LNG construction sector hits its peak and faces steep fall: Wood Mac

November 12, 2015

HOUSTON -- The LNG construction industry has enjoyed a sustained boom thanks to healthy order books of new LNG projects, especially in the U.S. 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-FID LNG projects on the horizon likely to materialize, 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. 

“2015, will be recalled by the LNG EPC sector as the year in which their workload peaked,” Saul Kavonic, a research analyst for Wood Mackenzie, said. “Worldwide, there are presently 31 trains concurrently under construction, 138 MMt/annum of nominal LNG production capacity, but this looks set to rapidly reduce. 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."   

Future construction

Faced with an imminent drop in workflow, the challenge for the sector isn't just about spare capacity, it's an increased number of competitors.

"Historically, the market has been dominated by five incumbent players: Chiyoda, Bechtel, KBR, JGC and Technip," Kavonic added. "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 profile of upcoming LNG projects in the U.S. 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 the upstream service sector is facing, there will be significant competitive pressure on contractors to accept reduced margins and more onerous terms, and downsize their LNG teams.

"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," Kavonic added. "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 LNG operators, who do proceed with new LNG projects, to achieve lower costs and better contracting terms.

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