A new analysis by Wood Mackenzie warns that 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, leading to heightened competition and downsizing.
The LNG construction industry has enjoyed a sustained boom, thanks to healthy order books of new LNG projects, especially in the US and Australia, which will see it reach peak capacity in 2015. However, as the global LNG market faces another supply glut, and with few pre-final investment decision (pre-FID) LNG projects on the horizon likely to materialize, Wood Mackenzie believes that this sector will be challenged with a steep decline in coming years.
Saul Kavonic a research analyst for Wood Mackenzie, comments that 2015 will be recalled by the LNG EPC sector as the year in which its workload peaked. “Worldwide, there are presently 31 trains concurrently under construction, 138 million tonnes per annum (mtpa) of nominal LNG production capacity, but this looks set to rapidly reduce,” Kavonic says. “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."
Noel Tomnay, head of global gas research for Wood Mackenzie, explains 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," he says.
Faced with an imminent drop in workflow, the challenge for the sector isn't just about spare capacity, but also of an increased number of competitors. Kavonic expands: "Historically, the market has been dominated by five incumbent players: Chiyoda, Bechtel, KBR, JGC, and 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 profiles 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."
As a result, Wood Mackenzie says that, akin to the pressures that the upstream service sector is facing, there will be significant competitive pressure on contractors to accept reduced margins and more onerous terms, and to downsize their LNG teams.
Kavonic adds, "These impacts have already begun to be felt with highly competitive tenders being placed for the limited number of upcoming pre-FID projects. 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."
Wood Mackenzie concludes that the heightened competition in the EPC sector will provide an opportunity for those LNG operators who do proceed with new LNG projects to achieve lower costs and better contracting terms.