Atlantic LNG: Going after full utilisation Optimising the value chain

Excerpts of an address by Rick Cape, President, Atlantic LNG Company of Trinidad and Tobago on December 2003 at IBC’s 3rd Energy Caribbean Conference held at the Trinidad Hilton. His speech was titled, “Atlantic LNG Company Revisited — Progress, Performance and Prospects.”

In the time since I spoke to you in this conference one year ago, Atlantic LNG has increased its throughput capacity by 60 percent.  We have loaded 133 cargoes of LNG from our jetty in Point Fortin.  We produced a volume of LNG that would have been sufficient to keep TTEC, the Trinidad and Tobago Electricity Commission, supplied for four and a half years. We gained approval for Train 4 and began construction.  By now on Train 4, we have poured concrete in an amount equivalent to re-paving both sides of the Hochoy highway from the Butler intersection to Chaguanas.  We have driven 26 kilometres worth of piles on the construction site, and erected 1,600 metric tonnes of steel.  We have mobilised 1,300 construction workers.  We have added 91 permanent staff members.  We’ve been busy!

One year on from our last conference, it seems a good time to revisit the progress, performance, and prospects for Atlantic LNG.  It is obvious from photographs of the site that much has changed with the look of Atlantic.  That’s one take on our progress.  But to get a feel for the real progress and prospects for Atlantic LNG, we should try to understand what drives the business, and how the business is performing against those key drivers.  Many observers of the firm are satisfied to believe that things are going well, and that’s enough to know.  But deeper insights are important in that the route map for national development is still being constructed.  Firms like Atlantic LNG should tell their stories at every opportunity.

Atlantic LNG sits in a value chain between natural gas reserves and end users of natural gas.  It is clearly evident that there are key business drivers for Atlantic that are external to the firm, such as reserves development and production, and market demand for natural gas.  I’ll touch on these briefly a bit later, but my primary focus will be upon the key drivers for which we are accountable within the value chain.

Asset development is one of the five key drivers of our business.  In order to create the best opportunities for growth we have to be good at developing and executing projects to improve our capabilities as a company.  The better we are at developing assets, the more opportunity we are likely to get to expand.  Our asset development strategy is very simple - low unit costs and high reliability for the installed asset base.  The tactics we employ to execute this strategy have been discussed in forums such as this in the past.  Atlantic utilises known technologies and equipment, and focuses rigorously on execution.  The same is true whether we are building entirely new trains or upgrading existing trains. Our contract and execution strategy is lump sum turnkey contracting. Whilst this strategy separates Atlantic from management of the day-to-day construction activities, we have worked with Bechtel, our contractor on all four trains to date, to set expectations and goals regarding safety and local content.  We have been highly successful in both areas.  The Train 2/3 project, for instance, surpassed 10 million man-hours without a day away from work being lost due to injury.  This spectacular performance has offered many lessons to Atlantic and other companies in Trinidad in the safe management of projects.

Striving for local content

Local content has been a successful element of Atlantic’s asset development to date.  In Train 1, goods and services procured from local companies amounted to USD 173 million, or 18 percent of the EPC price. For the Train 2/3 project, local content reached USD 195 million, but the same 18 percent of the EPC price.  The Train 4 project represents a more powerful model for local content, in that the focus shifts to increasing the depth and breadth of locally provided goods and services by committing to local content on the basis of line items rather than only an over-all dollar quantum.  Bechtel has adopted a highly transparent approach wherein all categories of materials and services are specified as to whether they are to be sourced onshore or offshore. 

This degree of focus and transparency has enabled the stakeholders to plan for and actively drive development of locally supplied materials and services, as never before.  Train 4 will benefit from more linear metres and larger diameters of locally supplied pipe than any previous train, for instance.  The transparency of the local content strategy reached a new level with Train 4, when our local content strategy was posted on the website of one of the area Chambers of Commerce.  Another breakthrough in local content is the unprecedented level of engineering that will be done in country.

The fourth LNG train has been designed for a production capacity of 5.2 MTPA, making it the largest LNG train currently under construction in the world.  Included in the project are one additional 160,000 cubic metres LNG tank and one additional jetty.   Efficiency has been further improved in Train 4.  Design changes by the Phillips, Bechtel, and Atlantic team led to Train 4 being able to yield 18 percent more LNG per tonne of gas feed into the plant than Train 1, and six percent more than Trains 2 and 3.  Train 4 also produces 26 percent less carbon dioxide emissions that Train 1, and 11 percent less than Trains 2 and 3.   The results of our asset development efforts to date have been chronicled previously. Train 1 set new benchmarks for project cycle time and for construction costs per metric tonne of LNG produced.  This slide depicts the capital costs per unit of production capacity for Train 1 against other LNG projects prior to 1999.  Total capital for Train 1, including all necessary infrastructure was $243 per tonne, which represented a savings of more than 30 percent versus contemporary LNG trains. Our first two expansion projects improved upon costs per unit, to drive them down further.  Analysing the processing areas, and thus excluding major infrastructure additions such as tanks and jetties creates the most relevant comparisons.  Viewed in this way, the expansion projects have steadily improved on the unit economics as we have grown.  We are achieving the economies of scale that we expected. But analysing the costs on a like-for-like basis in the processing area alone is clearly not the whole story. 

Interesting opportunities

The total installed capital base must be highly competitive to keep pace with the leapfrogging trend of ever-larger LNG trains being proposed.  So taking into account all installed capital in dollars of the day, including utilities, tanks, jetties, and related infrastructure, Atlantic LNG’s installed asset base will be less than $197 per tonne following Train 4 - a reduction of 19 percent on a per unit basis over ten years in nominal terms.  A fifth train would result in a further reduction in total installed costs per unit, in that storage and marine loading facilities will already be in place for Train 5 with the completion of Train 4. 
Our asset development strategy is very simple - low unit costs and high reliability for the installed asset base.  I would submit that our development activities to date have been very successful.  Most have been focused on full-train expansions.  But we also have some highly interesting opportunities to expand the existing trains via “debottlenecking” projects, which are narrowly focused capital projects to remove constraints in the process flow, thus enabling additional throughput.  These could well generate the equivalent of one train worth of production at some time in the future.

A good way to think about the first four drivers of success is to think about them on an “S-curve”.  Imagine that the vertical axis represents production growth, and the horizontal axis is time.  First, you build plant.  Then you make sure that the plant is always available to operate.  You want to be highly efficient in managing planned production outages for maintenance and repair, and you want to eliminate unplanned downtime.  Next you focus on getting more production out of the existing plant.  We do this through finding innovative ways to increase yields, to lengthen the run time between planned outages, and to shorten the duration of planned outages. All of these actions increase production and, in effect, create more days in the year to operate.  Next we want to ensure that we are fully utilising the capabilities that we have built, made available, and created through our innovation.  We want to ensure that we operate at the optimum performance.  And then, we look for new expansion opportunities to build again, and move to the next “S-curve”.
We devote considerable effort and focus on these drivers of performance.  Not surprisingly, our staffing levels, hiring, training, and development plans are prepared with success against these key drivers in mind.  In Atlantic, we are striving to create connectivity and identification for all of our people to these key drivers.  Absolutely everyone in the company has a role to play in contributing to our success against our critical metrics.
Our progress thus far has been good.  We have developed ways to lengthen the run time on the compressors between major maintenance, which will create the equivalent of 1-1/4 days of additional production per year for all trains.  We have implemented process adjustments and operating improvements to get two percent more product through the plants versus the baseline technical limits, adding the equivalent of another seven days of production across each of the three trains each year. 

Working with the community

Our first priority in maintaining a positive reputation is in our local community of Point Fortin.  But following closely is the importance of our national reputation.  Our reputation goals speak to a commitment to grow as a company with the understanding that we are a significant entity in Trinidad and Tobago whose actions, behaviours, and stands really matter.  We must meet elevated expectations for safety, environmental protection, honesty and integrity, and for valuing diversity.  We must be a-political.  We rely on our reputation to maintain open doors with our communities and their leaders, with the Government, with our employees, with students and prospective employees, with national opinion leaders, and with our investors. 

On the whole, we are doing fairly well.  Our international reputation and our reputation within the investment community based on our achievements and performance is good.  We ranked in the top four in a recent University of West Indies survey of students regarding employers of choice.  Our relationship in our home community of Point Fortin with citizens, community leaders, and local government is at a high not seen we started construction of Train 1.  But we are very aware that the recent public debate over Train 4 revealed some concerns about Atlantic by residents closest to our facilities.  We are aware that there are many citizens in Trinidad and Tobago who do not understand the case for further expansion, or have higher expectations for benefits that should flow into communities throughout the nation.  We were humbled both by the tremendous support that we did receive, and by the challenges remaining with respect to closing the expectations gap.  But we look forward to meeting those challenges with the same level of enthusiasm and resolve with which we address expansion and operating opportunities.

The recent debate over approval for Train 4 contributed to creation of a greater level of understanding of the case for LNG expansion.  The Republic of Trinidad and Tobago has an advantaged position for LNG development due to its proximity to arguably the best gas market in the world.  LNG from Trinidad has the lowest delivered cost to the US by far for LNG.  Transportation costs from Trinidad are 20 to 30 percent below the transportation costs from West Africa or North Africa.  Add to this the fact that Atlantic LNG Company’s installed capital base is low cost, and getting even lower with expansion, and you have a powerful competitive advantage.  This means that for any given market price for gas in the US, more value is left over for Trinidad and Tobago after deducting transportation and capital costs than for LNG from any other source in the world today.  The Government of Trinidad and Tobago publicly estimated with the announcement of Train 4 that government tax revenues would average USD 240 million per year or TTD 1.5 billion per year for twenty years - figures which include corporation taxes paid by Atlantic LNG plus royalties from the gas producers.  That is TT$ 30 billion from monetising only six percent of the potential reserves currently estimated by the government.  Most of us can imagine that this revenue base can go a long way toward an investment in developing the nation and in providing greater opportunity for wealth building by current and future generations of Trinbagonians.

Lifting safety standards

But that is not all.  The development of Atlantic LNG is bringing more to the nation and its communities.  Beyond jobs alone, Atlantic is creating a new labour pool of skilled, knowledge workers.  Our support of the National Energy Skills Center, and of environmental engineering at the University of the West Indies is putting capable individuals into the workforce in significant numbers.  In a relatively small labour market, this is critical to enabling future growth for manufacturers and those in the gas processing industry.

Beyond jobs alone, the Atlantic development, and specifically Bechtel, has lifted the safety performance in the country.  More workers getting home safe each day improves productivity, lowers costs, and raises confidence.  Beyond local content expenditures alone, the Atlantic development is still creating sustainable business growth.  New service firms, including engineering, will soon have the capability and the base load of work to compete for projects outside of the country at a level not seen before.  The streets of communities like Point Fortin look much different than they did only a very few years ago, as local businesses thrive with a new prosperity.  Atlantic LNG is assisting directly in ways other than tax revenues, jobs, and trickle-down economics, as well.  We have put forward a plan in support of Point Fortin that includes resources for sustainable development and post-secondary education. Recent and future LNG development did not and does not require fiscal incentives.  The benefits from further development, invested wisely, are sustainable. 

Gas to last 

There are a number of strong reasons why we should see further expansion of Atlantic LNG.  The least controversial of these are that demand growth appears to be robust and LNG infrastructure in the US, in the form of receiving terminals and the shipping fleet, is expanding.  Our site in Point Fortin can support the equivalent of another two trains at least, or 25 million tonnes per year of production. Further expansion lowers our unit costs of production even more, improving our competitiveness and ensuring incremental benefits to the Republic and to the Shareholders.

Finally, LNG development does not exclude new gas processing industries or the expansion of existing industries.  The reserve base is sufficient.  This point will of course be examined and debated thoroughly in the future.  But for the moment, let me suggest that based on a potential reserves estimate of 92 tcf, six trains worth of LNG will consume less than 30 percent over twenty years.  Existing gas industries will consume approximately 11 percent.  Let’s imagine that only one-half of the potential reserves beyond the current proven and probable reserves ever materialise.  That still leaves sufficient reserves to justify up to 28 new world-scale methanol plants, or 45 new worldscale aluminium smelters, or 56 new ammonia plants, or some combination thereof.  The conclusion is that LNG development does not exclude other downstream development under any reasonable forecast for potential reserves.  In addition, there is the distinct possibility of Venezuelan cross-border gas options.  One year ago I concluded my remarks by telling you that I thought the future looked bright for Atlantic LNG.  Now we’re a little older, a little wiser, a little more experienced, and we’ve seen a little more of the future revealed.  My conclusion now?