Clarifying the path to high-quality LNG
investment decisions
Stephen Thompson, Asia Pacific Regional Manager
Charles N. White, Senior Consultant
© POTEN & PARTNERS 2008
CONFIDENTIAL
AOG 2015
11 March, Perth
Poten: oldest and largest specialist LNG consultancy
Unique breadth and depth in the industry
•
•
Worldwide reach
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Support from strategy to
execution
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POTEN
• 40 full-time professionals, 5 senior
advisors and over 600 years of
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Consultant experience as senior
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© POTEN & PARTNERS 2009
CONFIDENTIAL
February 2015
MONTH 2009
Page 1
SHIPPING
The case for adopting high quality decision
making (QDM) practices
© POTEN & PARTNERS 2009
CONFIDENTIAL
February 2015
MONTH 2009
Page 2
These are definitely turbulent times
In January 2014:
• Asian spot LNG prices hit $20/MMBtu
• European re-exports reached 0.5 MMt/m
• Henry Hub surged to $6/MMBtu
• CNPC entered Yamal with 20% equity
• Petronas sanctioned second FLNG vessel
© POTEN & PARTNERS 2009
CONFIDENTIAL
February 2015
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The path to high-quality LNG investment decisions
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Under today’s business environment, making the right decision is tougher than ever
Thought
World
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DECISION
MAKING
Actions
World
The right decision is like a good marriage
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Complementarity across disciplines and geography
Balance between multiple goals
Discipline
When complexity and value are high,
structured Decision Quality processes
allow qualified teams to achieve success
© POTEN & PARTNERS 2009
CONFIDENTIAL
February 2015
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The stage-gate development process is not a cure-all
Like a line of elephants
Screen
Assess
x
Develop
x
Execute
x
A key objective of stage-gate project development is to avoid looping back
When does “no turning back”
change from being the
outcome of sound process to
an a priori commitment?
The stage-gate rationale: relative cost of fixing design errors
© POTEN & PARTNERS 2009
CONFIDENTIAL
February 2015
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The first generation of “stage-gate process” projects
Study of Top 190 Oil & Gas Projects
Average delay of 12 months
60%
Venture cost overruns
50%
40%
30%
20%
10%
0%
Pluto
QCLNG
GLNG
Gorgon
APLNG Wheatstone Ichthys
Note: Ichthys increased its budget by 70% shortly before FID
© POTEN & PARTNERS 2009
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New tools depend on user will and skill
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First generation practices
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Newer tools
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Pros & Cons
Value Engineering
Economic models with sensitivity analysis
Decision trees
Comprehensive, structured processes
Dynamic optimization
Portfolio simulation
Advanced Multi-Criteria Analysis / with spatial data bases
Adoption is often
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Slow
Driven by ‘evangelists’ lacking detailed specific knowledge
Blighted by pitfalls
© POTEN & PARTNERS 2009
CONFIDENTIAL
February 2015
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Page 7
Garbage in, garbage out (pitfalls)
© POTEN & PARTNERS 2009
CONFIDENTIAL
February 2015
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Error #1: Professional tunnel vision
For LNG investments, good decisions require a broad view of the value chain
• Optimization is holistic and iterative – project teams must consciously avoid
fragmentation
FRAMING
TECHNOLOGY FOCUS
© POTEN & PARTNERS 2009
CONFIDENTIAL
February 2015
MONTH 2009
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Error #1: Professional tunnel vision
For LNG investments, good decisions require a broad view of the value chain
• Optimization is holistic and iterative – project teams must consciously avoid
fragmentation
• The best “technical solution” addresses commercial + shipping + marketing
TECHNOLOGY FOCUS
© POTEN & PARTNERS 2009
CONFIDENTIAL
February 2015
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HIGH
WIN
Error #2: Talking past each other
Oil Price
NO
Optimization vs regret minimization
• In this schematic decision tree, the
optimal decision would be to “buy”
Australian LNG
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HH
availability
HIGH
YES
TIE
HIGH
Oil Price
Five “wins” vs. two “losses”
Regret-minimizing decision is “do
nothing”
WIN
LOW
WIN
HH Price
LOW
HIGH
Zero possibility of a loss
WIN
Competing agendas if hidden
undermine decision quality
Errors #1 and #2 lead to teamwork
in name only
BUY
Oil Price
LOW
NO
WIN
LOW
HH
availability
HIGH
YES
LOSE
Oil Price
LOSE
LOW
Purchase
Decision
DO NOTHING
© POTEN & PARTNERS 2009
CONFIDENTIAL
February 2015
MONTH 2009
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$0
Error #3: Introspective data bias
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Effective benchmarking means that four conditions are met
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Comparative data includes a rich enough variety to stimulate alternative thinking
Data compared is really comparable – not too noisy to be useful
Data can be interrogated to uncover roots of divergence and pros & cons of change
Iteration between benchmark data and design improvement is fast enough to create a “virtuous
circle” of improvement
Few projects engage in effective benchmarking
Benchmarking at the highest level
EPC contractor margin
Labor cost
Bulk materials cost
$ million
Engineering charges
Supply/Erect materials cost
Equipment cost
Project ID
A
B
C
D
© POTEN & PARTNERS 2009
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February 2015
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E
F
G
H
I
Error #4: Loss of objectivity
Assessing/achieving decision quality
1
Appropriate frame
2
Clear Valuation System
3
Creative, doable options
4
Useful information
5
Logical reasoning
6
Commitment to Action
7
Decision Quality Assurance
8
Timely monitoring/review
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Project teams suffering errors #3 and #4 get caught in
decision limbo
Decision quality assurance checks (DQA) should be done
by external experts not emotionally invested in project
decision trajectory
© POTEN & PARTNERS 2009
CONFIDENTIAL
February 2015
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Your
“weighty”
decision
Real life challenges ahead for major projects
© POTEN & PARTNERS 2009
CONFIDENTIAL
February 2015
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Coming trials demand high quality decision making
Major pending projects
• Australia
• East Africa
• SE Asia
Key technology challenges
• Long-reach subsea tiebacks
still face well-known issues
• “New” technologies face
many unknowns
Key risks
• Non-technical
• Technical
Jansz-Io will soon produce as subsea tieback from >120km offshore
© POTEN & PARTNERS 2009
CONFIDENTIAL
February 2015
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Screening may be needed to identify a manageable
set of options
• After a solid framing effort has clearly established the decision context
• The team must identify a meaningful range of options to evaluate
Poten’s Opportunity Screening Tool is tailored to each client’s culture,
values, and decision criteria
A
Criteria
B
Criteria
C
Criteria
D
Criteria
E
Criteria
© POTEN & PARTNERS 2009
CONFIDENTIAL
February 2015
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F
Criteria
G
Criteria
H
Criteria
I
Criteria
Quality decision making practices lead the way to
high quality LNG investments
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Strong QDM practices deliver value amid turbulence
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Awareness of decision traps is helpful but not sufficient
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Poten’s rational, highly interactive processes find the highest value path forward
for LNG investors
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Liquefaction: Detailed schedule and cost simulation identified major risks off lead sponsor’s “radar
screen”
Shipping: Dynamic simulation of LNG carrier fleets identified ~$0.5 billion savings for a major IOC
Marketing and procurement: Dynamic optimization to achieve risk/ return portfolio balance and
negotiate contract pricing terms
Project benchmarking and screening
© POTEN & PARTNERS 2009
CONFIDENTIAL
February 2015
MONTH 2009
Page 16
NATURAL GAS & LNG CONSULTING CONTACTS:
© POTEN & PARTNERS 2009
CONFIDENTIAL
February 2015
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AMERICAS (NEW YORK)
Contact: Jim Briggs
Email: [email protected]
Tel: +1 212 230 2000
AMERICAS (HOUSTON)
Contact: Doug Brown
Email: [email protected]
Tel: +1 713
344 2378
Page
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EUROPE, M. EAST, AFRICA
ASIA PACIFIC
Contact: Graham Hartnell
Contact: Stephen Thompson
Email: [email protected] Email: [email protected]
Tel: +44 20 3747 4820
Tel: +61 8 6468 7942