LNG continued from 38 and permitting challenges delayed or shelved a number of projects, notably Shell’s proposed project in Mare Island and Chevron projects on Coronado Island and in Baja, California.
Dynamic market structure: The pipeline and storage infrastructure necessary to transport gas from its point of production or import is rapidly developing. For example, pipeline capacity increased 50 percent from 2005 to 2006. As a result, the basis differential to Henry Hub is being altered dramatically in some regions of the U. S. (See map.)
U.S. Pipeline Basis Differentials vs. Henry Hub (Mcfe)
$1.88
$1.16
Rockies
Chicago
$0.03
Transco Z. 6
-$1.04
-$1.42
-$0.07
$0.46
$0.54
SoCal Gas
Mid-Cont.
Dominion
-$0.42
-$0.64
-$0.43
-$0.72
‘03 - ’05
2007
Florida
-$0.04 $0.02
Source: Wood Mackenzie; Kinder Morgan; Sempra Pipelines and Storage; Booz Allen Hamilton analysis
Toward business and operational excellence
While the current U. S. market is challenging, importers can take steps to improve performance and set the stage for long-term success.
Be a great operator. In an uncertain market environment with high capital intensity, the name of the game is cost control. Managing capital projects effectively is a priority for both existing and planned assets. Existing plants require less investment, while new construction projects represent bigger bets. A recent Booz Allen study revealed that central coordination of project activity significantly improves
Figure 2. Impact of Central Coordination
on Project Performance
50%
Small projects Large projects
Percentage of projects exceeding
either budget or schedule
by more than 10%
40%
30%
20%
10%
0
0
20% 40% 60% Percentage of function managed centrally
Source: Booz Allen Hamilton 2006 Survey
80%
performance, especially in larger projects. (See Figure 2.)
Central coordination enables strong project execution in many areas—best practices are more easily shared, engineering resources can be used more effectively, designs are standardized across the project, and the supply chain can be better managed. Often, central coordination requires the creation of a number of elements: internal capabilities, including fit-for-purpose project-management processes
(tailored for large and small projects); a structured organization with
clearly defined roles and responsibilities; and well-defined perfor-
mance- and knowledge-management systems that focus
on proactively managing deviations. In our experience,
best practices can lead to dramatic performance improve-
ment (e.g., cost reductions of 20 percent to 30 percent and
cycle time reduction of as much as 25 percent).
Managing assets efficiently is also important
because staffing, maintenance, and energy consumption
can be key areas of improvement. Terminal operators and
marketers can learn from other industries, such as the
automotive industry, that have successfully adopted tools
such as lean and Six Sigma to highlight inefficiencies
and eliminate waste. Moving to predictive maintenance
programs can reduce costs by 20 percent to 30 percent
as well as cut forced outage rates. Similarly, we have
seen lean initiatives at power plants that have cut material
handling costs by 10 percent to 20 percent and at the
same time reduced energy consumption by 1 percent to
2 percent. More disciplined planning and execution of
outages can cut expediting costs and reduce the duration
of the outages.
Be a great marketer. International competition in a commodity market creates substantial market price volatility, which can be viewed as a threat or an opportunity. Leading refiners took on the challenge when, in response to decreasing margins, they developed robust marketing and trading capabilities, allowing them to hedge risks and optimize margins, leading to an uplift of $0.50/bbl or 10 percent at typical margins.
In the LNG industry, the environment is ripe for extracting value via marketing and trading for two reasons. First, pricing arbitrage between Europe and the U.S.: Because shipping distances have curtailed worldwide liquidity of LNG, Europe and the U. S. actively compete for the gas shipped to the Atlantic basin. As demand grows in Europe, European gas prices, due to contract mechanisms, closely track oil prices. Pricing differentials between Europe and the U. S. are creating arbitrage opportunities in which companies can optimize the flow of LNG to markets with the highest netbacks.
The second reason is flexible supply contracts. Traditionally, the LNG regasification market has relied on long-term contracts. Now contracts are becoming increasingly flexible. Currently, more than 10 percent of the volume of the LNG trade is based on short-term contracts, up from 5 percent in 2000. This opens the door for increased trading activity on the spot market for cargo coming from producing countries.
LNG continued on 45
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