Effective use of supply chain can reduce costs and speed up execution
The liquefied natural gas (LNG) industry is facing challenges of lower oil and gas prices, and consequent reductions in capital expenditure, along with remote and challenging projects.
The rush to be the first LNG delivery company, the challenges of constructing plants in remote and unfamiliar locations, and workforce skills shortages are probable causes for sub-optimal supply chains. This demands a rigorous and innovative approach towards the supply chain. To ensure new LNG projects are viable, and to extract increased value from existing projects, operators have to unlock their supply chain. Managing a supply chain means ensuring LNG projects get enough men and materials to operate efficiently and safely at a low price. Such management is essential to reduce costs, get acceptable financial returns, and in turn, give stakeholders the confidence to press ahead with the next wave of LNG investment.
Based on insights gained in interviews with senior executives from global oil and gas companies, the KPMG Global Energy Institute identified three major challenges LNG supply chains are facing. These are:
- The size and complexity of projects
- The remoteness and other challenges (political, environmental, etc) of the new wave of projects
- The construction of multiple plants in contiguous locations, leading to bottlenecks and sharply rising costs of labour and materials
Ten ways to help address these supply chain challenges are:
- Put human resources first
- Adopt learning from other industries
- Collaborate with other operators
- Re-think contractual relationships with suppliers
- Prepare for environmental, ethical and local content supply chain requirements
- Unlock the potential of modularisation
- Consider floating LNG (FLNG)
- Understand the local environment
- Foresee the handover to operations
- Adapt maintenance policy according to the location.
Appropriate use of these approaches can cut costs, reduce construction time, improve the speed of a start-up and cut environmental impact. In a world where the economics of new LNG ventures are seriously challenged, projects with competitive supply chains have better prospects for going ahead.
KPMG’s analysis across global geographies, and particularly in India, suggests that sustainable progress depends on Indian companies building on LNG-specific business capabilities. These include greater consolidated financial strength, gas trading, increased partnering, better marketing and distribution and improved management of margins, especially through an effective supply planning. They also need to enhance capabilities of project management, gas contract negotiations and management, and increase their understanding of customer business models.
Effectively utilising the supply chain, both during construction and operations, is the key to reducing costs and speeding ‘time to market’ for LNG projects.
The author is head, oil & gas practice, KPMG in India.
Views are personal