Resource Reserve Estimate in LNG Project Development Phases

An important policy objective of developing gas resources is to promote domestic access to energy resources while growing the electricity and industrial sectors. In many cases, because the investment associated with developing the resources is very significant, LNG export appears as the reasonable option for securing the necessary financial resources underpinned by long-term LNG offtake contracts. Typically a portion of the gas will be allocated to the domestic market, the rest to the liquefaction plant.

The following chapters describe the developmental steps of a typical LNG export project, which covers estimation of gas reserves, project screening evaluation, pre-front end engineering design (pre-FEED), FEED, tender, and selection of the engineering procurement and construction (EPC) contractor, the EPC phase and finally, facility startup.

Resource Reserve Estimate

Before embarking on a project, formulating a comprehensive reserve estimate for the resource is essential. After the exploration and development (E&P) company (or consortium) obtains the lease, it will likely complete 3D seismic surveys, which allow a geological and geophysical understanding of the oil and gas resource potential. The E&P company will proceed with one or more exploration wells. If the results of the exploration well(s), evaluated in well logs, are promising, then flow tests may be performed. Additional appraisal wells may then be drilled to delineate the extent and quality of the reservoir before a discovery may be announced.

The resource can be appraised at any point in time, based on the information available at that time. As more information becomes available through additional wells or production tests, the resource will be evaluated using engineering methods. Resources can then be classified as reserves after more certainty exists that they can be technically recovered.

Production probabilities of proven, probable and possible reserves are estimated. Reserve estimates continue to be refined throughout the development of the field(s). After the initial reserve estimate is completed, the field flow rates will be estimated based on best engineering practices. Then, economic analysis is typically performed to determine the economic recoverability of the reserves.

As the field development moves progressively from the initial phases into the final phases, the reserves are increasingly defined with more certainty as well as the upstream investment requirements to produce them and achieve the desired deliverability for the LNG plant and any Domestic market for relationships on LNG salesdomestic gas requirements. At least 20 years of plateau production from dedicated proven reserves is highly desirable to proceed with an LNG project and begin LNG marketing and financing efforts.

Before the sales and purchase agreements are finalized, reserves must be certified by an independent petroleum engineering reserve certification firm. The lenders will also require the certification of the reserves dedicated to the project before providing financing.

LNG Project Development Phases

Progressing an LNG project from inception to final investment decision (FID) requires three main work streams that run in parallel: commercial, technical, and financial. The commercial work stream consists of securing the necessary project agreements and LNG offtake contracts. The financial team will rely on the technical and commercial feasibility of the project to structure and secure the necessary capital investments to finance the project. The technical work stream ensures that the technical aspects of the project are sufficiently defined and a contractor is selected to undertake engineering, procurement and construction (EPC) works. Details of the technical work stream are described in this section; commercial and financial work streams are addressed separately in this handbook.

An LNG export project typically comprises the following developmental phases:

• Screening and Evaluation;
• Pre-Front End Engineering Design (“Pre-FEED“);
• Front End Engineering Design (FEED);
• Engineering, Procurement and Construction (EPC) bidding, evaluation, and selection of contractor;
• EPC Phase – performing final engineering designs and drawings, procurement of materials and equipment, and construction of the project.

As project development progresses from screening and evaluation through EPC, the project developer will be spending increasingly larger amounts of money to complete the work deliverables under each phase. Each phase prior to the EPC (which occurs after FID) acts as a decision point where the project developer may exit the project if the analysis does not support proceeding to the next phase.

In each phase below, the project developer will work to provide increasing definition in the description and cost of the facilities, and the execution schedule with a goal of achieving a high definition of costs (+/- 10-15 %) by the time of awarding the EPC contract. Project economics, calculated for each phase based on the latest cost estimates, schedule, and the LNG pricing outlook, would be a key factor in determining whether the project is economically viable to move on to the next phase.

Discovery

Discovery of a gas field has resulted in a preliminary reserve estimate that may be sufficient to support an LNG project.

Screening and evaluation

Based on the initial estimation of the size and deliverability from identified gas reserves, an initial description is developed of a potential LNG project, including the size of the LNG trains and their initial and ultimate number. Several potential LNG plant sites are evaluated, based on their suitability for berthing for year-round shipping via LNG carriers (water depth, weather conditions, etc.).

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Possible pipeline routes to the potential plant sites are assessed as well as pipeline sizing. Initial cost estimates are made based on benchmark cost data. LNG market opportunities are assessed and LNG price forecasts are secured. A range of economic scenarios are developed to help optimize and assess attractiveness of the potential project and whether the potential project merits proceeding, e. g. if the reserves could support an economically and technically viable 15-20 year plateau gas sale at a minimum 3-5 MTPA which is generally considered the minimum economic size of a single LNG train. Economies of scale can sometimes improve the financial decisions with a larger size train and multiple trains if the market exists. The reserve requirements for a 5 MTPA plateau sale of 20 years is approximately 8 TCF. The duration of this screening work can vary from 6 months to more than a year depending on what information is already available from existing reserve studies and previous drilling and reservoir assessments. Staffing is increased and a rough cost of this phase could be 500 000 to 1 million US dollars.

Pre-Front End Engineering Design (Pre-FEED)

Initial or preliminary designs for the intended project. This results in a better estimation of the project and associated costs and can take an estimated six months. Costs can be on the order of 2 to 5 million US dollars typically.

Front End Engineering Design

Produces higher detail information necessary to prepare bidding documents for selection of an EPC contractor. This phase can take 1 to 1,5 years. This can typically cost in the range from 40 to 80 million US. dollars.

Engineering, Procurement and Construction (EPC) Bidding, Evaluation and Selection of Contractor

This phase is typically 6-8 months in duration. It is often necessary to pay several million dollars to each of the unsuccessful bidders for their work.

EPC Phase

After a final investment decision, the EPC contractor will produce final engineering designs and drawings, arrange the procurement of materials and equipment, and oversee construction of the LNG plant and export facilities. Costs should be more accurate at this phase and completion of the project could cost US $1 500 – 2 500 per tonne of capacity or perhaps more depending on local and market conditions.

FEED

After the in-house screening and evaluation and contractor led pre-FEED, which covers optimization of various plant equipment and configuration options, the basic scheme is selected for the FEED in order to provide better scope definition to the EPC contract bidders. The FEED process takes approximately 12-18 months to complete and results in a FEED package.

Two of the key outputs from the FEED are the cost estimate and schedule projection. Estimated FEED cost for an LNG plant can range from US $40-80 million depending on size and complexity. Company personnel required for the FEED are in the order of 20-30 full-time persons.

The better the definition of the project at the FEED stage, the better the definition for project cost and schedule. LNG project cost estimates after the pre-FEED stage generally have a contingency (uncertainty in the estimate) in the order of 30-40 %. After the FEED, the contingency level is reduced to about 15-25 %. The EPC contract will generally have a contingency of about 10-15 % to cover changes that result from gathering more information and doing progressively more design work.

EPC Contractor Bidding and Selection

Failure to implement a proper bidding process is likely to result in significant problems with project completion. Performance guarantees are required (legal agreements that require agreed specifications be completed). EPC contract bidding for a greenfield project is almost always done on a competitive basis. The number of contractors that are experienced and qualified to carry out an LNG project is limited, on the order of 6 or 7 companies. The number of qualified bidders is often further reduced by the practice of forming consortiums for bidding on the EPC work, which can reduce the number of separate bidding companies or groups to only 3 or 4. Usually, one company acts as the lead for the consortium. Competitive bidding is highly important for obtaining a competitively-priced proposal.

One method employed to increase the competitive intensity is to utilize a competitive FEED approach, whereby two well-qualified bidding consortiums are selected to conduct separate FEEDs, with a commitment from each to submit lump sum bids as the price of admission to such a limited competitive bidding slate. Prior experiences with this bidding strategy indicate that it can potentially save 10-20 % on the price of the EPC bid.

An additional approach occasionally employed that may be used by companies without significant LNG experience to reduce requirements for internal company expertise is the so-called Open-Book FEED/EPC approach. Under this approach, a chosen EPC contractor provides a price at the end of FEED with an option for the company to continue forward under a given pricing approach utilizing open disclosure of adjustments based on actual equipment bid costs. This method has not been as commonly used.

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The following discussion is based on selection processes based on competitive bids from multiple bidders or bidding consortiums (i. e., two or more) whether under a competitive FEED approach, or a process where multiple EPC contractors are provided with a single FEED for their bidding.

The FEED package is provided to the EPC contractor-bidders as the basis for their bid submittal. As part of their bid submittal, they are requested to provide a design endorsement certificate (or equivalent) stating that they are in accord with the FEED and endorse the FEED design. This is essential in order to prevent future change order legal claims that might result from a defective LNG FEED package, which can be very costly. If a bidder cannot endorse the FEED, then they must propose any required changes necessary to achieve the specified LNG capacity, obtain the LNG company’s concurrence, and then base a bid and guarantees on an approved revised FEED package. In addition, included in a company’s bid instructions, an opportunity is provided to each LNG EPC bidder to provide in the bid submittal a higher LNG capacity performance by up to a specified limit (e. g. 5 %).

The bidders are typically provided a period of around 4-6 months to prepare and submit their bids after receipt of the company’s FEED package. The EPC bidders submit their bids in 2 packages.

The first EPC bid submittal is the unpriced proposal or technical proposal, that describes in detail all important technical and project execution aspects of the bid, including major equipment specifications and performance sheets (e. g., for refrigerant gas turbines, refrigerant compressors, main cryogenic heat exchanger or cold boxes, fired heaters, waste heat recovery units, LNG storage tanks, LNG jetty and berth including LNG vapor recovery facilities at the berth). The unpriced proposal bid also includes a complete detailed project execution plan, including a detailed EPC Schedule.

The execution plan will address:

1. the early site work;
2. the plan for the temporary facilities (construction camp, roads, construction material offloading facility (MOF), and site preparation);
3. the plan for site mobilization of construction personnel and the arrival of concrete batch plants, and the delivery schedule of the major equipment to the site and its installation.

The company evaluation of the unpriced proposal requires about 2 months. As part of the unpriced proposal, each bidder is required to provide a schedule guarantee and performance guarantees for LNG capacity and fuel consumption.

Proper evaluation of contractor capability is highly important for assuring the successful completion of an LNG project. Contractor capability is generally assessed by evaluating the engineering, procurement, and construction capabilities from each contractor’s proposal, including key personnel for their project team, as well as evaluating the contractors in three key areas – quality, project control, and project management. Evaluating the contractor’s safety record and performance on other LNG projects is also critical.

Adjustments are made for any non-conformities or differences in guaranteed plant performance (LNG capacity, fuel consumption, assessed downtime) and are priced as adjustments to the proposal. Each bid submittal is judged as to whether it is acceptable or not, and the results of the evaluations are reviewed with management for approval of the non-conformity price adjustments and final approval of the bid slates. Approved EPC bidders are then requested to submit the priced proposals. These submittals include a lump sum price and an EPC completion schedule guarantee. Plant performance guarantees and the schedule completion guarantee are each backed by a schedule of liquidated damages (escalating penalties) in the event of non-performance.

The Priced Proposals are evaluated and the price adjustments from the unpriced proposal evaluations are applied. The overall evaluation is then assessed, and a recommendation prepared for EPC contract award. This process may require going back to the EPC contractors for some final clarifications, but generally, this priced evaluation can be accomplished within 1 to 2 months.

The EPC award to the successful EPC contractor is not made until the other necessary conditions for the final investment decision (FID) have been achieved and the FID decision taken.

These other conditions include:

1. government approvals, including passage of any enabling legislation;
2. execution of sales and purchasing agreements (or alternately, binding heads of agreements);
3. financing agreements. The lack of any of these other necessary agreements can hold up the final investment decision and the subsequent EPC award.

Final Investment Decision (FID)

The final investment decision (FID) is the decision to make a final commitment to the project, including the financial commitment to award the EPC contract and the satisfaction of conditions precedent in the LNG SPA.

This decision by the project partners requires:

• the prior completion of all necessary government agreements, including complete fiscal terms and passage into law of all required enabling legislation and land allocation and access;
• financing commitments provided to the project by the lenders, including export credit agencies, multilateral development banks, commercial banks, and other lenders.

EPC Stage

The EPC contractor is required to provide a project execution plan (PEP), which shall include the detailed engineering specifications:

• the procurement plan; the construction plan;
• health, safety, and environment (HSE) plan;
• as well as quality assurance, project management, and project control aspects.

Engineering

The EPC contractor uses the FEED work as the starting point to carry out detailed engineering and design needed for construction, utilizing appropriate design specifications, material specifications, and construction specifications. In addition, detailed engineering requires the application of a safety-in-design process, a safety-in-review process (Guidance on HAZID and HAZOP for LNG bunkering operationsHAZID), and a hazardous operations plan (HAZOP).

EPC contractors generally have fairly complete databases detailing cost and delivery schedules for major equipment that they have compiled prior to submitting their bids. During periods of high industry activity, there can be shortages even of common equipment, such as normal valves (Australian Gorgon experience) and price spikes for such materials as copper or specialized alloy cryogenic materials, such as the nickel-chrome alloy used in the LNG Accidents Involving LNG and LPG Storage Tanksstorage tanks.

Consideration should be given to ordering materials and equipment in advance, where warranted, to maintain or improve schedules. Some major equipment, such as the refrigerant turbines, can generally be ordered in advance with a schedule of cancellation costs and charges. The cancellation costs are generally low during the first 6 to 9 months of the project since they only represent engineering costs and therefore cause only limited financial exposure for the supplier.

Engineering work and procurement work should be done in the same office to ensure full coordination.

Construction

This part of the EPC phase typically takes 4 to 6 years. It is performed at the plant site, except for those plants that are modularized or floating (i. e., have their main equipment placed inside modules that are fabricated in offsite fabrication yards such as those in Korea or China).

During the first 16 months, EPC contractor focus is on Engineering and Procurement in the contractor’s home office. Meanwhile, initial mobilization on the plant site is focusing on site clearance and road construction.

After 16 to 20 months, the majority of project activities shift from the home office to the site. Approximately 5 000 to 8 000 workers may be required. Initial activities include:

• Building the large construction camps.
• Arrival of concrete batch plants on site.
• Construction of foundations.
• Construction of pipe racks (supports).

With the availability of the construction camps, the mobilization of large numbers of workers can occur. Equipment delivery on site occurs between the 30^th to 45^thmonths. Then installation of equipment and running piping on pipe racks can begin.

Commissioning of plant equipment can begin between the 12^th and 18^thmonths before start-up. The first major equipment to be commissioned and started up is the power generation system.

After the plant is mechanically complete, and after equipment commissioning is completed, the plant is ready for the introduction of the Characteristics of Natural Liquefied Gasesnatural gas feedstock. Start-up can range from two to as long as six months or more if there are problems. Typically it takes about six months for the plant to ramp up to its full capacity.

After the plant is operating at full capacity and operations are stable, the plant performance and acceptance tests are conducted by the company jointly with the contractor. Plant LNG capacity is measured by a plant performance test conducted within a specified time after startup (typically on the order of 6 months).

Any deficiencies found that are covered under the guarantee provided by the contractor, must be corrected by the contractor before the company accepts the plant as complete and final payment is released.

LNG Technology

Virtually all operating large scale liquefaction facilities use liquefaction process technology developed by US companies. The production of LNG from natural gas is based on three main processes:

• gas treating,
• dehydration,
• and liquefaction.

Treating results in the removal of impurities from the raw gas and these comprise entrained particulate matter, mercury, and acid gases such as H2S and CO2. The chilling or liquefaction process is the conversion of the treated and dehydrated gas into liquid by refrigeration of the gas down to a temperature of about -162 °C (-240 °F).

There are two main commercially available processes for liquefaction, the Cascade process and the Air Products (APCI) C3MR process which employs a combination of propane (C3) and mixed component refrigeration (MR). Most of the LNG trains in operation employ the APCI technology rather than the Cascade process (about 80/20), due to the number of trains built pre-1995 employing only the APCI process. Since then, the ratio of APCI trains to Cascade process trains has changed to about 65:35, based on capacity. There is not a large advantage to either major technology.

The most common liquefaction process currently used for land-based LNG plants is the APCI–C3MR. The feed natural gas stream is essentially pre-cooled with a propane refrigerant and the liquefaction is completed with a mixed refrigerant which is a mix of:

• nitrogen (N2),
• ethane (C2),
• methane (C1),
• and propane (C3).

The C3MR technology is well-known and has high efficiency, ease of operation and reliability, with the use of readily available refrigerant streams. However, the use of propane as a key refrigerant requires some risk mitigation. Propane is highly explosive, is heavier than air, and accumulates in low-lying areas – presenting an explosion risk if there is a leak. The hazardous properties of Propane drive some of the plant design by requiring that refrigerant storage tanks be located at some distance from the main processes.

The Cascade process typically employs three pure refrigerants, such as:

• methane,
• ethylene,
• and propane.

The feed stream is first cooled to about -35 °C in the propane cycle, then it is cooled to about -90 °C in the ethylene cycle, then finally it is liquefied to -155 °C in the methane cycle.

LNG Technology has generally followed an evolutionary path rather than one of radical, rapid changes. Over the last 30 years, the size of LNG plants has grown from 2 MTPA to as much as 7,8 MTPA (size of the large Qatar trains), with attendant economies of scale – though specialized equipment and materials and large required gas reserves for the 7,8 MTPA size make facilities of this size difficult to replicate. The current standard size is about 5 MTPA. The size increase has resulted from the availability of large size gas turbines for refrigerant service.

The evolutionary approach has benefited the industry. The well-established LNG technology has given LNG EPC bidders the confidence to bid on a lump sum turnkey basis, increasing the execution certainty of the companies developing LNG plant projects.

Innovative technology continues to appear on this evolutionary track; the recent use of aero-derivative turbines in LNG plants is an example. Use of aero-derivative turbines reduces plant fuel consumption by about 10 % and improves plant up-time by about 2 % through avoidance of the longer maintenance cycles associated with frame industrial turbines. The first use of aero-derivative turbines was in the Conoco LNG plant at Darwin, Australia. The second use was in the ExxonMobil LNG plant in Papua New Guinea which started up in 2015.

A company’s project manager charged with executing an LNG Plant project on budget and on schedule generally prefers that there be only limited use of new technology and that new technology has first been utilized at other sites; i. e., only limited or no use of “Serial No. 1 technology“.

Modularized LNG plants have been utilized in selective locations in recent years at locations such as Gorgon LNG and Pluto LNG with mixed results. They require earlier and more complete engineering during the EPC phase for the use of the fabrication yard in the module fabrication. Any delays in the engineering and procurement work can be very disruptive to the module fabrication work, so some additional execution risk is introduced. Large modules can also be difficult to offload and transport.

Schedule Estimate

With the gas resources already defined, the estimated time for execution of an LNG export project could range from 6-10 years, assuming no interruptions. As expected, many unforeseen developments can occur during project implementation which can impact the schedule. Contingencies are normally factored into the indicated schedule range. Schedule discipline should be maintained throughout the project. Schedule recovery options should be identified to mitigate delays. Change management must also be employed to minimize changes since any changes will impact the schedule and almost always add cost. It is important to optimize the engineering, procurement and construction schedules to minimize the number of critical path items for the project.

Delays in the overall project schedule result in liquidated damages for the contractor (giving the contractor incentive to complete the project on time). It is a requirement for the EPC contractor to develop a level 4 project schedule (Primavera) as a guide throughout the project.

Key Success Factors

Some important factors contributing to the success of the LNG project include:

• Government support, timely issuance of permits and authorizations, timely access to the plant construction site.
• A complete set of geotechnical data from an adequate number of bore holes on the plant site to determine soil conditions and allow foundation planning or soil remediation if required. Seismic information to evaluate potential earthquake problems is also necessary.
• A well-qualified and experienced LNG EPC contractor. Key EPC personnel assigned to the project must be capable and experienced in the LNG area.
• EPC contract should be lump sum turnkey to increase project certainty:
  • Ensures contractor has ‘skin in the game’ and is aligned with the company in being highly motivated to keep costs under control and project on schedule.
  • Needs to be turnkey to provide the contractor the latitude needed to perform in order to take on the obligation of a lump sum contract.
• Company and EPC contractor relationship needs to be collaborative.
• EPC contractor needs to evaluate and formally endorse the company’s FEED design (Design Endorsement Certificate). If they find an issue with the FEED, they must propose and agree with the company on a remedy to the FEED, and then provide the formal endorsement. This is important so as to avoid future costly change orders due to later design changes.
• Minimize change orders in the EPC no matter how attractive they may appear.
• Maintain focus on safety in all aspects of the LNG project. Maintain a strong, proactive, involved safety program in collaboration with the contractor.
• In the EPC contract – secure strong guarantees on:
  • LNG plant production capacity.
  • Fuel consumption.
  • LNG product quality meeting all specifications.
  • Plant completion schedule.
  • All other products or emissions meeting specifications.
  • Completion.
• Ensure that LNG partners are fully aligned throughout the project development phase.
• Take measures, where available, to increase project execution certainty.
• Embrace new technology but on a measured basis. Avoid “Serial No. 1” unproven applications which almost always result in delays and increased costs.
• Implement an effective training program to facilitate utilization of local labor in the construction and operation of the LNG plant.
• Understand that persistence and patience are critical – LNG plants are challenging and complex and take some time to implement.
• Keep the project as simple as possible.
• Recognize other associated investment opportunities that may be available with the LNG project, such as natural gas liquids extraction, helium recovery if it exists in the feed gas (the LNG process increases the concentration of helium 10-fold, and can make its recovery economic, as was the case in Qatar), potential for domestic gas deliveries for power generation, and so on.

Author

Olga Nesvetailova

Freelancer

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