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Figure 1: This graphic depiction illustrates the enormity of trains capable of liquefying 7.8 million metric tons per year. Trains 4 and 5 are more than double the sizes of Trains 1, 2 and 3, which can each liquefy about 3.3 million metric tons per year. Chiyoda and Technip agreed to build six of these megatrains at Ras Laffan for an estimated price tag of about $12 billion. Photo and graphic courtesy of Technip.
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"Technip is a world leader in LSTK [lump-sum turnkey] contracting,” Gérard Renaudin, chief technology officer of the LNG Business Unit, assured the audience in Paris at Technip’s Investor Day conference, October 22, 2004.
“We have financial engineering expertise…the experience required to manage projects, characterized by large-scale contracts.”
The audience may not have appreciated how much Technip would need its LSTK contracting skills. Within a few weeks, the company and its joint venture partner, Chiyoda Corp, would announce winning a $4 billion contract to construct two megatrains – 7.8-million-metric-ton/year behemoths – that would comprise the primary infrastructure of Qatargas II. See Figure 1.
Then, during the following year, the venture would win construction contracts for four more megatrains: two at RasGas 3 and one each at Qatargas III and Qatargas IV, all to be situated within a congested corner of the Qatar peninsula called Ras Laffan.
Ras Laffan is an industrial city with a master plan. Khalid Bin Khalifa Al Thani, the directorate, says that “Ras Laffan is gearing up to be the single largest complex and most comprehensive gas-processing city in the world.”
Covering just 106 square kilometers, Ras Laffan is smaller than Orlando’s Disney World. Yet, where Disney took four decades to complete its four theme parks, Ras Laffan intends to build six megatrains, a sulfur treatment plant, and the 140,000 barrel-per-day gas-to-liquids plant in one. With only two roads leading into the city and heightened levels of security, one engineer complained last year that the entire system was “near collapse.”
Hours-Long Traffic Jams
“A logistical nightmare” is how an analyst from the Middle East Economic Survey (MEES) describes efforts to import and assemble equipment at the Ras Laffan port.
“Supply chains frequently stop, with resultant hours-long traffic jams. The absence of space has meant that materials have to be loaded off ships directly onto trucks, which has added to logistical difficulties,” the MEES analyst reported.
As a result, construction has been slowed. The first megatrain at Qatargas II was supposed to have been online in October 2007 and then by June 2008. It rumbled to life in the fourth quarter – more than a year late.
Costly Overages, Delays
By January 31, 2008, Technip management had to inform shareholders that, with the first train of Qatargas II delayed, it would charge €200 million ($295 million) against fourth quarter 2007 income.
“These projects … were affected by unpredictable costs escalation and a severe shortage of resources during the construction phase,” management stated. “As a consequence, we recognized significant charges in 2007 which had material impact on our margins.”
Technip would book a loss from recurring activities in the fourth quarter of 2007 of €227.6 million ($330 million).
Investors reacted strongly. Between October 2007 and February 2008, the value of the company’s equity fell by €2.0 billion ($2.6 billion) down to €4.5 billion ($6.6 billion) as the news unfolded.
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Chiyoda Hit Even Worse
In early 2008, Goldman Sachs analysts estimated Chiyoda, which owns 60% of the joint venture with Technip, would have to take a charge of nearly $450 million (¥45 billion or €355 million).
On February 12 this year, management reported that the Joint Venture was unsuccessful in persuading Qatargas III and IV to increase the contracted price for construction of the last two trains.
“Prolonged negotiations with Qatargas III and IV to extend the construction period and increase the contracted price for construction of Trains 6 and 7 are almost concluded; however, which results will not cover the projected additional costs to be paid to subcontractors and others.”
The market value of Chiyoda as of the end of February 2009 had fallen by 83% from its high in early 2006 to about $800 million (¥75 billion). Between Chiyoda and Technip, nearly $4 billion in market capitalization was wiped out between October 2007 and January 2008 as news of the difficulties surfaced. See Figure 1.2.
Qatar Accepts Delays, But No More Money
Perry Williams of the Middle East Business Intelligence reported early last year that the partners of Qatargas rejected a claim by the joint venture for more than $700 million. However, the owners agreed to extend deadlines for the completion of some of the trains.
“In response to the claim, Qatargas has given the contractors an extended deadline but no financial compensation,” Williams said. “The massive cost complications on the project are the first tangible sign in the Middle East’s energy sector of the enormous risk surrounding lump-sum turnkey contracts.”
From the Caboose
Speaking to analysts, Jim Mulva, CEO of ConocoPhillips, which owns 30% of Qatargas III, said that the project is delayed until 2010, which is two years behind the original schedule.
“So much is being done over at Ras Laffan, and it does take longer for each of the trains,” Mulva said. “Of course, our train follows each of the trains ahead of us, and that’s the way it works.”
The only oil company investor farther behind than ConocoPhillips is Shell, which has 30% of Qatargas IV. The train was supposed to be complete in 2010. However, Nawad Kashani-Shirazi, gas processing director for BASF, which is supplying technology for several of the megatrains, told Bloomberg that Qatargas IV would not be ready before 2011 or 2012.
Costly Decisions
The decisions by owners to accept delays under the terms of the contracts with Chiyoda and Technip, however, are turning out to be costly. In March 2009, Professor Jonathan Stern of the Oxford Institute for Energy Studies told Ed Crooks of the Financial Times that gas demand has “gone off a cliff” worldwide, with electricity generators and industrial users such as car manufacturers cutting their use sharply.
“Asian and European markets could shrink by 10 per cent this year,” Stern said. Thus, exporters may be forced to dump cargos into the U.S. Gulf Coast, which has witnessed a decline in price from $7/MMBTU to $4/MMBTU since October 2007. |
