LNG Export Plans Lay Foundation For An Emerging Market

December 2012, Vol. 239 No. 12

Richard Nemec, Contributing Editor

The engineering, procurement and construction (EPC) business has a buzz under way with the advent of a new natural gas industry building boom idling on the sidelines as more than a dozen proposals for federal permits await a decision on the start of a domestic LNG export program. The industry assumption is federal policymakers – regardless of who controls the White House – will give the green light to many of the export projects.

While the global market ultimately will decide how many U.S. projects come to fruition, there is no doubt that the EPC sector for large energy projects will be busy in the next five to 10 years. Export complexes – particularly greenfield projects like Jordan Cove in Oregon – are major engineering projects involving skilled contractors, workers, suppliers and logistics.

Already, firms like Foster Wheeler AG, Bechtel Group and Black & Veatch are squarely involved in some of the U.S. projects now on the drawing board, such as Cheniere Energy Partners’ export project at its existing Sabine Pass LNG import terminal in Louisiana. Late last summer, detailed construction design was about 20% complete on the Sabine Pass export facility, which was in line to be the first one completed, prompting at least one major credit rating firm, Standard & Poor’s (S&P), to give Sabine a strong credit rating (“BB+”) and stable outlook.

S&P cited the project strengths as a strong debt service coverage ratio (2x), along with the use of ConocoPhillips liquefaction technology and a date-certain, fixed-price EPC contract with Bechtel Oil Gas & Chemicals Inc.

“Bechtel has contractual incentives to achieve scheduled completion and the construction budget has adequate contingency,” S&P credit analyst Mark Habib says. “We believe operation and maintenance risk is manageable at the rating level.”

A pioneer in liquefaction technology going back nearly a half-century, ConocoPhillips, the developer with Marathon Oil of the first U.S. LNG exports from Alaska to Japan in the 1960s, and Bechtel operate a collaborative LNG technology center that dates back to their initial experiences with the Kenai, Alaska facility. More directly, the technology center was formalized in the mid-1990s when Bechtel won an EPC to build a single-train liquefaction facility in Trinidad Tobago that, over the years, has grown into a four-train, 5.2 metric tons-per-annum (mtpa) facility.

ConocoPhillips has what it considers its tried-and-true, continuous improvement approach – “Optimized Cascade Process” – which it has perfected through its 16-year-old collaboration with Bechtel in the Houston-based LNG Product Development Center. This has led to what the companies call a “two-trains-in-one” approach to building liquefaction facilities.

With lofty goals of “driving profitability and protecting the environments,” which some cynics would see as an oxymoron, the two energy giants apply what they call “aeroderivatives” to keep a close eye on thermal efficiency, a key driver in LNG facilities. This is underscored in marketing the companies’ combined LNG wares. A ConocoPhillips spokesperson clarifies that his company is in the business of “licensing of a technology” for liquefaction, and not in building LNG facilities.

“(We have) demonstrated advances in thermal efficiency through the use of highly efficient aeroderivative gas turbines in (our) process configurations,” ConocoPhillips says in its website promotional materials. “For this reason, the Optimized Cascade Process is the preferred technology choice of many LNG projects worldwide.” Four advantages are emphasized:

  1. More LNG plant options;
  2. Economic advantages when gas supplies are constrained;
  3. Fast start-ups through variable-speed gas turbines; and
  4. The promise of a smaller carbon footprint due to superior efficiencies.

More generically, many engineering firms, such as Swiss-based Foster Wheeler AG, are pushing a modular approach that involves the use of satellite construction yards, many in Asia, to assemble huge sections of the final LNG liquefaction facilities.

San Diego (CA)-based Sempra Energy early in 2012 hired Foster Wheeler for the development of its proposed export facility at its Cameron, LA LNG-receiving terminal, including project development, front-end engineering design (FEED) to support its pending federal regulatory applications and support for the engineering/construction contracting, which can be complex and economically sensitive.

Octavio Simoes, president of Sempra’s LNG business, sees existing (brownfield) LNG terminals as having a leg up in the export project race from a strictly engineering and construction perspective. “The challenges always come in terms of schedule, potential delays, winter delays, labor issues, productivity having to do with on-site construction where every site is different and you are subject to local zoning-permitting issues. You can avoid all that with brownfield sites.

“So what you are really doing is contracting with suppliers to build the heat exchangers, pumps, compressors and turbines, and all the things you eventually assemble together with minimal local construction. That is the advantage to a brownfield site like Cameron.”

The backers of at least one greenfield project, Jordan Cove, along the south-central coast of Oregon at Coos Bay, would disagree with some of Simoes’s thoughts, particularly the idea that projects starting from scratch necessarily face higher costs. West Coast sites have cost-advantages over plants in the Gulf of Mexico for reaching the largest, most lucrative and high-priced Asian markets, says Jordan Cove Project Manager Bob Braddock.

“Projects of this size tend to overwhelm local and sometimes (even) regional support infrastructure so it is imperative that preparing the community for the scale of the undertaking be done well in advance,” according to Braddock who estimates Jordan Cove will require a workforce of nearly 3,000 people.

“We’ll need to bring in a man-camp and to develop additional RV slots for all of the workers.” Braddock quickly adds that this is not unique to his project, noting that any of the projects slated for locations other than on the Gulf of Mexico will have to provide similar workforce infrastructure.

Having had this verified most recently with the liquefaction project development in Australia, Braddock says that earlier in the U.S., during what he called the LNG import frenzy, “the large number of projects under construction simultaneously caused both labor and materials prices to be inflated again, making some of the late-coming projects much more costly than other, earlier starters.”

No one wants to be left for the second wave of export facilities in North America, many project managers will say quite candidly. Some experts see three to five export plants in the U.S.; one or two in western Canada; and maybe even one or two in Mexico. It is generally a five-year process at best – two years for planning, engineering and permitting and three years to build the facilities.

“At $4.5 billion in direct construction costs, the (proposed) Jordan Cove/Pacific Connector Project in Oregon exceeds that of all construction spending on power plants, natural gas pipelines, communications utilities, transmission infrastructure and manufacturing buildings in the entire state for the last five years (2007-2011).” –Bob Braddock, Jordan Cove Project Manager

Technology advancements are a separate area to which the EPC contractors have to pay attention. There are potential game-changers in terms of cost-cutting and productivity improvement so it makes sense to review developments in other nations that have been undergoing an LNG export building boom as Jordan Cove’s Braddock has done with Australia’s LNG build out.

Illinois-based Honeywell’s UOP LLC gas processing technology development unit announced in September that it is working with the national oil/gas company in Malaysia, Petroliam Nasional Berhad (PETRONAS), to improve the processing used in making LNG and in onboard LNG ship transportation. UOP is focused on some arcane advances in the development of an improved carbon dioxide (CO2) absorption technology that promises to improve the reliability and efficiency of equipment used to remove contaminants from the gas before it goes through the liquefaction phase.

This is where science and the engineering contractors must co-exist, and it can complicate what is being contemplated for the proposed facilities in Sabine Pass, Cameron and Coos Bay.

A spokesperson for Honeywell’s UOP says the company and its Malaysian partners are hoping to create improvements that can be deployed in both onshore and offshore gas processing equipment, which could include some of the LNG export facilities being planned for various U.S. sites.

“The main driver behind this collaboration was technology improvements, but economic benefits were certainly a factor, too,” says one of UOP’s engineering spokespeople for the project. “LNG producers face challenges with contaminant removal and the associated equipment’s footprint. Size ultimately adds cost.

“With technology that will improve this equipment and allow producers to remove contaminants from natural gas closer to the source, producers will be able to monetize their natural gas more effectively.”

UOP’s spokesperson would not go any further in detailing its technology, contending that gets into proprietary information it is keeping confidential at this point. She would only say it is an “advanced process” for CO2 absorption that will allow more reliability of equipment and also reduce the weight and footprint of equipment onboard LNG ships.

“The joint program with PETRONAS is another example of how UOP is committed to developing gas processing innovations to meet the growing global demand for natural gas, especially in Southeast Asia,” says Rebecca Liebert, vice president and general manager for UOP’s gas processing and hydrogen unit in the Chicago suburb of Des Plaines, IL.

A neighbor of UOP in the Chicago suburbs, the nonprofit industry supported Gas Technology Institute (GTI) has been carrying out LNG-related research projects, but dealing with smaller-scale applications. For example, GTI has worked with the global gases and engineering firm Linde Group, and the North American waste management giant, Waste Management Inc., to develop the nation’s largest landfill LNG facility, Altamont, in the East San Francisco Bay Area town of Livermore, CA. They have created a system to purify and liquefy landfill gas, using a GTI-patented system.

Houston energy attorney Stephen Davis, a partner with Akin Gump Strauss Hauer & Feld LLP, looks at the brewing LNG building boom in the U.S. from the standpoint that “one way or another we are going to be exporting gas molecules,” noting that this doesn’t mean LNG necessarily. “We’re either going to be having exports of LNG, or petrochemicals produced from ethane or propane that are derived from the gas stream being produced, or we will export natural gas liquids (NGL) from those streams.

“Or we’re going to be exporting liquids that are directly converted from gas, or ‘all of the above’ as they say. There can be a debate about whether we want to export the gas molecules in the form of LNG, or whether we want to get the equivalent of value-added through the refining process by converting ethane into ethylene, etc.”

LNG processing is less hazardous and more straightforward than processing petrochemicals, says Davis, who holds a bachelor’s degree in chemical engineering as well as a law degree. “Commissioning petrochemicals is really complicated. You don’t have chemical reactions going on with LNG.”

The technical challenges are there with both, but more so perhaps for petrochemicals, he says. Either way, the EPC activity level will continue to be high, according to all of the experts who contributed to this assessment. Pipeline, processing and storage infrastructure will continue to be in demand to support the shale gas boom.

Bob Nimocks, president of Houston-based Zeus Development Corp., an energy clearinghouse and consultancy with expertise in global LNG developments, generally sees fewer problems for LNG export development than elsewhere around the world due to what he says are “reduced geopolitical risk and more of an abundant labor pool on the U.S. Gulf Coast.” There is more experience in the process industries here, and Nimocks sees the development of liquefaction facilities as straightforward and mature.

“There are about 100 operational liquefaction trains that have been constructed worldwide since 1964,” he says, adding that the EPC required is less complex than building refineries or petrochemical plants.

Liquefaction facilities operate best on a “steady-state” basis, so buyers of gas going through plants will look for storage to protect against disruptions of service, according to Sempra’s Simoes. “I think you will see increased interest in underground storage of gas,” he says.

While the engineering/construction challenges inherent in liquefaction facilities will continue to arise, the overall process is not as big and complex as either refineries or petrochemical plants. Simoes, who knows both, thinks some of the components in the LNG complex are similar to petrochemical plants, but still more simplified.

“(LNG liquefaction facilities) don’t have anything like cracking towers (in petrochemical plants), which are much more complex. Those types of components are much different, and we (LNG developers) don’t need any of that.”

Richard Nemec is the Los Angeles-based West Coast Correspondent for P&GJ. He can be reached at: rnemec@ca.rr.com.

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