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Prerequisites for the success of the Vasilikos LNG plant

LNG plant in Australia

By Abboud Zahr

Major new natural gas liquefaction plants are planned throughout the world, from the United States, Canada, East Africa, to Australia.

There are several factors involved in successfully completing one of these multibillion dollar facilities, including: gaining a firm market commitment; securing an adequate supply and upstream pipeline capacity; securing financing; and, of course, clearing all necessary regulatory and location hurdles. After all these conditions have been satisfied, project owners must then plan, design and construct the facility, which is no small matter. Stories of massive cost overruns have pervaded the industry, and given the sheer number of facilities likely to be attempted worldwide, construction challenges are now a fact of life. Thus, it is important to highlight some insights into the potential obstacles developers might face and the lessons learned when constructing LNG facilities.

Several unique design and construction challenges and risks that have been encountered by these international LNG export facilities, which will likely be faced by sponsors of such projects in Cyprus. In addition, some best practices can be applied and utilised to limit or control the effects of risks.

Some of the known reasons that make such projects complicated and difficult to execute are: remote, undeveloped project locations; limited pool of potential contractors competent in mega-projects; overheated markets and impact on supply/costs; construction of marine facilities and contractor delays and claims

As typically occurs in the energy industry, as new opportunities give rise to new types of risks and complications, practices and approaches are identified and adopted to address and control those challenges.

The delivery model for the project, including the different parties involved, their respective roles and responsibilities, the form of contract, etc., is the most basic tool in the construction industry for the allocation and control of risk. And as the characteristics and size of projects in the oil and gas industry have changed over the decades, project delivery models have evolved to keep pace.

The traditional construction project delivery model, design-bid-build, is not a common practice in the hydrocarbons industry. Such an approach requires an extended period of time, delaying the first delivery of product to market. In addition, it creates the potential for gaps in responsibility between the design and construction entities, often leading to delays and claims.

In order to address these problems, the industry moved toward the Engineering, Procurement and Construction (EPC) model, in which the owner contracts with one entity to design, procure equipment and commodities, construct, and commission the facility. Importantly, this allowed for the contractor to overlap the design and construction process, significantly reducing the duration of projects. It also eliminated any gaps in responsibility for design and construction activities and reduced claims for design changes.
However, as addressed above, the increase in the scope of current LNG projects, due to the need to construct substantial infrastructure prior to the onset of construction of processing facilities, can significantly increase the duration and cost of the project. Under the typical EPC delivery model, this could result in too long a period until first operation, as well as projects too large for most contractors to accept the risk of a fixed price contract.
The industry has adapted to these challenges by beginning to employ further innovative methods as follows:

Engineering, Procurement, Construction Management (EPCM) Contract – Cost Reimbursable: Under this method, the owner contracts with one entity to perform the engineering, procurement, and construction management services on a cost-reimbursable basis. The EPCM entity performs the engineering and procurement work, and with the assistance of the Construction Management (CM) team of that entity, the owner contracts with various contractors to construct the facility. This approach allows for the benefits of the EPC approach (overlap of design and construction and input from the CM firm early in the process), but avoids the problem of finding a contractor willing to accept the risk of a US$10 billion fixed price contract. It also provides the owner with the opportunity to have significant input regarding the purchase of equipment, key design or technology issues and contractor selection. It does, however, require that the owner employ a very large team of experienced construction personnel to fulfill its substantial responsibilities. It also opens the owner to risks of unexpected cost overruns.

Engineering, Procurement (Cost Reimbursable) Contract, Followed by Fixed Price Construction Contract (EPC): The owner contracts with an entity for the Front End Engineering Design (FEED) and procurement activities as well as initial infrastructure construction work, on a cost reimbursable basis. Once the initial work is complete and the design of the process system has advanced sufficiently to identify the full scope of the work, the entity provides a fixed price or a guaranteed maximum price (GMP) for the remainder of the design and construction work.

The selection between these two methods generally depends upon the factors on which the owner places the greatest emphasis: owner control and input as well as shortest duration (EPCM); or reliance on a major design-construction firm and limited cost growth.

In either case, use of these delivery methods have allowed project owners to address the challenges of initial infrastructure work, daunting cost estimates, and a limited supply of capable design and construction firms for today’s major LNG projects.

In summary, it is a long road from knowing you want to build a liquefaction plant and having the financing and approvals, to sending out the first shipload.

Good planning would mitigate the risks along that long road to make the Vasilikos LNG plant a reality.

Abboud Zahr is an oil and gas Specialist

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