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The end of the LNG megaproject Chris Pateman-Jones Director Oil & Gas | Ernst & Young LLP Andrea Teasdale | EY Lead Analyst

The end of the LNG megaproject

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Page 1: The end of the LNG megaproject

The end of the LNGmegaprojectChris Pateman-JonesDirector Oil & Gas | Ernst & Young LLPAndrea Teasdale | EY Lead Analyst

Page 2: The end of the LNG megaproject

Page 2 The End of the LNG Mega-Project

Industry forecasts — market for LNG will rebalance by early to mid-2020’sBut is the equation behind forecasts fully understood or even accurate?

Supply side certainty Demand side uncertaintyGlobal LNG export capacity forecast to increase by one-thirdby 2021, based solely on projects currently underconstruction.

Cheap coal and policy-supported renewable energy aredisplacing gas in the energy mix.

As of April 2017, a little over 100mtpa of new liquefactioncapacity was under construction.

Short-term forecasts of gas demand growth are lessoptimistic than those generated just a couple of years ago.

A further 400mtpa of unsanctioned liquefaction projects are atvarying stages of development, half of which is in the US.

Uncertainty around demand growth in emerging markets.

Page 3: The end of the LNG megaproject

Page 3 The End of the LNG Mega-Project

Industry forecasts — market for LNG will rebalance by early to mid-2020’s(continued)But is the equation behind forecasts fully understood or even accurate?

Can the marketabsorb all this extracapacity …If you build it, theymay not come!

Demand side uncertainty poses the question

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Page 4 The End of the LNG Mega-Project

Demand side uncertainty and a low price environmentImmediate Implications for project investment decisions

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A total of 128mtpa of liquefaction capacity, equivalent to eightGorgon-sized projects, has been delayed or cancelled since thebeginning of 2015.

Canada has 17 proposed export projects with an aggregateoutput of more than 150mtpa but none have reached finalinvestment decision (FID) and three have been delayedindefinitely.

In fact, an FID was taken on just one major project in 2016, theaddition of a third train at the Tangguh LNG plant in Indonesia.

Page 5: The end of the LNG megaproject

Page 5 The End of the LNG Mega-Project

Demand side uncertainty and a low price environment (continued)Immediate Implications for project investment decisions

Why have there been so few FIDs for newLNG projects?

1 Convergence of regional gas prices has eroded the premium for LNG in some markets.

2 Supply surplus has strengthened the negotiating power of buyers.

3 Industry-wide examples of cost and schedule overruns on greenfield LNG projects.

4 Price downturn has increased rigor in capital allocation and reduced near-term capital expenditure budgets.

5 Energy investment directed to short-cycle projects with capital flexibility and projects outside the industry.

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Page 6 The End of the LNG Mega-Project

Demand side uncertainty and a low price environmentImplications for future investment decisions

Future investment decisions will depend on whether the industry is able to developgreater certainty of forecasts and critically forecasts that show clear demand growth.Their ability to deliver this will be dependent upon:

Competing energy sources

Energy consumption cycles and new nuclear

Sustained price recovery

Project performance issues

Project cost relative to alternative investment options

the rise of renewables and storage technology.

how will energy demand growth be met?

how quickly will prices recover and for how long?

can endemic performance issues be overcome to increase delivery efficiency?

increasing competition for capital investment.

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Page 7 The End of the LNG Mega-Project

Investor/industryexpectations

Project deliveryperformance

Market pressure/oilprice volatility

Adopting forecast assumptionsWhen should future projects aim to achieve FID?

► If forecast consumption growth projections are adopted, based on development timelines, new projects should bemoving through FID in 2019 onward.

► So what needs to change on future projects to ensure they are approved at FID … and are able to deliver againstFID targets?

Project performance — An industry wide challenge

Productivity over past 10 years:

The Conundrum:

To be approved, projectsmust reach FID with lowercosts and with greatercertainty of delivery totarget — All from thesame teams and usingsimilar/the sametechnology.

+

+

of projectsoverbudget

Averagecostoverrun

projectsoverschedule

%%%

Oil and gas Industry

64 73 59

-55% +50%

Source: EY – Spotlight on oil and gas megaprojects

Source: Wages and salaries, employment and productivity, by industry, Table 09174 Statistics Norway and EY research

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Page 8 The End of the LNG Mega-Project

How to ensure sufficientoversight over project targetsand performance?

► How to increase transparency overkey decisions and project performancefor board, investors and partners?

► How to improve operated andnon-operated project/programperformance through effectiveassurance?

► How to effectively govern projectportfolio to manage risk and select thebest projects to progress.

How to build and maintainappropriate capability to developand execute projects?

► How to ensure sufficient capacity,expertise and challenge to managecontractors and deliver project?

► How to meet peak man-hour needsacross portfolio without unnecessaryexpense?

► How to maintain consistency indelivery of projects in a market wherethe workforce is mobile and notretained?

How to develop and executeprojects in as efficient a methodas possible?

► How to reduce project cost to meetmore stringent hurdle rates andcontinue to drive cost efficiencyover time?

► How to reduce inefficiency ininteractions with key contractors andsuppliers through more effectivecollaboration?

► How to drive consistency of equipmentand common units (trains, utilities etc.)across projects?

Transforming project planning and delivery performanceThree Strategic themes

► Important to recognize that there is unlikely to be a silver-bullet solution to the industry’s problems.► Oil and gas organizations need to look to the cumulative effect of many additive efficiency opportunities that exist in

existing processes and behaviours.

Project oversight Project capability Project efficiency

Page 9: The end of the LNG megaproject

Page 9 The End of the LNG Mega-Project

Conclusions

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Page 10 The End of the LNG Mega-Project

The world has changed — the LNG industry needs to respond/adaptto survive

Demand creationIncrease understanding of potential consumers of gas andactively engage in demand creation to create a market forproducts.

Fossil fuel dominance?Fossil fuels may be around for a while to come, but fossilfuel growth may be a thing of the past … so does it makesense to build projects with such long life-spans?

Accuracy of industry forecasts?Are industry forecasts too inward focused and do they giveenough weight to advances in renewables and storagetechnology … specifically in developing markets?

Does LNG make sense?In a market where gas is abundant, does LNGtransportation make sense or should we seek to furtherdevelop pipeline options?

Recognizing the winds of changeDon’t overlook the potential impact of renewables —Despite the US withdrawing from Paris agreement, otherstates are hardening stance on investment in green tech.

Step change in project deliveryExplore new ways of developing smaller, more flexibleprojects to reduce costs and minimize the risk of projectoverruns.

Three Questions for the industry to consider: Industry next steps:

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Page 11 The End of the LNG Mega-Project

Visit our capital projects page for more informationey.com/oilandgas/capitalprojects

Page 12: The end of the LNG megaproject

Page 12 The End of the LNG Mega-Project

Chris Pateman-Jones

Director Oil & GasErnst & Young LLP, UK

AuthorChris is a director within EY’s global Oil & Gas service, focusing on the development of majorcapital projects. After completing his PhD, Chris started his career at Bechtel Corporation, oneof the world’s major EPC companies. Then seven years ago, after working across the UK andMiddle East with Bechtel, Chris joined EY Global, based from the UK. Chris now splits his timebetween client engagements on projects around the world and continuing his authorship of theEY Megaprojects Series.

Page 13: The end of the LNG megaproject

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