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BLOOMBERG: Shell, Statoil LNG Project Expansion Setbacks May Worsen a Fuel Shortage

Shell, Statoil LNG Setbacks May Worsen Fuel Shortage (Update1)
Feb. 13 (Bloomberg) — Royal Dutch Shell Plc and Statoil ASA are among liquefied natural gas producers that may miss output targets and worsen a scarcity of the fuel because of insufficient construction staff.
The shortage of engineers and other workers plus higher materials prices led to a 30 percent jump in building costs for new LNG plants over two years, Frank Harris at Wood Mackenzie Consultants Ltd. estimated. That may delay startups and worsen a “tight'' market through 2010, he said.
LNG producers are planning to build plants that will boost global output of the fuel 94 percent within five years, according to Citigroup Inc. The boom has stretched capacity at contractors such as Halliburton Co.'s KBR and threatened to swell an estimated $67 billion of capital investment in LNG plants, import terminals and ships in 2005-09.
“The level of activity on LNG construction is eating into the expertise and the resource base; we're seeing a big squeeze,'' said Andy Flower, an independent LNG consultant in London and a former executive at BP Plc. “It's being manifested in delays in start-ups of new trains and in the cost increases, akin to the fact that there's big demand and limited supply.''
Demand for LNG may double to 264 million metric tons a year by 2010 because of increased consumption in the U.S. and sales to new markets such as China, India and Mexico, Citigroup said in an Oct. 24 report. About 97 million tons of LNG production capacity is under construction.
`Things Going Wrong'
“We're definitely talking about increased costs and/or delays and/or things going wrong when you try to start it up,'' said Susan Farmer, a London-based partner at law firm Watson, Farley & Williams and an adviser on international LNG projects. Farmer is working in a group with MW Kellogg Ltd., a joint venture of Halliburton and Japan's JGC Corp., to advise the Cyprus government on setting up an LNG import terminal.
Farmer will join senior executives from Shell, the world's biggest non-government owner of LNG production capacity, and Korea Gas Corp., the world's biggest LNG buyer, as a speaker at the LNG Asia Pacific 2006 conference in Seoul, starting today. James Boyd, California's Energy Commissioner, and P. Dasgupta, chief executive of Petronet LNG, India's only LNG importer, will also speak at the two-day conference.
Development costs at Sakhalin-2, the world's largest oil and gas project, may double to $20 billion because of soaring metal prices, higher contractor fees and a declining U.S. dollar, Shell said June 14. LNG deliveries will start in the summer of 2008, about eight months behind schedule, Shell said.
Revised Targets
Sakhalin and most other projects already under construction should meet their revised start-up targets, Robert Dencher, Shell's country manager in South Korea, said at the conference today. Those that aren't so far advanced may be affected by shortages in LNG construction and shipbuilding capacity, he said.
“Beyond things that we already know, we wouldn't foresee significant delays for the projects which are in the advanced development stage,'' Dencher said in an interview at the conference. “For projects under consideration, of course it's a totally different issue. If you look beyond 2009, 2010 it's going to be very difficult to be precise.''
Statoil, Norway's largest oil company, on Sept. 16 raised its estimate for the cost of its Snohvit liquefied natural gas project in the Arctic for a third time, to 58.3 billion kroner ($8.6 billion), or almost 50 percent more than initially budgeted in 2002. Exports will be eight months late in 2007 because of bad planning and additional expenses, the company said.
Chevron's Gorgon
Chevron, the second-largest U.S. oil company, may announce by midyear an increase in the A$11 billion ($8.1 billion) 2003 cost estimate to build the 10 million tons-a-year Gorgon LNG project in Australia. The venture includes Shell and Exxon Mobil Corp.
“There are challenges for the project as there are for those construction projects throughout Australia which include the cost of materials and the cost of labor and those types of issues,'' said Scott Walker, a Gorgon spokesman.
New plants in Nigeria and Egypt have also been delayed or taken longer after startup to reach full capacity, paring global supplies, Flower said.
About 100 million metric tons a year of new LNG capacity may start up between now and 2010, Credit Suisse Group estimated in a Nov. 18 report. That's less than the 105.6 million tons a year rise in demand forecast by Citigroup Inc., which said global capacity may increase to 264.7 million tons in 2010, from 136.1 million last year.

Unexpected Shutdowns

Other plants, such as a A$2 billion fourth production unit at Australia's North West Shelf venture, have had unexpected shutdowns soon after commissioning, said Farmer at Watson, Farley & Williams. Some setbacks may be due to work being passed to less-experienced contractors as the major construction companies are at capacity, she said.
Contracts to build about 14 new LNG units are expected to be awarded in 2006 and 2007, adding 68 million tons of capacity, Andrew Lane, chief operating officer of Halliburton, whose KBR unit is involved in more than half of new plant construction, said Jan. 27. Chiyoda Corp. said Feb. 8 its third-quarter profit more than doubled as it built more LNG plants.
Prices for LNG have risen to between $5 and $10 per million British thermal units today from $3 to $4 about three years ago amid rising demand, Flower estimates.
“LNG prices have gone up more than construction costs and so that's shielding a lot of producers from the worst of the impact,'' he said.
To contact the reporter on this story:
Angela Macdonald-Smith in Sydney at [email protected].

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