Open for Business

Kenneth Grajek

Project Director - Commercial

ECRI Sponsors Meeting

June 8, 2016

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Oil & Gas Industry Boom to Bust

Image source Forbes.com

We are not in

Kansas anymore…

All told, 69 oil and gas producers with $34.3 billion

in cumulative secured and unsecured debt have

gone under. Since share prices peaked in 2014, the

oil bust has wiped out about $1 trillion in equity, with

the Dow Jones U.S. Oil & Gas Index off 40%. Forbes

May 2016

“Shell this week announced a fresh round of job

cuts across its business, bringing its total planned

for the year to at least 5,000. Earlier this month, the

Anglo-Dutch company said it would cut its planned

2016 spending on new projects by nearly 10%”.WSJ

June 2016

“We’re not going to try and get into a boom and

bust,” BP’s chief financial officer, Brian Gilvary,

said in a conference call last month. Even at $60 a

barrel, he said, “We wouldn’t be looking to

significantly ramp [activity] up.” WSJ June 2016

“Exxon hit the brakes this year, slashing its budget

by 25% and dropping the number of drilling rigs it

runs in the U.S. from close to 60 at the height of the

oil boom to about 16 as it delayed shale production.

What will it take for Exxon to step on the gas

again?.”.WSJ June 2016

“sea of pink slips that has engulfed

more than 350,000 petroleum workers

around the world” Houston consultant

Graves & Co. June 2016

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Open for Business

Image source puckerap.tumbrl.com

• Topics

• What is at Stake?

• Why the Emergence of OBE to LSTK in LNG Market

• LNG Market

• Client Type

• Business Models

• Conversion Challenges of OBE to Lump Sum Turn

Key

• How to Balance the Risk

• Success Factors

• The Future?

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What is at Stake?

Image source ehsworks1.com

• OBE to LSTK Successes:

• Reduced schedule duration-sole source

• Reduced price for the owner than traditional LS

• Better owner/contractor integration and alignment

• Improved early procurement cycle

• Reasonable profit for contractor

• OBE to LSTK Failures:

• Damaged relationship with owner

• Upon execution significant loss for contractor

• Contractor internal cost & pricing is overly exposed to others in market

• Inability to convert cancels the project

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Why the Emergence of OBE to LSTK in LNG Market?

Image source ehsworks1.com

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LNG Market

Image source ehsworks1.com

Energy prices have tumbled in the past year due to a global oil

glut. Spot gas prices have as a result dropped below prices for

cargoes on long-term deals, prompting buyers, such as India’s

Petronet, to renegotiate contract terms or take more gas from the

spot market. Reuters 2016

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LNG Market

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LNG Market

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LNG Market

• 35 MMt/y of demand available globally for potential projects by 2025

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New Client Type

Traditional Client Developer Client

Established, Large Corporation (IOC / NOC) Small – Mid Start-up Business

Procedural/Process Driven Nimble/Limited Processes

Balance Sheet Funding Dependent

Secretive, Media Cautious Entrepreneurial-Need for Buzz - Spin

Proven Solutions Innovation, Differentiators

Project Economics Components of the Deal

Known Entity Seeking Credibility

Proven Marketer Inexperienced Seller

Linked Value Chain Fragmented

EPC Project Experience Limited Project Knowledge

Portfolio of Multiple Projects Portfolio of One Project

Well Staffed Limited Staff

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Business Models

Image source ehsworks1.com

• Integrated:

• Stakeholders have same interest in value chain upstream thru LNG facility

• Traditional stranded assets: Gorgon, Skikda, NWS

• Merchant:

• Owner of LNG Facility buys gas from seller(s) & sells the LNG to Buyer(s)

• Abundant supply/oversupplied markets: Cheniere

• Tolling:

• Owner of LNG Facility does not take title

• Abundant supply/oversupplied markets: Freeport

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Typical Project Finance Arrangement

Image source HSBC Gardner.com

Procuring Authority Government

Tolling Co.Project Company (SPV)Lenders

Local Sponsor Co.Foreign Sponsor Co.

Sponsor 1 Sponsor 2

Contractors Security Trustee

Loan

Agreement

O&M and EPC

Contacts

Security

Agreements

O&M and EPC

Direct Agreements

PPA Direct

Agreements

Fuel and tolling payment

Power Purchase Agreement (PPA)

Electricity

Shareholder’s Agreement

Land Lease

Agreement

Credit

Support

Budgetary

allocation for

Payments to

Project Co.

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Typical Business Model Elements

Image source ehsworks1.com

• Secure a single pipeline to transport known amount of gas 24/7 to

LNG facility

• Buy Henry Hub indexed gas supplies at inlet of pipeline for 20

years

• Acquire fixed number of ships for high utilization, point to point

transportation of the gas

• Pay the liquefaction toll

• Capture price spread between high oil price and low HH priceSource BP Marketing Feb 2016

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LNG Market Summary

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• Pricing temporarily converged for all LNG

indices

• Long term Oil Linked Contracts down

significantly

• Excess supply pushing spot prices down

• Demand and Supply are currently in balance in

the near and mid terms

• IOCs are not playing in the current market

• Rise of the developer client type

• Traditional large LNG projects are being

postponed due to oversupply

• Smaller future project market seen in 2023-2025

driving smaller project sizes

• Developer client projects are Project Financed,

but funding at risk with limited buyers for gas

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5/26/2015

Final Investment Decision

(FID)

Accessible

Feedstock

Credible EPC

LSTK

Offtake

Commitments

Permitted

Site (FERC)

Pricing

Project FID

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OBE Conversion Contract Types

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• Adjust Conversion to LSTK

• escalation

• quantities

• unit rates

• Fixed Conversion to LSTK

• allowances

• contingency

• funded liabilities

• Fully Open Conversion to LSTK

• “Pure open book”

• entire estimate is open for review

• LSTK Risk Elements

• scope definition

• quantity

• productivity

• performance

• schedule

• pricing

• commercial

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OBE to LSTK Challenge – Methodology

Image source ehsworks1.com

• Owner requires Contractor to guarantee commercial terms & cost

elements prior to starting OBE efforts:

• Guarantee schedule with LDs

• Design allowances %

• Escalation %

• Contingency %

• Performance Guarantee

• Profit %

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OBE to LSTK Challenge – Execution Selections

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• Owner has final decision on selections of EPC execution matters

(functional spec vs technical spec):

• Materials

• Equipment

• Subcontracts

• Design

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OBE to LSTK Challenge – Aligning within the Constraints

Image source ehsworks1.com

• Owner continuously threatens that the project will not proceed if

Contractor can not meet early targets for cost, schedule,

performance.

• Guarantee schedule with LDs

• Cost

• Performance Guarantee with LDs

• Warranty

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OBE to LSTK Challenge – Selling the Estimate

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• Owner continuously drives lower cost, challenges always point to

bottom line total cost, failure to understand buildups, “its just not a

bankable project”

• Design

• Quantities

• Priced Equipment

• Bulk Pricing

• Subcontract Cost

• Work Hours

• Schedule

• Indirect Costs

• Terms & Conditions

• Risk Cost

• Profit

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OBE to LSTK Challenge – Selling the Estimate

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• Owner challenges every dollar…especially in the risk allowances

Strong

Potential

Conflict

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OBE to LSTK Challenge - Conversion Timing

Image source starworks.com

Timing is Everything

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Credible EPC

LSTK

OBE to LSTK Challenge - Conversion Timing

Image source Dr. Garth Job

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OBE to LSTK Challenge – Continuous Negotiations

Image source amazon.com

It ain’t over till its overYogi Berra

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Success Factors

Image source ehsworks1.com

• Commit to a conversion methodology that allows for allowances,

contingencies, escalation and profit to be established when the

Contractor knows enough to establish them.

• Establish the parameters that will govern selections for materials,

equipment, and subcontracts etc. The Contractor must retain

control over those decisions.

• The Contractor will eventually be the one with the LS risk. The

estimate needs to be owned by the Contractor and reviewed by the

Owner.

• Sell the estimate in subcomponents to reach an agreed total cost.

• Communicate OBE strategy to all Contractor team to avoid the

pitfalls. Train for negotiations.

• Listen to client and closely monitor client’s market and business

plan. Timing in all things.

• Develop alternate commercial plan, if agreement is not achieved on

the conversion.

• Convert with client’s who seek to win together with the Contractor.

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The Future?

Image source ehsworks1.com

In an ever changing & challenging market….how will your

organization remain…

Open for Business