KOLKATA: Optimising supply chain during both construction and operations are key to reducing costs and speeding up time to market for liquefied natural gas projects, according to Gaurav Moda, head of oil and gas practice at professional services firm KPMG in India.
KPMG Global Energy Institute has published a study on ways of unlocking LNG supply chain for project success, which suggests that the LNG industry is facing massive challenges in today’s unprecedented wave of expansion. LNG developers are facing the challenges of lower oil and gas prices, and consequent reductions in capital expenditure, along with more remote and challenging projects.
“Those companies that proactively address supply chain now will be best placed both to deliver their existing projects successfully and to launch new ones ahead of the competition,” said Moda.
According to the report new LNG projects are viable and successful, and to extract maximum value from existing projects, proponents and operators have to unlock their supply chain.
Based on insights gained in interviews with senior executives from some of the largest oil and gas companies in the world, the KPMG Global Energy Institute identified three major challenges LNG supply chains are facing. These include the size and complexity of projects; the remoteness and other challenges, for instance political and environmental, of the new wave of projects; and the construction of multiple plants in contiguous locations, leading to bottlenecks and sharply-rising costs of labour and materials.
According to KPMG, the sector can overcome the challenges if it puts human resources first, adopts learning from other industries, collaborates with other operators, rethinks contractual relationships with suppliers and prepares for environmental, ethical and local content supply chain requirements. The consultancy firm also suggested that the sector unlock the potential of modularisation, consider floating LNG, understand the local environment, foresee the handover to operations and adapt maintenance policy to location.
KPMG’s Hilda MulockHouwer said in a statement, “Appropriate use of these approaches can cut costs, reduce construction times, speed start-up and cut environmental impact. In a world in which the economics of new LNG ventures are seriously challenged, projects with the most competitive supply chains have the best prospects for going ahead successfully.”
As a key locus of LNG supply and demand, Asia-Pacific is a geographically huge and diverse region. Moreover, the supply chain to LNG plants itself comprises many components. Nonetheless, the region’s energy and natural resources supply chain is generally considered underdeveloped and costly.
Moda said, “Currently the main challenges and problems faced in LNG supply chain in countries like India are: remote consumer locations with no infrastructure or no access to pipelines; lack of skills in optimisation in routing and scheduling; lack of proper technical regulations to use LNG in transport and taxation problems with part cargo delivery to multiple destinations.”
Developing the local supply chain is as much a concern in India and Africa as it is in Australia and Western Canada, Moda said, but added that LNG proponents can turn this expectation to their advantage. “Providing local economic opportunities helps win support from communities, governments and indigenous people. At the same time, at the cost of some upfront investment, it can deliver more robust, timely and cost-effective supply chains,” he said.
According to Moda, KPMG’s analysis and client experience suggests that sustainable progress depends on Indian companies building on LNG-specific business capabilities. These capabilities include greater consolidated financial strength, gas trading, increased partnering, better marketing and distribution, and improved management of margins especially through optimal supply planning. The companies also need to enhance project management, gas contract negotiations and management, and increase their understanding of customer business models, he said.
“The oil and gas industry has a long and proven history of operating in remote locations. Nevertheless, other industries may offer valuable learning. The mining industry has vast experience in operating large capital projects in remote locations in Australia, Canada and Africa. This may bring knowledge of local weather conditions, appropriate shift patterns, how to set up camps and make them attractive in a harsh environment, as well as how to keep staff happy and motivated,” he said.
Although there are good examples of major oil and gas companies working with local suppliers to develop capabilities to a level where they are an integral part of business operations, local content compliance remains an obstacle that many companies have to overcome, said Moda. Local governments have been observed to be more accommodating initially on core equipment that has to come from the original equipment manufacturer, but they do push for high local labour content, he said.
Moda also referred to the growing public scrutiny of large companies that includes environmental and ethical issues – including attention to sustainable sourcing, human rights and labour conditions. “The growing complexity of international and US-led sanctions presents another complex area for supply chain compliance. Such factors demand more rigorous auditing and certification of subcontractors. Specific environment requirements have to be planned for in advance,” he said.
