LNG boom flaws laid bare

LNG operators have themselves to blame for cost and schedule blowouts that proliferated Australia's LNG boom, RISC said as Chevron admitted on the last day of LNG18 it should have understood Barrow Island's logistics issues better before approving Gorgon. By Peter Milne

    • 20 April 2016
    • 17:37
    • News
LNG boom flaws laid bare

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Consensus amongst consultants

In its analysis last week of what is behind cost and schedule overruns at some Australian LNG projects, RISC's message was similar to those of Independent Project Analysis and Bechtel in its focus on the decisions taken before project go-ahead.

"The initial planning and development decisions - not the pay rates for an Australian electrician or welder - have often been the issue, and E&P producers have to recognise that," RISC CEO Peter Dawson said as LNG18 wrapped up.

"In a number of cases, the financial fall-out of head office decisions on project location and infrastructure duplication make the incremental cost of labour pale into insignificance."

Dawson said the operators were "overly optimistic" about their ability to manage the challenges.

He believes that warnings on Australian productivity and costs at LNG18 masked the capex consequences of decisions made by the operators well before construction began.

Concerns about the effect of schedule pressure on making the right decisions before sanction are not new.

EY examined 365 oil and gas mega projects in their Spotlight on oil and gas mega-projects report of 2014.

Even back then, EY identified "a lack of appropriate front-end loading and an unhealthy focus on project sanctioning often results in the setting of unrealistic, overly aggressive goals which become serious delivery issues as projects move beyond FID into delivery".

Bechtel's oil, gas and petrochemicals president Jack Futcher had a similar focus at LNG18 on what happens before sanction.

"The decisions made during pre-FEED and FEED phases of the job, early in project execution, set the tone for how that project will turn out in the end," he said.

On the relationship between the operator and contractor, Futcher thought the best owners are those that participate in the outcome of the project and don't focus on assurance and compliance to contract terms.

He offered some red flags for the owners: "Listen for the terms fast track, schedule driven, and concurrent EPC - and if you hear them you need to be concerned."

Independent Project Analysis oil and gas practice director Neeraj Nandurdikar told LNG18 that as an industry, "… we are pretty bad at reacting to surprises".

He defined project management as "the science of planning combined with the art of reacting to surprises".

From reviewing 150 projects, IPA concluded that when a project slips its first hydrocarbon date there was only ever one real reason: because "detailed engineering is where that slip actually starts."

Nandurdikar also had strong words about the use of the stage gate process to progress projects.

"The problem is that the gates are broken, they are off the hinges, the gates do not work," he said.

He said many projects go through the pre-FEED and execution gates before they are ready, with incomplete FEEDs leading to "predictably bad engineering performance".

Even before LNG18 opened Deloitte had chimed in with the good, the bad and the ugly of Australia's LNG construction boom.

The lessons, gathered from 10 industry insiders, included ticks for innovation, looking after employees and the environment, though improvement was needed on collaboration with communities and managing concurrent contracts.

Avoiding a "get it done at any cost" mentality that prioritized schedule before cost was on the "never do again" list in Deloitte's report.

Barrow Island

At the end of LNG18, the operators of the great Australian LNG capex rush had the opportunity to present an update on their projects and the lessons they have learned.

Chevron Australia managing director Roy Krzywosinski reviewed the achievements of the Gorgon and Wheatstone projects on the last day of LNG18.

Energy News, referring to the IPA analysis, asked Krzywosinski his thoughts on the contribution of the work before sanction to issues his projects faced.

"Gorgon was probably one of the most heavily scrutinised projects that we'd ever done," Krzywosinski said.

However, if they had to do it again, Chevron would do more detailed engineering work before making the final investment decision.

"We thought that we had done enough of what we called front-end loading.

"When we start to get into the megaproject range you really need to do more homework … especially if you are building your project on a remote location."

Krzywosinski focused on the logistical side of Gorgon.

"You really need to understand the engineering; you need to understand what kind of material you need, both the volumetric as well as the weights. You have to know how you are going to move it," he said.

"Quite frankly there is not a Bunnings store down the street."

As well as improving logistics, Krzywosinski said the extra work would have allowed better scoping of pre-investment in infrastructure; such as accommodation, power, water and fuel.

Curtis Island

Gladstone LNG CEO, Rod Duke from Santos, said the right approach was to let the contractor do their job and not micro manage them.

"We very much right sized our project team," he said. "My team peaked at 75 people."

Australia Pacific LNG CEO Page Maxson ‎identified two key lessons on allowing project teams to perform well.

"You need the environment when the problem is surfaced early enough, so you have time to do something about it," Maxson said.

He also advocated taking the pressure off the team, giving them the room to make it a bit better, rather than having to solve the whole problem.

APLNG was last in the queue for a Curtis Island site and was allocated a site further up the harbour that entailed more dredging and earthworks.

Maxson admitted his management were not happy about this; but what APLNG did not see at the time was "the productivity enhancement of having such a spacious site ... certainly when we got into train execution ... it gave huge advantages".

Where to now?

At LNG18 fundamental questions were asked about the ability of the industry to deliver projects.

Many different industry players are reaching the same fundamental conclusion: the work done before a sanction is the primary driver of cost and schedule overruns.

This work is entirely under the control of the operators, and much of it is performed overseas. Yet LNG18 was full of industry leaders saying Australia needed to be more competitive to attract their capital.

Maybe it is time for the operators to explain what they can do for Australia, rather than keep insisting that Australia make more and more concessions to them?

Shareholders would benefit from improved project execution as much as the resource owners.

"We do not seem to learn from the past; we continue to come up with engineering estimates that are just unrealistic," Nandurdikar said.

For this to change, senior management of the operators need to focus on doing their job better, as they are the primary drivers of project performance.

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