I Saw Three Ships Come Sailing In - LNG Terminal Construction
Earlier this week, Dominion's Cove Point LNG announced that it would begin full commercial operations "early next year" -- despite its third quarter earnings call announcement that the project would be in-service "by the end of this year [2017]." Speculation regarding the delay has been ongoing, with some sources contending that the delay was caused by continual testing in order to ensure smooth operations, while others have suggested that the delay was caused by efforts to renegotiate contract terms. What are the critical hurdles to the timely construction and operation of a liquefaction terminal?
The conjecture over Cove Point's contracting was spurred by statements from India's Oil Minister, Dharmendra Pradhan. So what does India have to do with this? The project is the subject of 20-year contracts with ST Cove Point, a joint venture of Sumitomo Corporation and Tokyo Gas, and GGULL, the U.S. affiliate of GAIL (India) Ltd. Pradhan stated that "GAIL has held a number of discussions with Cheniere Energy (Sabine Terminal) and Dominion Cove Point LNG LP (DCP Terminal), for re-negotiation of the contracts." But Dominion pushed back this week, noting that it has not been engaged in any contract renegotiation, and stating that it " looks forward to commercial operations early next year under the terms of previously negotiated 20-year contracts." It appears, then, that those speculating that the delays could be attributed to testing and quality assurance were correct.
The construction of an LNG terminal is, perhaps not surprisingly, much more involved than the construction of a natural gas pipeline system. While the footprint of an LNG terminal is relatively more geographically confined than that of a pipeline system, the engineering proves to be more complex. Cheniere recently completed construction of the Sabine Pass Liquefaction Project. The project added liquefaction capability to the existing Sabine Pass Terminal, allowing it to liquefy and export 16 mtpa of domestic natural gas supplies, and also modified the terminal to add LNG import services. The expansion project, one of four such projects planned for the facility, added four trains to the existing terminal, and required over 50 notices from FERC to proceed with construction.
The Sabine Pass project has not only required more construction approvals than a pipeline project, but has also taken longer to construct. While the Sabine Pass Liquefaction Project took 1581 days to construct from the first notice to proceed, the median duration of construction of a new pipeline system is 248 days. The Dominion Cove Point LNG project will likely take at least 820 days, assuming it is operational by mid-January. While this is several months shorter than the time it took to build the four train Sabine Pass project, the Cove Point LNG project only involves the construction of one train.
For Cove Point, anticipation began to build regarding a pending in-service when the FERC, on November 13, 2017, issued to Cove Point its "Authorization of Commissioning Cargoes," allowing Cove Point to export liquefied natural gas related to commissioning activities. But the project cannot go in service until, according to a condition in its Certificate Order, a determination has been made that "the facilities have been constructed in accordance with the Order and applicable standards, can be expected to operate safely as designed, and ... the rehabilitation and restoration of the areas affected by the project are proceeding satisfactorily." Regulatory review and inspection continue.
As with a pipeline, project scope alone may not be the only indicator of construction duration and difficulty for an LNG terminal. The location of the terminal is also important. As with pipelines constructed in an existing right of way that would likely draw the ire of few property owners, LNG terminals constructed on or adjacent to the existing footprint of an LNG terminal will likely see less protestor involvement. The Sabine Pass project benefited from this dynamic. Although its expansion involved four separate projects, involving various trains and additional facilities, requiring adjudication by the FERC, it was the subject of fewer formal protests than Dominion Cove's single project.
LNG Project Duration
