has the
lowest efficiency and the triple cascade pure refrigerant cycles give
highest efficiency. More refrigerant cycles will not result much more
process efficiency; instead it will result a diminishing economic return
due to process complication and lost of the economic of scale benefit
on equipment design.
Employs a mixed refrigerant.
If the composition selected properly, a mixed refrigerant can give a
proper fit to the feed-gas cooling curve. However, since the mixed
refrigerant does not have a distinct boiling or dew point temperature,
therefore it requires a more complex process scheme and heat
exchange equipment.
The net impact of a LNG liquefaction technology on a project cost is an
economical balance between process efficiency, number of equipment required
and it‟s best fit to the off the shelf machinery.
Project owners shall cautiously question a LNG technology that claims reduce
project cost more than 5%, simply because the LNG process thermodynamic does
not allow process efficiency improvement in that order of magnitude. If there is a
potential cost reduction as high as 20 – 30%, it must be in the other project aspect
not on the LNG process technological excellence.
Therefore, since the 20 – 30% potential cost reductions are in the other project
aspect, all LNG technology will essentially have the same opportunity to enjoy
the same cost optimization advantage. Then, whether the cost reduction potential
can be materialized or not, will remain on the innovation and excellence of the
FEED and EPC Contractors hands.
In the LNG industry, what is so called „technology competition‟ is actually a
design competition.
E n t r op y
Te
mp
.,
de
g.C
F eed Gas In
L NG Out
C ar n ot C yc l e Id e al W o r k
F or L N G L iq u e fa c tio n
Area
of
Pro
cess
Inef f
ici e
ncy
O p tim ized S in gle M ixed
R efrigera nt Pro cess
F eed Gas InC a rn o t C y c le
I de a l W o rk
F o r L N G
L iq u efa ct i o n
Are
a o
f P
ro
ce
ss I
ne
ffic
ien
cy
Pro pa ne Pre-co oled M ixed
R efrigera nt Pro cess
3 Sta ges Prop an e
M ix ed
R efrigera nt
-170
-130
-90
-50
-10
30
70
110
150
E n t r op y
Te
mp
.,
de
g.C
L NG Out
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VI. Building A Fair And Accountable LNG Plant Design Competition
Rule No. 1
All design must be based on a workable LNG process technology. This is the rule
no. 1 for project owner because it is also rule no. 1 for the LNG Buyer and the
project financier.
The first critical thing a project owner need to do before embarking into a LNG
design competition is to verify that the basis technology will really work in the
real world. Each owner has a different definition on what is considered a
„workable‟ technology. Some defined as a technology that has a proven operating
unit for the service and capacity in the same order of magnitude. Others apply a
limit on the scale up factor from the existing operating unit. However, to accept a
technology based on the technical simulation print out is not a recommended
approach in the LNG industry.
This rule not only to be applied for the process technology as a whole but also for
the critical equipment such as the main process driver, the refrigeration
compressor, the cryogenic exchanger, and in some cases the control scheme
around those critical equipment. Whatever definition on workable technology is
used, the point is to apply that definition consistently for all technology or design.
Rule No.2
All design must use the same design criteria. This is even a trickier rule to define
than rule no. 1. The design criteria span from a very broad and basic guideline
such as project philosophies, and sizing guidelines down to a very detailed
standards, specifications, recommended practices and even a working procedures.
Project owner shall define at which level of design criteria, a design competition
will be implemented.
C AS CA D E Pro cess
E n t rop y
Te
mp
.,
de
g.C
M E T HA N E
R E F RI G E RA T IO N
ETHYLE NE
REFRIGE RATIO N
PROP ANE
REFRIGE RA TION
Ar
ea
of P
ro
ce
ss In
effic
ien
cy
Ca
rn
ot
Cy
cle
Id
ea
l W
or
k F
or
LN
G L
iqu
efa
ctio
n
F eed Gas In
L NG Out
Figure 7, 8, 9 – LNG Processes Refrigeration Cycle Efficiency
19 of 28
On a performance based design competition, the Contractors use the same project
philosophies and sizing guidelines. Owner only defines the main characteristic of
the project such the plant capacity, product quality and the plant availability
factor, then the rest of the design would be up to each Contractor. In this case,
owner must prepare to receive a design, which will not be „apple to apple‟ from
the equipment design point of view. In a performance-based design competition, a
cost reduction up to 20 –30% is not uncommon target to achieve, regardless the
technology selected as the basis of the design competition.
In a specification based design competition, the outcome of the design will looks
more „apple to apple‟, but since the Contractors do not have too much degree of
freedom to design, Owner shall be prepared to accept a cost reduction in the order
of 10 – 15% only. In the LNG industry, it is advisable that owner at least define
the safety and reliability specifications at a detailed enough level to maintain the
current proven track record of the LNG industry.
Those two basic rules set the cost optimization objective in a fair and accountable
LNG plant design competition. Furthermore, owner require to define and describe
to the Contractor the EPC bid evaluation criteria in order to maintain a fair and
accountable design competition:
If owner pre-selected the process driver and its available power, will
owner allow the Contractors to utilize the available power beyond the
plant capacity specified by owner and receive a merit score in the EPC bid
evaluation
In the case the EPC bid evaluation is done on a „life cycle cost‟ basis,
owner to define how the fuel or feed gas saving will be valued.
A „life cycle cost‟ EPC bid evaluation will also require owner to define the
value used for imported fuel, chemicals and refrigerant.
Owner is also require to define Net Discount Rate as well as the Break
Even Capex $ for every $ of Opex saving.
A clear definition of EPC bid evaluation criteria will not only ensure that the
owner will receive an EPC Bid Proposal which met the owner project objectives,
but also enable Contractor concentrate on the design competition and feel
comfortable that the EPC bid evaluation will be done fairly according to the
prescribed criteria known to the EPC Bidders and the public.
VII. Real World Dilemma In LNG Plant Multiple FEED Competition
Real World Factors in LNG Technology Competitiveness:
1. Specified LNG Plant Capacity
2. Specified Driver Type and Configuration
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3. Allowed Supplemental Driver Power
4. Value of Potential Excess LNG Capacity
5. Value of Fuel Gas
6. Feed Gas Composition
In the concept of multiple FEED competition for LNG plant cost optimization
described above, it is concluded that the LNG technology does not really have a
significant impact to the overall project cost. However, since every concept is
developed based on idealistic approach, its real world application may lead to a
completely different conclusion. One of the important factor which cause a LNG
technology may has a noticeable merit in a project cost reduction is the specified
plant capacity. Most recent LNG projects were designed based on the gas turbine
drivers fixed off the shelf available power, this constraint will cause certain
technology will enjoy an optimum driver power utilization. All available power is
used and match will Owner requirement for the specified plant capacity. For a
more fair competition, it is recommended to allow Contractor select from several
approved type of gas turbine drivers. Other way is to allow Contractor to utilize
starter/helper driver (motor or steam turbine) supplement in the gas turbine trains.
Plant capacity specification and the limitation of approved gas turbine type to be
used for the design may also impose a particular LNG technology must apply
refrigeration compressor size beyond what is considered „proven‟ by the LNG
industry. This constraint will certainly lower the technical confidence of those
particular technology and if technical confidence in this critical part of the plant
had a significant weight factor on the overall technical evaluation, a particular
technology may not become attractive to compete.
Other impact of the specified plant capacity to the competitiveness of a LNG
technology is how Owner valued the „excess‟ LNG production or limitation on
the allowed supplemental power from the helper driver. Excess LNG capacity has
no valued if the plant is under utilized. However, many LNG producers have been
successfully market their excess capacity. Some LNG plants even enjoyed a
repetitive debottlenecking projects. On the other hand, if the potential excess
capacity is valued too high, Contractor may design a high capacity plant, which
may not be actually marketable, when the plant is in operation.
The gas composition may also has considerable advantage to a particular
technology. A rich feed gas or a feed gas with adequate heavier components
content will advantage a LNG technology using all refrigerants from the available
feed gas component, while other LNG technology may need to import the
refrigerants which will require additional investment for the receiving and storage
facilities.
While some factors such as feed gas composition are beyond Owner control, other
factors can be devised to promote maximum competition on LNG technology.
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Factors on LNG Plant Design Competition:
1. Contractor competition within a particular technology
2. Definition of „Fit For Purpose‟ design
3. Level of details of design deliverables
4. Limitation on bid documents deviations, exceptions and alternatives
proposal.
5. Bidding Processes
As has been discussed earlier in the concept of fair and equal LNG Plant design
competition, it is of utmost important to apply the same principle and criteria for
all competing LNG technology and competing EPC Contractors. In other words,
ideally what left for the competition are: (a) the intrinsic characteristic of the
technology, (b) Contractors innovation in facilities design, (c) Contractor
efficiency in procurement and (d) Contractor efficiency in the construction of the
facilities.
However, strict application of the same design principle and criteria will greatly
reduced Contractors flexibility in the interpretation of the principle and criteria,
match them with their past experiences, best practices, company policy and
procedures and working environment. Each of which is unique for every
Contractor and may contribute to considerable potential cost reduction of project
cost if applied properly.
One case in point is how a process licensor market their LNG technology to the
EPC Contractors. Many of the process licensor make their technology available
for any interested Contractor, some has a closer relationship and preferences to a
particular Contractor and a process licensor may decide to have an exclusive
alliance with only one Contractor to improve their competitiveness in the LNG
industry. Exclusive alliance of a process licensor to a particular Contractor is not a
new concept in other industry such as in the oil refinery, petrochemicals and
fertilizer industries. In fact, in those industries exclusive alliance may become a
necessary business strategy to protect the intellectual property rights of the
technology. Exclusive alliance of a process licensor and a Contractor is not a
common concept in the LNG industry, until recently. LNG technology is more a
physical processes and apply very similar refrigeration principles. However, an
exclusive alliance or any close relationship of a process licensor to a Contractor
may have a considerable advantage in project cost reduction due to the potential
improvement in the working efficiency and will foster design innovations.
Alliance or not to alliance, both have their own merit and disadvantage. Exclusive
alliance will not work for single FEED concept where Owner pre-selected a LNG
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technology. The best way for Owner is to leave this business decision to the
process licensor and the EPC Contractors community. In a multiple FEED
competition, all parties have the same opportunity to win the competition and
therefore benefit Owner objective for project cost reduction. However, Owner
must be very careful in accessing the impact of exclusive alliance for the project
expansion case. In a multi trains LNG project, any technology or contractor
successfully won the initial train development will have a clear advantage over
other competing technology or contractor for the expansion project even if the
expansion project is opened for different technologies.
The EPC of a LNG project consist of approximately 10 – 15% detail engineering
cost. The contractor who won the contract for the initial project facilities will
enjoy a minimum cost for the design of the expansion project. This factor need to
be considered or incorporated in the evaluation criteria for the expansion project
to ensure that the bid processes and environment for the expansion project will
still be attractive for competing contractors and promote project cost reduction.
The other three factors in the design competition, (a) definition of the „fit for
purpose‟ design, (b) level of details of the design deliverables, and (c) limitation
on the allowed design deviation, exception or alternative proposal are interlinked.
It is not very simple to define and agree on what is considered a „fit for purposes‟
design. Figure – 10 below illustrate the basic components of a LNG plant design.
It is well understood that a project shall has a consistent project philosophies
applied in all project design basis, specification and data sheets. In the
development of project design basis, specification and data sheets, requirement
Project Strategy(Mission Statement, Project Economics, Execution Plan,
Marketing, Contracting, Organization)
Project Philosophy(Commitment statement, RFP, Basis of Design, Corporate EHS Policy, TIICS, Preinvestment)
Technology & System Industrial Standard Design Margin Life Cycle Cost
Licensor Technology,Process Scheme
API, ASME, NFPA, etc.EPC Contractor Margin
Licensor MarginOwner Margin
Capital Cost vs Operating Cost
Exi
stin
g LN
G P
lant
Prac
tice
s
Oth
er L
NG
Pla
nt
Oth
er I
ndu
stry
New
Dev
elop
ed
INNOVATION
EPC BID Alternative
OVERALL “FIT FOR PURPOSE” MATRIX
“Must and Shall” for LNG Plant
Must have for general Industry
“Should” (Optional)
EHS Aspect
EPC BID Alternative
Maintenance &Operational Aspects
Capital Cost
Operating Cost
Expected EPCCost from FEEDContractor
Figure 10
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for a very detail design deliverables is an assurance of what will be purchased,
built and constructed. Detail project description also makes the bid evaluation
much easier and accountable. On the other hand, detail description means the
qualified manufacturers, supplier or vendor list are getting narrower which will
certainly limit contractor leverage with the sub-contractor or vendors. The cost of
the project may become adversely impacted.
Therefore, the key of the issue is to find an acceptable balance between the level
of details of the design deliverables to ensure a clear main contractor commitment
to the project owner, but not to details as to limit the subsequent competition in
the sub-contractor and vendor level.
Another dilemma is how owner will evaluate or treat a non compliance bids. A
near perfect bid documents shall lead to a minimum number of clarified items,
none or minimum number of bid exception, deviation or alternative proposal.
However, the EPC contractor community does not have as high concern as the
owner side to fully comply with a bid requirement. For the contractor, an
alternative proposal may be the only way to win a bid. Therefore, it will be very
naïve to expect that all contractors will fully comply with the bid requirement. On
the other hand, if a project description and specification is to broad and give so
much freedom for an interpretation and alternatives, the bid evaluation may
become the second FEED work. Before defining what is expected, allowed or not
allowed, owner may want to explore each potential bidders intention and
interpretation of the bid documents.
Due to the complication of the multiple FEED bid processes and evaluation, it is
almost impossible to execute a multiple FEED bid processes in a single bid
proposal submittal system. Separate submittal of technical bid, followed by
clarification and revision is likely to be more manageable and ensure that all
bidders meet owner expectation on technical requirement. Submission of the
commercial proposal and the Lumpsum fixed price is then be done only if all
technical matters have been clarified. The downside of this separate submittal of
technical and commercial bid is the longer time required to reach a bid winner
decision. Here again, the key is to find a balance between the available time for
bid evaluation and a consistent „apple to apple‟ technical bid evaluation.
VIII. Contracting Strategy For A LNG Project Cost Competition
Beside a consistent design and bid evaluation criteria, a well defined contracting
strategy is another essential factor for a fair and accountable LNG plant design
competition. The contracting strategy for a Multiple technology design
competition can be either:
An integrated bidding process of FEED work and EPC work.
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In this case, the pre-qualification process is intended to qualify
Contractors for the EPC bid. The qualified EPC Bidders are also the
qualified FEED Bidders. The integrated bid process is intended to
shorten the whole bid process by eliminating the pre-qualification
phase in the EPC bid process. Owner may also apply a so-called „drip
FEED‟, in which the Contractors not winning the FEED contract will
receive the FEED deliverables, as they are available from the
Contractor executing the FEED work. By doing so, the time to prepare
the EPC bid proposal can be reduce by 50%. While this contracting
strategy does have a merit to speed up the project schedule, it is a
complex process and therefore requires a careful planning, proper
technical quality assurance as well as adequate project control and
administration.
A separate FEED work and EPC work bidding process.
This is the conventional way of executing the FEED and EPC bid and
can be done only if the time is available. In this case, the qualified
FEED bidder does not necessarily become a qualified EPC bidder.
Another pre-qualification using different criteria will be done for the
EPC bid phase.
IN T EG R A T ED F EE D & EP C B ID
B D EV E LO P F E E D
- T E CH NO LO G Y X
F EE D BID DE RS :
A , B, C
B
E PC BID DE RS :
A, B, C
E D EV E LO P F E E D
- TE C H N O L O G Y Y
F EE D BID DE RS :
D , E, F
E
E PC BID DE RS :
D, E, F
G D EV E LO P F E E D
- TE C H N O L O G Y Z
F EE D BID DE R:
G
G
E PC BID DE R:
G
EPC
Contract
W inner
D
X -
E PC BI DP ACKA GE
Y -
E PC BI D
P ACKA GE
Z -
E PC BI D
P ACKA GE
M ultiple F EED
F EE D BID DE RS :
A , B, C , D ,
E, F, G
Figure 10 – Contracting Strategy for Multiple Technology Competition
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In the multiple FEED design competition with „drip FEED‟, owner must pay
adequate attention to the quality of the FEED work. There is a possibility that due
to the need to be competitive in the EPC bid the FEED contractor will not
completely disclosed all of their design innovation to their „would be
competitors‟. If the FEED work is done properly, there should not be much
exception; clarification or alternative bid items in the EPC bid proposal.
IX. Cost Optimization Of Indonesia’s Tangguh LNG Project
The Tangguh LNG is developed to be the third LNG center in Indonesia. Located
in the eastern part of Indonesia, it enjoys the proximity to China, Japan, Korea
and Taiwan LNG market. For PERTAMINA, Tangguh LNG is the next
grassroots plant almost 30 years after the grassroots facilities were built in Arun
and Bontang LNG Plants.
However, the LNG business environment today is completely different from the
business set-up back in the 70‟s. The future is no longer a linear extrapolation of
our experiences.
Bontang LNG plant still hold the world record for the shortest time required for
the first LNG shipment counted from the first gas well discovery. Both Arun and
Bontang grassroots LNG Plants were built as a fast track project on reimbursable
fee EPC contract.
On the contrary, Tangguh LNG project is being developed in a fierce LNG market
competition, as a grassroots plant that has to compete with many LNG expansion
projects. Therefore, Tangguh LNG project must do things differently in order to
survive the competition.
The Tangguh LNG Project was originally planned for a two trains launch, with
Owner pre-selected the Acid Gas Removal technology and the LNG Liquefaction
technology on a single FEED contract strategy. The project economics started to
deteriorate when the industry experience a record low on crude oil price in 1998,
amplified by the difficulties to find prospective Buyers for a 2 trains production
quantity. Since then, the project economics was thoroughly re-evaluated, crude oil
price assumption revised, and the launch quantity revised to one train. It was
concluded that the only way to achieve such a massive cost reduction was by
executing a multiple technology competition on an integrated FEED and EPC
bidding processes. Lesson was learned from the Trinidad LNG Project, in which
British Gas is also one of the partner in the project.
FEED/EPC Bidders pre-qualification completed in August 1999, and the FEED
bid process completed in February 2000. The FEED work started in April 2000
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for a 12 months schedule . The FEED applies a „drip FEED‟ concept, in which the
FEED Contractor will drip the deliverables to the EPC Bidders participant.
The Multiple FEED strategy had been implemented in Atlantic LNG (Trinidad &
Tobago), and had achieved a very significant project cost reduction. The plant has
been commissioned and operated successfully. The „drip FEED‟ had been
implemented in Oman LNG Project and has reduced the project cycle time
significantly. Tangguh LNG Project will implement both concept, a Multiple and
„drip‟ FEED. To the best of our knowledge, no other LNG project has ever
embarked into such kind of integrated project management concept.
PERTAMINA had executed two grassroots LNG projects in the 70‟s, since then
PERTAMINA had successfully managed 7 (seven) LNG Expansion Projects. The
last project was completed in 1999. No other oil majors have similar experiences.
Despite the previous project were managed in a ‟conventional‟ way, our
commitment to execute Tangguh LNG project in a different way prove
PERTAMINA ability to meet the changing LNG industry demand, business
practices and competition.
X. Conclusion
The world LNG industry is changing but the Asia Pacific LNG industry is facing
even more business pressure to change. With the sluggish LNG demand forecast
and more players entering the LNG industry, LNG will become more a
commodity rather than premium energy alternative.
Eventhough analysts forecasted that the supply demand gap would disappear past
the year 2010, but that forecast itself is a signal that more LNG project will be
developed to anticipate the narrowing gap. Competition for the LNG market will
not going to be easier in he future. Consequently, the LNG producers started to
accept the need to restructure the business, the contract term and condition, the
project management and the project-financing scheme.
Any grassroots LNG project has obvious cost disadvantage compare to an
expansion project, owing to larger scope and complexity. However, a grassroots
project has its own merit of higher opportunity for cost optimization since it does
not limited by the existing design, specification or contracting strategies. If
managed properly a grassroots LNG project would be able to compete head to
head with any expansion project, even at a smaller LNG sales quantity.
The need and the opportunity to do things differently in a grassroots LNG project
has generated a numbers of project management concept, design philosophies and
contracting strategies. Multiple FEED and „drip‟ FEED emerges as a promising
concept to achieve the specified target cost.
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Execution of Multiple and „drip‟ FEED requires Owner to clearly pre-scribe the
competition boundary and the evaluation criteria. Level of detail on design
competition should be appropriately set to meet Owner project cost objective. All
of the competition aspect, including bid procedure should be planned thoroughly
to achieve a fair and accountable design competition.
The LNG industry has a varied understanding on what is called a LNG
Liquefaction technology competition. Many studies revealed that the LNG
Liquefaction technology is not a significant contributor to the project cost
optimization. Recent PERTAMINA study also confirmed the previous study
finding. Other aspect such as design innovation, project specification and
contracting strategy contribute more than the feature of the technology itself. The
so called „technology competition‟ is more appropriately called as „design
competition‟.
PERTAMINA considers a design competition is a necessary tool for a survival of
a grassroots project like the Tangguh LNG Project. In the future, it would not be
impossible to expand the concept for an expansion project.
In doing any effort to optimize project cost, Owner must always remember that
the end result of any LNG project competition is to secure LNG Sales Purchase
Agreement and Project Financing Agreement. Buyer requirement to meet safety
and reliability standards shall not be overlooked or relaxed by the need to reduce
cost.
The trend to have a smaller contract quantity, for a shorter period and at a less
rigid contract term and condition has put a LNG project as a higher investment
risk for Project Financier. Owner should consider this aspect by designing
countermeasures in the project cost optimization effort. FEED/EPC Bidders must
be pre-qualified and selected not only based on their technical performance but
also the financial strength.
The LNG industry will continue to change. The players that will survive in the
long run is the one that can adjust to and anticipate new demand and situation.
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XI. Reference Cited
1. “Asia Pacific LNG Demand and Supply Forecast”, Gas Matters, April 1998
2. “LNG Project Cost Benchmarking, Multi Client Study”, Poten & Partner,
Internal Report to ARCO, April 1999
3. R. N. DiNapoli, C. C. Yost III, “LNG Plant Costs: Present and Future
Trends”, 12th
International Conference on Liquefied Natural Gas, Perth, May
1998
4. K. J. Vink, R. K. Neigelvoort, “Comparison of Baseload Liquefaction
Processes”, 12th
International Conference on Liquefied Natural Gas, Perth,
May 1998
5. PERTAMINA, “LNG Processes Evaluation Report”, PKP, Processing
Directorate Internal Study, November 1999
6. “Liquefied Natural Gas (LNG) Fact Sheet”, U.S. Energy Information
Administration, October 1998
7. Institute of Gas Technology, “Delay Seen For New Projects”, LNG Observer
Vol. IX No.6, November – December 1998