The competitiveness imperative for the LNG industry

Mary Hemmingsen's picture
Mary Hemmingsen, Partner, National Sector Leader, LNG, Power and Utilities, KPMG
Chris Young's picture
Chris Young, Director Oil and Gas Strategy, KPMG
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LNG markets are rapidly evolving, accelerated by a sustained period of oversupply. A wave of new supply and supply options are combining with uncontracted volumes to drive prices down and in a price-driven market, cost competitiveness is key. Asset operators and investors need to take steps across their portfolio to ensure full cost competitiveness.

The key trends are impressing the need to focus on cost competitiveness given increasing buyer price sensitivity and pressure on seller margins:

  • Buyer consolidation is underway with over 40 MTPA or about 16% of global demand purchased through consortiums with a stated aim of increasing short term positions and lowering purchasing costs
  • Un-contracted production capacity is rising
  • Average length of contracts are decreasing with spot and short term trades increasing, having reached over 30% of overall trades in 2016
  • Commercial terms are being reviewed, with major buyers in Japan, China and India seeking to renegotiate supply arrangements
  • Late-life, depreciated assets are following off long term contracts holding the ability to price purely at variable costs

A relentless focus on asset performance is increasingly needed. This means going beyond continuous improvement programs to achieve step change improvements in lower capex and opex as well as maximum possible throughput.

A starting point to understand exposures and opportunities for required cost and competitiveness improvements is to benchmark performance.  Looking at simple quartile performance levels relative to benchmarks on a landed cost basis and a variable operating cost basis can create a compelling call to action.

On the asset front, significant opportunities to improve asset performance are in opex savings, margin improvements and incremental utilization opportunities that have been proven in downstream businesses.  The performance improvement prize is large. Based on KPMG work in the sector, suppliers have the opportunity to achieve 20–35% unit operating cost improvement in LNG assets.

Across LNG asset portfolios, further cost improvement opportunities exist in the following areas to add further cost efficiencies of at least 5% of the total procurement spend and/or support function spend:

  • Procurement: jointly procure common shares and indirect equipment with other ventures
  • Warehousing: create centrally-located global warehouses for critical spares
  • Shared Services: establish global shared services for value adding activities

And beyond improving cost competitiveness in rationalizing and reducing operating costs, there are also a number of steps across an LNG asset portfolio to ensure fuller cost competitiveness. These include:

  • Alternative business model and demand strategy: Opportunity to explore alternative business models and value chain participation that could secure, extend and spur further LNG demand.  Consideration should be given to extend from a pure-play position to a more active role in the value chain and in creating new partnerships with other value chain, supply chain and financial participants to access niches and new markets and create new import points.
  • Optimizing supply across the customer portfolio:  Opportunity to optimize the portfolio to serve customers and to optimize, not on individual assets or contracts, but also in utilizing a portfolio frame that includes trading in the market instead of solely on own capacity.
  • Reviewing commercial terms: Opportunity to ensure feed gas and LNG contracts are negotiated to provide the best possible terms under current and expected market conditions. Opportunity to segment markets and understand buyer’s bargaining positions regarding price-sensitivity and pricing basis. This includes understanding buyer’s business strategies and building in-house capabilities for such negotiations.
  • Optimizing Joint Venture arrangements and management:  Realizing the many opportunities to improve cost competitiveness requires JV partners to act as active asset managers.  Consideration should be given to making material step change in improved Joint Venture arrangements to promote comprehensive programs keyed on performance.

The current supply glut and ongoing supply competition puts a priority on maintaining, creating and accessing markets.  To survive and thrive, suppliers need to improve margins and/or utilization and increasingly, to focus on broader competitiveness and within the value chain. The imperative is not only for asset operations and project developments to improve cost competitiveness, but also in extending positions to include downstream customer value. This requires reorienting and reskilling to focus on customer- centric competitiveness backed by world-class operational efficiency.

Share your insights and join the conversation: How will ensuring cost competitiveness on projects improve the industry as we know it? Leave your comment below.

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