CONCEPT & TECHNIQUES FOR GRASSROOT LNG PLANT COST OPTIMIZATION

Yoga P. Suprapto Engineering Manager -Tangguh LNG Project PERTAMINA

Paper presented at the LNG - 13 Conference May 2000, Seoul South Korea

Abstract How Grassroots LNG Plant Can Compete With Expansion Project Cost Screening of LNG Liquefaction Process Technology Contract Management of Front End Engineering Work for Multiple Technology Competition Case Discussion for Tangguh LNG Project

As the Asia Pacific LNG market experiences a sluggish demand in the last 5 years, the competition to find a niche market between LNG projects are getting tighter and tighter. The new grassroots LNG projects are facing their biggest challenge for survival unless they can compete head to head with the expansion project, something that is not easily achieved due to the significant difference in the project scope. The changing supply demand balance of the Asia Pacific LNG forced the LNG producer revisited the basic concept the way a LNG project is being developed. This paper describes and analyzes the critical change drivers of the business in order to appropriately address the best strategy to compete. In the next section, this paper discuss how to put the cost optimization merits to works in the real world in a grassroots LNG project, which include the implementation of Multiple technology Front End Engineering Design competition. Further discussion focus on the implementation of Multiple FEED execution, technology screening, and risk management and project coordination. Then, a detailed discussion on the execution procedures follows, how a Multiple FEED procedures and evaluation criteria should be properly designed to maintain fair and equal competition between FEED Contractors. As an example, the Tangguh LNG project Multiple FEED execution is used as the basis of case discussion. A grassroots LNG project does have some inherent cost optimization merits, which an expansion project does not always have. This paper analyzes the project cost factors and identifies which are the cost optimization merits for a grassroots LNG project.

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LES CONCEPTS & TECHNIQUES POUR OPTIMISATION DES COUTS DUNE USINE DE GNL GRASSROOT Yoga P. Suprapto Engineering Manager Tangguh LNG Project Presentation pour la conference GNL 13 14 17 Mai, 2001, Seoul, Koree Resume
Comment une unite de GNL grassroots peut elle etre competitive avec un projet dextension. Revue des technologies de procedes de liquefaction de GNL. Comment specifier des conceptions competitives, niveau de detail et criteres devaluation des offres pour optimiser le cout du projet. Discussion sur le projet GNL Tangguh.

A un moment ou le marche du GNL en Asie-Pacifique fait face y une demande lethargique depuis cinq ans, la competition pour trouver une niche de marche entre les projets de GNL est de plus en plus serree. Les nouveaux projets grassroot de GNL font face y leur plus grand defi pour survivre, excepte sils peuvent etre competitifs avec les projets dextension, ce nest pas facile y realiser compte tenu de la difference significative des cahiers des charges. Le changement de la balance de la production et de la demande de GNL en Asie- Pacifique force les producteurs de GNL au revoir le concept de base et la maniere dont le projet de GNL est developpe. Ce papier decrit et analyse les moteurs de changement critique de lindustrie pour adresser correctement la meilleure strategie pour etre competitif. La section suivante de ce papier discute les merites doptimisation des couts dun projet de GNL en grassroot, qui inclut la mise en ouvre detudes preliminaires qui mettent en comp tition plusieurs technologies et conceptions. (Multiple technology Front End Engineering Design competition). La suite de la discussion vise la realisation de plusieurs etudes preliminaires (Multiple FEED), comparaison technologique, analyse des risques et coordination du projet. En suite il y aura une discussion sur les procedures dexecution, dans le cas dun Mutiple FEED, quelles procedures et criteres devaluation doivent etre elabores pour maintenir une juste et egale competition entre les contracteurs pour un FEED. Comme exemple de Mutiple FEED execution le projet de GNL Tangguh est utilise comme base de discussion. Un projet de GNL grassroot contient des zones doptimisation de cout quun projet dextension na pas toujours. Ce papier analyse les facteurs de cout du projet et identifie les avantages doptimisation des couts dun projet de GNL grassroot.

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I.

Introduction. Asia Pacific without any doubt has been the center of the world LNG industry for the last 30 years. Japan, Korea and Taiwan are the main LNG importer with Indonesia, Malaysia, Australia and Brunei among others are the major LNG supplier in the region. In the last decade, Qatar and Oman entered the prestigious LNG Club and in the near future Yemen will join the club. Some other countries have been trying hard to develop LNG project as the outlet of their large gas finding but without much success, mainly due to the marginal project economics. Even major LNG players such as Indonesia and Australia have not been very successful in developing a new grassroots LNG project, such as Indonesia Natuna and Australia Gorgon. On the other hand, the existing LNG Plants have been continuously expanded which give a clear indication that despite the impact of the recent economic turmoil in the region, there is some niche market that can always be developed. The new Middle East LNG producers, especially Qatar is of different case. Their huge gas reserve, the proximity of the gas reserve, and the gas quality have made the development cost become quite competitive even with the existing South East Asia LNG expansion project which have a comparative shipping distance advantage and a competitive low capital for expansion.

As ia P a ci fic L NG S u pp ly & D em an d Fo re ca st
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Figure - 1

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However, beside the issue of grassroots versus expansion competition, there is a more fundamental issue in the current Asia Pacific LNG competition that is a clear shift of the supply demand balance in the last decade. From the existing plant in operation alone, there is at least 10 million-ton/annum excess LNG production. LNG analyst believe that the situation is not going to be better in the next 5 year and probably will approaching its supply demand balance later than the year 2010. Some LNG producers have decided to implement a pre-emptive marketing strategy by construction of a LNG Plant even before all of the design capacity is committed. A new project financing strategy is required for this kind of marketing scheme. The fierce competition between LNG producing countries, or between projects in a producing country, have forced Seller and the Buyer parties constantly revisited the term and condition of a LNG Sales Agreement. A shorter LNG commitment is not a new issue anymore, and some LNG producers offer a full business chain development up to the power plant gate. China and India enter the LNG importer club at this favorable time for LNG Buyers, with additional advantage of not being severely impacted by the Asian economic crisis. While Indian LNG market is more or less confined to the Middle East LNG producers, China LNG market is more open for competition. Notwithstanding with the importance of competitive LNG Sales contract terms and comparative advantage of shipping distance, the question that is very intriguing to be explored is: why some LNG producing countries still pursuing a grassroots LNG project for a market before the year 2010? Will a 1-train grassroots LNG plant be competitive with an expansion project? How to manage the project cost competition while satisfying Buyer and Project Financier investment risk. The Indonesias Tangguh LNG Project will be used as a case study for this discussion of optimization of grassroots LNG Plant cost. It is worth to note that the whatever strategy a LNG producer is taking, the final objective of a LNG project is to secure LNG Sales Agreement and the Project Financing Agreement therefore LNG Buyers and Project Financier interest and concern must become the underlying framework in every strategy discussion.

II.

Change Drivers of Asia-Pacific LNG Industry No LNG project are alike, uniqueness of each business chain contribute to a complex factors of a LNG Project cost structure. Benchmarking of LNG Project Cost must be done cautiously and sometime has misled Project Owner or their Audit Team. However, at the end of the day what really matters to the LNG Buyer and Project Financier is the Cost of Service of the LNG as received by the Buyers at their gate or unloading flange. The cost of service gives a simplified indication of LNG Project strength to return a capital investment. Low cost of service is a warranty that a project is not only economically attractive but also

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more importantly it will make the project more resilient to any fluctuation in any of the economics parameter. A very important issue for a long term take or pay LNG Sales Contract. However, higher cost of service does not necessarily means the LNG Buyers or Project Financiers will not select that particular LNG project. If the LNG producer is willing to absorb or share the impact of economics fluctuation from their revenue then a LNG project with higher cost of service may still be materialized. The graph below showed a typical variation of cost of service of LNG in the Asia Pacific region.

C os t o f S e r v ic e E x -s h ip To k y o H a r b ou r
$ /M M B tu 5 4 .5 2 5 $ /BB L 4 3 .5 3 1 5 $ /BB L 2 .5 2 1 0 $ /B BL 1 .5 1 5 $ /B B L 0 .5 0 2 0 $ /BB L $ /BB L Oil Equiv a le nt 2 9 $ /BB L

G R A S S R O O TS

E X P A N S IO N

Figure - 2 Typical LNG Cost of Service

LNG cost of service will very much depend on the cost share of each business element, starting from the upstream development, the LNG Plant, the LNG transportation and the receiving & regasification terminal. A typical cost share for each LNG business chain is as follows:
(1) Upstream Development (2) LNG Plant (3) LNG Transportation (4) Receiving & Regasification Terminal 10% 40% 30% 20%

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In analyzing the potential cost optimization of a LNG project, one must consider characteristic of each business chain in order to achieve the highest cost impact items without sacrificing the basic safety, reliability and operability of the whole system. Methods on Value Engineering are widely used for these purposes. The cost of the upstream facilities is very much determined by the nature of the gas reserve, such as the location of the reserve, the depth, and the gas quality, the size and distances between reserves to the selected gathering station. In some cases where the gas quality requires reinjection of CO2 to an underground reservoir, the upstream development cost can become prohibitively high. Typical process design for upstream facilities is not as complicated as the LNG plant, unless a large CO2 or sulfur removal unit is required by the process design then it may become a major cost item. Cost optimization may include a decision to relocate some facilities from offshore to onshore at the expense of higher pipeline cost or selection of multiphase single pipeline instead of single phase multiple pipelines. The LNG plant is a major cost item in a LNG business chain; its sophisticated system has become the focus of cost optimization in recent LNG projects. Prior to the recent cost reduction effort, the LNG plant cost level reflect the characteristic of the LNG business during the initial stage of the Asia Pacific LNG trades back in the 70s. The oil crisis has forced the Japanese energy users to secure a long term and reliable energy supply as an alternative to oil. The keyword is security of supply, safe and reliable LNG plant operation. This leads to conservatism in the system design and project specification. For better or for worse, the design philosophy had met its objectives and satisfies the LNG Buyers needs. Many of plants achieve availability factor as high as 97%, an impressive record compare to a typical refinery or gas plants. In other plants, the capacity had been debottlenecked up to 30 40% higher than its name plate capacity. Both the LNG Producers and Buyers had enjoyed this cheap cost of service of the LNG produced by the plant capacity improvement or debottlenecking project. Moreover, at that time, the market absorbed almost all of the excess capacity. The demand of LNG also has pushed the capacity of the plant to the limit of available process and rotating equipment technology. The design capacity of a LNG train has quadruple within 30 years, as shown in Figure 3, below:

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3 .5

3
L N G T r a i n C a p a c it y m m T p a

2 .5

1 .5

0 .5

0 1964 1969 1974 1979 1984 1989 1994 1999

Y e a r B u i lt

Figure 3 - Grassroot LNG Plant Cost Trend

As the LNG train size getting larger, we should expect that the specific costs of a LNG project will tend to be lower and lower. However, as shown by the cost trend chart below, that is not the general trend.

L N G P la nt C ap it al - 1 9 98 U S $/T P A
1 00 0

G ra ssro ot P ro ject

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U S$ /Ton Pe r Ye ar LN G Ca paci ty

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C OST TA R GE T OF N EW PR OJ EC TS

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1 00
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Ye ar of S ta rtup

Figure 4 - Trend of Grassroot LNG Plant Specific Cost

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But not until the late 90s that the LNG plant cost become the attention of the industry players, triggered by the LNG Buyers concern on the cost of service of LNG as a result of extrapolation of the 70s LNG price structure. A structure that was developed post oil crisis that consider LNG as a premium fuel, which secure a long term reliable supply of an environmentally friendly energy. While the premium attribute is still considered valid, especially from the environmental point of view, the attribute on security of supply is being questioned more and more frequently. The spring of new LNG producers and the never-ending expansion of the existing LNG plants have made LNG slowly shift from a premium fuel towards a fuel commodity. As in any other commodity trading, the name of the game is product price differentiation, which is in this case, is the cost of service of the whole LNG chain. Eventhough in some case quality differentiation strategy such as providing an integrated energy supply up to the customers gate may very well fit some customer needs. Nowadays, the LNG Buyers will certainly give more attention to a LNG projects that can offer lower LNG cost of service, shorter contract period, at smaller contract quantity, attractive price structure and more flexible Sales Agreement terms and conditions. However, without sacrificing the industry safety and reliability standard as well as the selection of a reputable EPC Contractor to ensure timely production of the constructed plant. The changing balance of LNG supply and demand is one of the most important driver for cost optimization. However, it is the extreme down fall of world oil price in 1997/1998 which triggered owner to ensure that the cash flow of a LNG project stay in the healthy side of the project economics. Eventhough the low oil price affected the economics of all LNG projects, but the grassroots project economics got the worst impact. In the current LNG business environment, where the LNG supply is well in excess of the demand, the LNG Buyers investment risk is in fact getting better by the availability of alternate sources. More spot LNG sales is a clear indication that alternative LNG is available in the open market. Therefore, from the project economics perspective, the LNG project financiers will face higher investment risk than ever before. Especially if the major portion of the project is funded through non-recourse project financing. On the other hand, in the case of equity financing, the burden shift to the Owner sides. Shorter contract period at a smaller contract quantity work against the project economics, above it all relaxation of the take or pay clause is a killer for the project economics. All this will make the project financiers execute a more stringent due diligent on the project economics, the feasibility of the design and the technology used, the EPC Contractor performance (technical and financial), political stability in the producing country as well as the financial capability of the LNG Buyers. At the

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end of the day, the project financiers assessment will be reflected in financing cost of the project. All of the above change drivers set a perfect framework for the LNG industry that a LNG project cost optimization is mandatory for the survival of many LNG projects and the grassroots project has the highest priority to do so.

III.

Cost Optimization Merits in a Grassroots and Expansion LNG Projects Why a grassroots project? Some owners or producing countries have an option either to build a grassroots plant or to expand the existing LNG plant. Beside the project economics there are other consideration that a project owner, a producing country or in some cases the LNG Buyers and the project financier will promote a grassroots LNG project instead of an expansion project. In a country like Indonesia where the state oil company are the single LNG Seller and where the substantial gas findings are in distance apart, the development of multiple LNG center will add strength to the security and reliability of supply aspect. Any production and shipping problem can be conveniently covered by the other LNG center, which ensure reliable supply to the Buyers and predictable revenue to the Seller. For the project financier multiple LNG center of a single Seller will dissipate the risk of the investment as well as reducing the risk impact on the existing LNG plant investment if portion of the existing plant is financed by different investor. The next question will be can a grassroots LNG plant project compete with expansion projects. There are several factors to be considered before we can appropriately address this issue. It is generally accepted that a grassroots plant will never be able to compete with an expansion project. However, since the LNG cost of service and the LNG sales price are two different things, it is possible that a project Owner offer a competitive LNG sales price even if the cost of service is higher, such as for a grassroots plant. In this case, the project Owner is accepting less revenue margin. From a technical point of view, several factors may work in favor of a grassroots LNG plant. The nature of the gas reserve may become the significant advantage for a grassroots LNG plant, such as the proximity of the gas reserve, access to deep sea waters, the depth of the reserve as well as the quality of the gas itself. The existing LNG plant also impose an inherent disadvantage for the cost optimization of the expansion project. Because of its modular train concept, safety, operability and maintainability consideration, cause the expansion project usually a mere duplicate of the existing trains. While this will reduce the design

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and operating cost, a duplicate design will limit the possibility of other potential cost optimization for an expansion project as follows: Duplicate capacity causes an expansion train could not enjoy the economic of scale advantage of a larger train design. For an expansion project done long after the first train, duplicate design may find that some equipment or spare parts has become obsolete and costly. Duplicate design will limit the EPC Contractor opportunity for a competitive bidding of each equipment and therefore reduce the possibility for an optimized project cost. Duplicate design will limit the opportunity for cost optimization through latest technology development such as in advanced process control; computer aided production as well as the newest application of higher efficiency equipment and material. Duplicate design may require a design retrofit to comply with the latest environmental specification, which will be more efficiently done in a grassroots design.

Figure 5 Project Cost Optimization Opportunity On the other hand, an expansion project does not require a new set of full-scale infrastructures, LNG harbor and utilities, which is a major cost item for a project. An expansion project with a duplicate design also could not easily enjoy the opportunity of multiple technology competitive bidding as in a grassroots project. All of the existing LNG plants have selected the same LNG liquefaction technology for their expansion project. However, this concept is currently being questioned by several Owners and a multiple technology trains in a single plant is not an impossible concept to implement. Also, a grassroots plant enjoy the possibility for a fit for purpose design with a pre-set cost objective which can be determined to meet or exceed the cost advantage of an expansion project. The following chart shows an estimated project cost comparison of grassroots and expansion LNG projects.

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O p t im iza t io n O p o rt u n it y - G ra s sro o t s & E x p a n s io n L N G P ro j e ct , 1 T ra in , 3 m m T p a

Liq u e fa c t io n S & L In fra s tru c t ure U t ilitie s M a rine EP C

P r o j e c t C o st
Gra ssro ots -Ba se

Gra ssro ots - Optim ize d

Expa nsion - Ba se

Expa nsion - Optim ize d

Figure 5 - Optimization Opportunity of Grassroot & Expansion Project

Therefore, competitiveness of a grassroots plant versus an expansion project should be analyzed on a case by case basis and could not be simplistically generalized. In fact, a recent grassroots LNG plant had successfully prove that a grassroots plant can be constructed at a competitive cost compare to a typical expansion project.

IV.

Making Competition At Work for a Grassroots LNG Project Cost Optimization For many years, the practice in the LNG industry has been a competition in the EPC (Construction) work. Project Owner pre-selected the main technology, which include the LNG Liquefaction technology and the Process Driver technology. Those are the technologies not much dependent on the feed gas composition or other site-specific condition. In the Asia-Pacific region, the Propane Pre-cooled Mixed Refrigerant LNG Liquefaction technology has led the market share. It has a proven track record on safety and reliability, which was and is still the main consideration of the Asia Pacific LNG Buyers. One LNG plant employs a Cascade Refrigeration LNG Liquefaction technology, which has equal safety and reliability records. In line with the rapid growth of LNG market in Asia-Pacific in the 70s and 80s, larger and larger plant capacity becoming a necessity to fulfill the economic of scale. The process efficiency and the manufacturing flexibility of the main equipment to match the higher plant capacity, makes the Propane Pre-cooled MR the technology of choice in that booming LNG era. The demand for a larger LNG plant also matched by the development of larger gas turbine technology, which makes the gas turbine the technology of choice for the process system driver. Despite the booming of the LNG market, it is quite surprising that the other LNG

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Liquefaction technology developer did not make significant attempt to advance their technology for the large capacity LNG plant. Not until recently that the other LNG Liquefaction, technology developer start to realize that the LNG market seem to offer enough rooms for more than one player. As has been described earlier, the key issue in the year 2000 era is a low cost LNG plant, something that the previous LNG project which happen to apply the Propane Pre-cooled MR, seem fail to address. Even for a larger capacity, which could have improved the economic of scale, as shown in Figure 4? LNG analysts have different assessment as to whether it is the LNG Liquefaction technology or the other aspect of the plant design is the main factor for the high LNG cost. At the LNG 12 Conference in 1997, Shell presented a benchmarking study of various LNG Liquefaction technologies. The study evaluated 3 LNG Liquefaction technology which are currently being used in various LNG plant, i.e. the Single Mixed Refrigerant; the Propane Pre-cooled Mixed Refrigerant and the Cascade Refrigerant technologies, plus the other 2 newer technology which is the Dual Mixed Refrigerant and the Nitrogen cycle technologies. The study concluded that the LNG Liquefaction technology contributed only less than 3% to the specific cost of a grassroots LNG plant. An excerpt of the study is presented in the table below.

Shell Study - 1998

C3/MR Specific Power, kW/tpd Fuel Efficiency, % Indexed Capex Plant Availability, sd/a Indexed Specific Cost 12.2 92.9 100 340 100 Cascade 14.1 91.2 119 336 143 SMR 14.5 91.6 97 338 103

Pertamina 1999
C3/MR 15.3 90.8 100 342 100 SMR 17.0 90.0 97 340 101

Figure 6 - Benchmarking of LNG Liquefaction Technologies

A similar study was done by PERTAMINA confirmed that the different in specific cost between the Propane Pre-cooled MR and the Single MR technologies are not more than 1% for the overall LNG project scope. 13 of 28

However, it will be a misleading conclusion to say that the LNG Liquefaction technology does not have a significant impact on the real-world LNG project cost competition. As in any hypothetical study, the result of a study valid only if the assumption used in the study is still being maintained in the real world. The assumption are, but not limited to the following: The same design philosophy, sizing criteria and project specification are consistently applied for the evaluated technologies A proven and perfect match of the process driver is available for each of the technology A proven and perfect match of main process equipment is available for each of the technology. The other process system such as the Acid Gas Removal; the cooling medium; the heating medium, storage & harbor system are using the same technology. No consideration for the additional cost required to compensate discrepancies on operational and maintenance features of each technology, such as control or safety system complication No consideration for the EPC competitiveness impact on cost such as procurement efficiency and construction efficiency No consideration or the EPC Contractor bidding strategy impact on cost

Therefore, in the evaluation of the real world LNG project cost competition, it is more important to put attention on assumptions and what is not considered in a hypothetical studies than the hard number conclusion of the studies itself. The only way to verify the assumption is by executing a Multiple technology Front End Engineering Design. However, multiple FEED is not cheap and simple to manage, requires not only technically competent Owners project team but also require a unique project management plan and control. It is therefore very important that the selection of the LNG technology to be involved in a Multiple FEED competition shall be put under the frame work of the final project objective, that is to secure LNG Sales Contract and Financing Agreement. As has been discussed in the earlier section, with shorter contract term and smaller quantity commitment the risk of a new LNG project lies more on the project financier rather than on the LNG Buyers side. Therefore, unless a technology has a clear technical and cost competitiveness that can be justified later in front of the project financier and Buyer it would not be wise to carry out a Multiple FEED.

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However, the problem is, the clear technical and cost competitiveness of a technology can only be verified after the FEED. Unfortunately, even a FEED cannot be used to verify the cost impact of EPC Contractors procurement and construction efficiency, and/or bidding strategy which will only be known after the EPC work bids. Requesting project financier and/or Buyer opinion prior to execution of Multiple FEED is not a common practice since what their concern is not how a project Owner implement the FEED but what is the outcome of the FEED work for the proposed project and proposed financial plan. In the current LNG producer competition, a project financier or a LNG Buyer will not have a difficulty to find alternative LNG project, which fit their requirement or risk criteria. Justification to include a technology in a Multiple FEED remains in the project owners hand, and can be addressed by one of the following strategy: Include only the technology which have been well accepted by the LNG project financier or Buyers in the region Include as many viable technology as the FEED cost can be justified and make decision after the EPC bids is received, evaluated and offered to the LNG market.

Execution of a Multiple FEED is indeed a unique and challenging undertaking, the LNG industry is yet to learn the whole process, the constraint and the complication of doing a Multiple FEED work. However, the potential benefit is so promising for a grassroots LNG project to simply ignore the concept. For them, it is more a survival kits rather than great looking outfit.

V.

LNG Liquefaction Technology, Is It The Real And The Only Issue On Project Cost Competition? As has been discussed briefly in the earlier section, the technology per se is not a significant factor for the project cost optimization. This means, in theory the optimization objective could still be achieved with design competition implemented around a pre-selected LNG technology. However, execution of a Multiple technology competition is still one of the best practical ways to promote cost optimized LNG plant design: Technology competition open the possibility for a performance based design rather than a specification based design Technology competition breaks the latent paradigm of outdated project philosophies and promote design innovation More Contractors and technology licensors involved, promote higher level of competition

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Id ea l C a rn o t C y cl e v s. P u re C o m p o n en t R efri g era ti o n
D es u p t in g er he a

nd & Co

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ion

F ee d G a s In

C a r n o t C y c le I d ea l W o r k

E xpan

T e m p . , d e g .C

ro

ce

ss

F o r L N G L iq u e fa ct io n

nc

ef

E v ap ora tio n
L NG O ut
E n t r op y

Figure 6 Ideal Carnot Cycle vs. Pure Component Refrigeration

In the evaluation of a multiple technology competition, there are several technical issues that need to be addressed properly even if in the overall project cost perspective those factors do not greatly impact the competition. Above all, the basis of the competition shall be a technology that will really works in the real world not in the process simulation print outs. In principle, the nature of the LNG Liquefaction technology does not have much rooms for efficiency difference compare to other process system such as in the oil refineries or petrochemical industries, where an advanced catalyst can make a significant difference in the process efficiency. Any LNG liquefaction technology is based on a simple Carnot refrigeration cycle, which is consist of 4 basic refrigeration steps: adiabatic compression, cooling & condensation, adiabatic expansion and evaporation. A refrigeration cycle is a process of transferring heat from the process side into a heat sink (air, seawater or a cooling tower system). The process efficiency of a LNG liquefaction technology is therefore depend on how a technology can closely fit the Carnot cycle, which is the ideal cycle (100% efficiency). The technology developer approaches the idealistic Carnot cycle curve in different ways, each with its own merits and constraints:

C om

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Employs a multiple refrigeration cycles. The more the refrigeration cycles the closer it gets to the feed gas cooling curves. In this regards, a single pure refrigerant cycle has the lowest efficiency and the triple cascade pure refrigerant cycles give highest efficiency. More refrigerant cycles will not result much more process efficiency; instead it will result a diminishing economic return due to process complication and lost of the economic of scale benefit on equipment design. Employs a mixed refrigerant. If the composition selected properly, a mixed refrigerant can give a proper fit to the feed-gas cooling curve. However, since the mixed refrigerant does not have a distinct boiling or dew point temperature, therefore it requires a more complex process scheme and heat exchange equipment.

The net impact of a LNG liquefaction technology on a project cost is an economical balance between process efficiency, number of equipment required and its best fit to the off the shelf machinery. Project owners shall cautiously question a LNG technology that claims reduce project cost more than 5%, simply because the LNG process thermodynamic does not allow process efficiency improvement in that order of magnitude. If there is a potential cost reduction as high as 20 30%, it must be in the other project aspect not on the LNG process technological excellence. Therefore, since the 20 30% potential cost reductions are in the other project aspect, all LNG technology will essentially have the same opportunity to enjoy the same cost optimization advantage. Then, whether the cost reduction potential can be materialized or not, will remain on the innovation and excellence of the FEED and EPC Contractors hands. In the LNG industry, what is so called technology competition is actually a design competition.
O p tim ized S in gle M ixed R efrigera nt P ro cess
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A re a o f P r o c e s s I n e ff i c i en c y

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M E T HA N E R E F R I G E R A T IO N

ETH YLE NE R EFR IGE RA TIO N

PR OP AN E R EFR IGE RA TION

F eed Gas In

A r e a o f P r o c e s s In e f f ic ie n c y

T e m p . , d e g .C

L N G L iq u e f a c t i on

I dea l W o rk F o r

C ar n ot C yc l e

C AS CA D E P ro cess
L NG Out

E n t r op y

Figure 7, 8, 9 LNG Processes Refrigeration Cycle Efficiency

VI.

Building A Fair And Accountable LNG Plant Design Competition Rule No. 1 All design must be based on a workable LNG process technology. This is the rule no. 1 for project owner because it is also rule no. 1 for the LNG Buyer and the project financier. The first critical thing a project owner need to do before embarking into a LNG design competition is to verify that the basis technology will really work in the real world. Each owner has a different definition on what is considered a workable technology. Some defined as a technology that has a proven operating unit for the service and capacity in the same order of magnitude. Others apply a limit on the scale up factor from the existing operating unit. However, to accept a technology based on the technical simulation print out is not a recommended approach in the LNG industry. This rule not only to be applied for the process technology as a whole but also for the critical equipment such as the main process driver, the refrigeration compressor, the cryogenic exchanger, and in some cases the control scheme around those critical equipment. Whatever definition on workable technology is used, the point is to apply that definition consistently for all technology or design. Rule No.2 All design must use the same design criteria. This is even a trickier rule to define than rule no. 1. The design criteria span from a very broad and basic guideline such as project philosophies, and sizing guidelines down to a very detailed standards, specifications, recommended practices and even a working procedures. Project owner shall define at which level of design criteria, a design competition will be implemented.

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On a performance based design competition, the Contractors use the same project philosophies and sizing guidelines. Owner only defines the main characteristic of the project such the plant capacity, product quality and the plant availability factor, then the rest of the design would be up to each Contractor. In this case, owner must prepare to receive a design, which will not be apple to apple from the equipment design point of view. In a performance-based design competition, a cost reduction up to 20 30% is not uncommon target to achieve, regardless the technology selected as the basis of the design competition. In a specification based design competition, the outcome of the design will looks more apple to apple, but since the Contractors do not have too much degree of freedom to design, Owner shall be prepared to accept a cost reduction in the order of 10 15% only. In the LNG industry, it is advisable that owner at least define the safety and reliability specifications at a detailed enough level to maintain the current proven track record of the LNG industry. Those two basic rules set the cost optimization objective in a fair and accountable LNG plant design competition. Furthermore, owner require to define and describe to the Contractor the EPC bid evaluation criteria in order to maintain a fair and accountable design competition: If owner pre-selected the process driver and its available power, will owner allow the Contractors to utilize the available power beyond the plant capacity specified by owner and receive a merit score in the EPC bid evaluation In the case the EPC bid evaluation is done on a life cycle cost basis, owner to define how the fuel or feed gas saving will be valued. A life cycle cost EPC bid evaluation will also require owner to define the value used for imported fuel, chemicals and refrigerant. Owner is also require to define Net Discount Rate as well as the Break Even Capex $ for every $ of Opex saving.

A clear definition of EPC bid evaluation criteria will not only ensure that the owner will receive an EPC Bid Proposal which met the owner project objectives, but also enable Contractor concentrate on the design competition and feel comfortable that the EPC bid evaluation will be done fairly according to the prescribed criteria known to the EPC Bidders and the public.

VII.

Real World Dilemma In LNG Plant Multiple FEED Competition Real World Factors in LNG Technology Competitiveness: 1. Specified LNG Plant Capacity 2. Specified Driver Type and Configuration

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3. 4. 5. 6.

Allowed Supplemental Driver Power Value of Potential Excess LNG Capacity Value of Fuel Gas Feed Gas Composition

In the concept of multiple FEED competition for LNG plant cost optimization described above, it is concluded that the LNG technology does not really have a significant impact to the overall project cost. However, since every concept is developed based on idealistic approach, its real world application may lead to a completely different conclusion. One of the important factor which cause a LNG technology may has a noticeable merit in a project cost reduction is the specified plant capacity. Most recent LNG projects were designed based on the gas turbine drivers fixed off the shelf available power, this constraint will cause certain technology will enjoy an optimum driver power utilization. All available power is used and match will Owner requirement for the specified plant capacity. For a more fair competition, it is recommended to allow Contractor select from several approved type of gas turbine drivers. Other way is to allow Contractor to utilize starter/helper driver (motor or steam turbine) supplement in the gas turbine trains. Plant capacity specification and the limitation of approved gas turbine type to be used for the design may also impose a particular LNG technology must apply refrigeration compressor size beyond what is considered proven by the LNG industry. This constraint will certainly lower the technical confidence of those particular technology and if technical confidence in this critical part of the plant had a significant weight factor on the overall technical evaluation, a particular technology may not become attractive to compete. Other impact of the specified plant capacity to the competitiveness of a LNG technology is how Owner valued the excess LNG production or limitation on the allowed supplemental power from the helper driver. Excess LNG capacity has no valued if the plant is under utilized. However, many LNG producers have been successfully market their excess capacity. Some LNG plants even enjoyed a repetitive debottlenecking projects. On the other hand, if the potential excess capacity is valued too high, Contractor may design a high capacity plant, which may not be actually marketable, when the plant is in operation. The gas composition may also has considerable advantage to a particular technology. A rich feed gas or a feed gas with adequate heavier components content will advantage a LNG technology using all refrigerants from the available feed gas component, while other LNG technology may need to import the refrigerants which will require additional investment for the receiving and storage facilities. While some factors such as feed gas composition are beyond Owner control, other factors can be devised to promote maximum competition on LNG technology.

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Factors on LNG Plant Design Competition: 1. 2. 3. 4. Contractor competition within a particular technology Definition of Fit For Purpose design Level of details of design deliverables Limitation on bid documents deviations, exceptions and alternatives proposal. 5. Bidding Processes

As has been discussed earlier in the concept of fair and equal LNG Plant design competition, it is of utmost important to apply the same principle and criteria for all competing LNG technology and competing EPC Contractors. In other words, ideally what left for the competition are: (a) the intrinsic characteristic of the technology, (b) Contractors innovation in facilities design, (c) Contractor efficiency in procurement and (d) Contractor efficiency in the construction of the facilities. However, strict application of the same design principle and criteria will greatly reduced Contractors flexibility in the interpretation of the principle and criteria, match them with their past experiences, best practices, company policy and procedures and working environment. Each of which is unique for every Contractor and may contribute to considerable potential cost reduction of project cost if applied properly. One case in point is how a process licensor market their LNG technology to the EPC Contractors. Many of the process licensor make their technology available for any interested Contractor, some has a closer relationship and preferences to a particular Contractor and a process licensor may decide to have an exclusive alliance with only one Contractor to improve their competitiveness in the LNG industry. Exclusive alliance of a process licensor to a particular Contractor is not a new concept in other industry such as in the oil refinery, petrochemicals and fertilizer industries. In fact, in those industries exclusive alliance may become a necessary business strategy to protect the intellectual property rights of the technology. Exclusive alliance of a process licensor and a Contractor is not a common concept in the LNG industry, until recently. LNG technology is more a physical processes and apply very similar refrigeration principles. However, an exclusive alliance or any close relationship of a process licensor to a Contractor may have a considerable advantage in project cost reduction due to the potential improvement in the working efficiency and will foster design innovations. Alliance or not to alliance, both have their own merit and disadvantage. Exclusive alliance will not work for single FEED concept where Owner pre-selected a LNG

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technology. The best way for Owner is to leave this business decision to the process licensor and the EPC Contractors community. In a multiple FEED competition, all parties have the same opportunity to win the competition and therefore benefit Owner objective for project cost reduction. However, Owner must be very careful in accessing the impact of exclusive alliance for the project expansion case. In a multi trains LNG project, any technology or contractor successfully won the initial train development will have a clear advantage over other competing technology or contractor for the expansion project even if the expansion project is opened for different technologies. The EPC of a LNG project consist of approximately 10 15% detail engineering cost. The contractor who won the contract for the initial project facilities will enjoy a minimum cost for the design of the expansion project. This factor need to be considered or incorporated in the evaluation criteria for the expansion project to ensure that the bid processes and environment for the expansion project will still be attractive for competing contractors and promote project cost reduction.
OVERALL FIT FOR PURPOSE MATRIX
INNOVATION

Existing LNG Plant Practices

EP CB ID Alt ern ati ve

Should (Optional)

Maintenance & Operational Aspects

Expected EPC Cost from FEED Contractor

Other LNG Plant

New Developed

Other Industry

Must have for general Industry Must and Shall for LNG Plant

EPC BID Alternative

Operating Cost

EHS Aspect EPC Contractor Margin Licensor Margin Owner Margin Design Margin

Capital Cost Capital Cost vs Operating Cost Life Cycle Cost

Licensor Technology, Process Scheme Technology & System

API, ASME, NFPA, etc.

Industrial Standard

Project Philosophy (Commitment statement, RFP, Basis of Design, Corporate EHS Policy, TIICS, Preinvestment) Project Strategy (Mission Statement, Project Economics, Execution Plan, Marketing, Contracting, Organization)

Figure 10

The other three factors in the design competition, (a) definition of the fit for purpose design, (b) level of details of the design deliverables, and (c) limitation on the allowed design deviation, exception or alternative proposal are interlinked. It is not very simple to define and agree on what is considered a fit for purposes design. Figure 10 below illustrate the basic components of a LNG plant design. It is well understood that a project shall has a consistent project philosophies applied in all project design basis, specification and data sheets. In the development of project design basis, specification and data sheets, requirement

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for a very detail design deliverables is an assurance of what will be purchased, built and constructed. Detail project description also makes the bid evaluation much easier and accountable. On the other hand, detail description means the qualified manufacturers, supplier or vendor list are getting narrower which will certainly limit contractor leverage with the sub-contractor or vendors. The cost of the project may become adversely impacted. Therefore, the key of the issue is to find an acceptable balance between the level of details of the design deliverables to ensure a clear main contractor commitment to the project owner, but not to details as to limit the subsequent competition in the sub-contractor and vendor level. Another dilemma is how owner will evaluate or treat a non compliance bids. A near perfect bid documents shall lead to a minimum number of clarified items, none or minimum number of bid exception, deviation or alternative proposal. However, the EPC contractor community does not have as high concern as the owner side to fully comply with a bid requirement. For the contractor, an alternative proposal may be the only way to win a bid. Therefore, it will be very nave to expect that all contractors will fully comply with the bid requirement. On the other hand, if a project description and specification is to broad and give so much freedom for an interpretation and alternatives, the bid evaluation may become the second FEED work. Before defining what is expected, allowed or not allowed, owner may want to explore each potential bidders intention and interpretation of the bid documents. Due to the complication of the multiple FEED bid processes and evaluation, it is almost impossible to execute a multiple FEED bid processes in a single bid proposal submittal system. Separate submittal of technical bid, followed by clarification and revision is likely to be more manageable and ensure that all bidders meet owner expectation on technical requirement. Submission of the commercial proposal and the Lumpsum fixed price is then be done only if all technical matters have been clarified. The downside of this separate submittal of technical and commercial bid is the longer time required to reach a bid winner decision. Here again, the key is to find a balance between the available time for bid evaluation and a consistent apple to apple technical bid evaluation.

VIII. Contracting Strategy For A LNG Project Cost Competition Beside a consistent design and bid evaluation criteria, a well defined contracting strategy is another essential factor for a fair and accountable LNG plant design competition. The contracting strategy for a Multiple technology design competition can be either: An integrated bidding process of FEED work and EPC work.

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In this case, the pre-qualification process is intended to qualify Contractors for the EPC bid. The qualified EPC Bidders are also the qualified FEED Bidders. The integrated bid process is intended to shorten the whole bid process by eliminating the pre-qualification phase in the EPC bid process. Owner may also apply a so-called drip FEED, in which the Contractors not winning the FEED contract will receive the FEED deliverables, as they are available from the Contractor executing the FEED work. By doing so, the time to prepare the EPC bid proposal can be reduce by 50%. While this contracting strategy does have a merit to speed up the project schedule, it is a complex process and therefore requires a careful planning, proper technical quality assurance as well as adequate project control and administration. A separate FEED work and EPC work bidding process. This is the conventional way of executing the FEED and EPC bid and can be done only if the time is available. In this case, the qualified FEED bidder does not necessarily become a qualified EPC bidder. Another pre-qualification using different criteria will be done for the EPC bid phase.

M ultiple F EED
IN T E G R A T E D F E E D & E P C B ID
F EE D BID DE RS :

A , B, C
E PC BID DE RS :

A , B, C

B
F EE D BID DE RS : F EE D BID DE RS :

D EV E LO P F E E D

- T E CH NO LO G Y

E PC BI D P ACKA GE

A , B, C , D , E, F , G

D , E, F
E PC BID DE RS :

D , E, F

E
-

D EV E LO P F E E D

TE C H N O L O G Y

E PC BI D P ACKA GE

D
EP C

F EE D BID DE R:

C on tract
E PC BID DE R:

G G

W inn er

G
-

D EV E LO P F E E D

TE C H N O L O G Y

E PC BI D P ACKA GE

Figure 10 Contracting Strategy for Multiple Technology Competition

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In the multiple FEED design competition with drip FEED, owner must pay adequate attention to the quality of the FEED work. There is a possibility that due to the need to be competitive in the EPC bid the FEED contractor will not completely disclosed all of their design innovation to their would be competitors. If the FEED work is done properly, there should not be much exception; clarification or alternative bid items in the EPC bid proposal.

IX.

Cost Optimization Of Indonesias Tangguh LNG Project The Tangguh LNG is developed to be the third LNG center in Indonesia. Located in the eastern part of Indonesia, it enjoys the proximity to China, Japan, Korea and Taiwan LNG market. For PERTAMINA, Tangguh LNG is the next grassroots plant almost 30 years after the grassroots facilities were built in Arun and Bontang LNG Plants. However, the LNG business environment today is completely different from the business set-up back in the 70s. The future is no longer a linear extrapolation of our experiences. Bontang LNG plant still hold the world record for the shortest time required for the first LNG shipment counted from the first gas well discovery. Both Arun and Bontang grassroots LNG Plants were built as a fast track project on reimbursable fee EPC contract. On the contrary, Tangguh LNG project is being developed in a fierce LNG market competition, as a grassroots plant that has to compete with many LNG expansion projects. Therefore, Tangguh LNG project must do things differently in order to survive the competition. The Tangguh LNG Project was originally planned for a two trains launch, with Owner pre-selected the Acid Gas Removal technology and the LNG Liquefaction technology on a single FEED contract strategy. The project economics started to deteriorate when the industry experience a record low on crude oil price in 1998, amplified by the difficulties to find prospective Buyers for a 2 trains production quantity. Since then, the project economics was thoroughly re-evaluated, crude oil price assumption revised, and the launch quantity revised to one train. It was concluded that the only way to achieve such a massive cost reduction was by executing a multiple technology competition on an integrated FEED and EPC bidding processes. Lesson was learned from the Trinidad LNG Project, in which British Gas is also one of the partner in the project. FEED/EPC Bidders pre-qualification completed in August 1999, and the FEED bid process completed in February 2000. The FEED work started in April 2000

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for a 12 months schedule . The FEED applies a drip FEED concept, in which the FEED Contractor will drip the deliverables to the EPC Bidders participant. The Multiple FEED strategy had been implemented in Atlantic LNG (Trinidad & Tobago), and had achieved a very significant project cost reduction. The plant has been commissioned and operated successfully. The drip FEED had been implemented in Oman LNG Project and has reduced the project cycle time significantly. Tangguh LNG Project will implement both concept, a Multiple and drip FEED. To the best of our knowledge, no other LNG project has ever embarked into such kind of integrated project management concept. PERTAMINA had executed two grassroots LNG projects in the 70s, since then PERTAMINA had successfully managed 7 (seven) LNG Expansion Projects. The last project was completed in 1999. No other oil majors have similar experiences. Despite the previous project were managed in a conventional way, our commitment to execute Tangguh LNG project in a different way prove PERTAMINA ability to meet the changing LNG industry demand, business practices and competition.

X.

Conclusion The world LNG industry is changing but the Asia Pacific LNG industry is facing even more business pressure to change. With the sluggish LNG demand forecast and more players entering the LNG industry, LNG will become more a commodity rather than premium energy alternative. Eventhough analysts forecasted that the supply demand gap would disappear past the year 2010, but that forecast itself is a signal that more LNG project will be developed to anticipate the narrowing gap. Competition for the LNG market will not going to be easier in he future. Consequently, the LNG producers started to accept the need to restructure the business, the contract term and condition, the project management and the project-financing scheme. Any grassroots LNG project has obvious cost disadvantage compare to an expansion project, owing to larger scope and complexity. However, a grassroots project has its own merit of higher opportunity for cost optimization since it does not limited by the existing design, specification or contracting strategies. If managed properly a grassroots LNG project would be able to compete head to head with any expansion project, even at a smaller LNG sales quantity. The need and the opportunity to do things differently in a grassroots LNG project has generated a numbers of project management concept, design philosophies and contracting strategies. Multiple FEED and drip FEED emerges as a promising concept to achieve the specified target cost.

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Execution of Multiple and drip FEED requires Owner to clearly pre-scribe the competition boundary and the evaluation criteria. Level of detail on design competition should be appropriately set to meet Owner project cost objective. All of the competition aspect, including bid procedure should be planned thoroughly to achieve a fair and accountable design competition. The LNG industry has a varied understanding on what is called a LNG Liquefaction technology competition. Many studies revealed that the LNG Liquefaction technology is not a significant contributor to the project cost optimization. Recent PERTAMINA study also confirmed the previous study finding. Other aspect such as design innovation, project specification and contracting strategy contribute more than the feature of the technology itself. The so called technology competition is more appropriately called as design competition. PERTAMINA considers a design competition is a necessary tool for a survival of a grassroots project like the Tangguh LNG Project. In the future, it would not be impossible to expand the concept for an expansion project. In doing any effort to optimize project cost, Owner must always remember that the end result of any LNG project competition is to secure LNG Sales Purchase Agreement and Project Financing Agreement. Buyer requirement to meet safety and reliability standards shall not be overlooked or relaxed by the need to reduce cost. The trend to have a smaller contract quantity, for a shorter period and at a less rigid contract term and condition has put a LNG project as a higher investment risk for Project Financier. Owner should consider this aspect by designing countermeasures in the project cost optimization effort. FEED/EPC Bidders must be pre-qualified and selected not only based on their technical performance but also the financial strength. The LNG industry will continue to change. The players that will survive in the long run is the one that can adjust to and anticipate new demand and situation.

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XI.

Reference Cited 1. Asia Pacific LNG Demand and Supply Forecast, Gas Matters, April 1998 2. LNG Project Cost Benchmarking, Multi Client Study, Poten & Partner, Internal Report to ARCO, April 1999 3. R. N. DiNapoli, C. C. Yost III, LNG Plant Costs: Present and Future Trends, 12th International Conference on Liquefied Natural Gas, Perth, May 1998 4. K. J. Vink, R. K. Neigelvoort, Comparison of Baseload Liquefaction Processes, 12th International Conference on Liquefied Natural Gas, Perth, May 1998 5. PERTAMINA, LNG Processes Evaluation Report, PKP, Processing Directorate Internal Study, November 1999 6. Liquefied Natural Gas (LNG) Fact Sheet, U.S. Energy Information Administration, October 1998 7. Institute of Gas Technology, Delay Seen For New Projects, LNG Observer Vol. IX No.6, November December 1998

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