DELIVERING LNG MEGA PROJECTS: WHAT GOT US HERE

WONT GET US THERE. WHAT NEEDS TO CHANGE?

Hilary Mercer
VP Integrated Gas Projects,
Shell Projects & Technology, The Netherlands

ABSTRACT

Mega-project delivery is inherently complex and, as we look into the future, itll remain
challenging. Shell and its partners have a strong track record of delivering LNG mega-
projects around the world: from Oman to Sakhalin in Russias far east. But the
landscape of LNG mega-project development and delivery is changing.

The stakeholders involved are more varied with different needs and aspirations; the
partnerships created to deliver the opportunity are more disparate; new geographic
locations are being explored; the impact of non-technical risks on project delivery
continues to rise; and more technology advances are available to deploy.

But has the recipe for developing LNG mega-projects become too complex: are they
still affordable? What is the right amount of technological development to deploy? Is
the industry creating the best environment to develop the next generation of LNG
Project Delivery Professionals? What sorts of contractor relationships are needed to
ensure safe, high quality, reliable and affordable Project Delivery? What can be learnt
from the past that will help or hinder development in the future?

This paper will look at these questions and, drawing on personal experience gained
whilst delivering LNG mega projects, Shell will provide insight into how LNG-mega
projects are being developed using a thematic approach, how technical and non-
technical risks are managed, what is being done to work with contractors to continually
improve construction capability and how the next generation of Project Delivery
Professionals is being developed.

Owned and presented by Host IGU Member Supporting Association

INTRODUCTION

The LNG industry is at an exciting place: it is young, dynamic and rapidly evolving. Shell is a
pioneer and an innovation leader in the LNG industry with more than 50 years of experience,
having helped to start global trade in LNG in 1964 and since then having led the rapid expansion
in LNG production and trade globally.

As depicted in figure 1. Shell and Partners have a comprehensive network of Integrated Gas
projects in construction and operation. The type of Integrated Gas projects covers the full range
of LNG/GTL-related developments such as:
GTL Plants
LNG Plants for LNG export
Shipping
Regasification / import terminals
LNG for transport

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The portfolio matches the markets demand of today and we are working to make sure we will
match the market demand for the future.

According to the International Energy Agencys latest World Energy Outlook, investments in the
LNG chain from upstream, to liquefaction, shipping and re-gasification could add up to $1.6
trillion from 2014-2040. By 2050, Shells own projections suggest global energy demand will
double from the level at the start of this century. This growth will be driven by expanding
economies in China, India, South East Asia and the Middle East, by demand in Europe, and by
new destinations such as Vietnam. We believe that the LNG Industry will continue its rapid
expansion in the years ahead, with global demand expected to almost double by 2025 with
growth of around 5% per annum to around 430 million tonnes per annum.

There are a number of challenges to overcome if the gas industry is to grow faster, ranging from
technical to commercial and political. And lets not forget the task of finding and developing the
right talent to develop and execute these complex projects. Examples are the reliability and cost-
effectiveness of the infrastructure needed and the speed at which they can be built; the Capex
availability to execute Projects, also driving the complexity of the Ventures that develop them;
the number of internal and external stakeholders with different aspirations and goals; and the
rapid changes in the legislations of the country where the projects are to be developed.

The social performance, environmental and the regulatory environment in particular continue to
play a strong role in shaping the consumption of natural gas. End-user price regulations, gas
pooling mechanisms and timely approval processes are examples of regulatory instruments that
can open up new gas sources for developing countries.

Competition to supply that growth will be strong. Supply projects with strong economics,
credible developers and short delivery times will be advantaged. Innovation will continue to be a
critical differentiator, both in new ways of producing and in developing new areas of demand for
LNG.

Shell and our partners have a strong track record of delivering Integrated Gas mega-projects
around the world from the deserts of Oman to Russias freezing far east. But what made these
projects successful will not necessarily make us successful in the future.

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DELIVERING MEGA LNG PROJECTS

Mega Project delivery in our industry is nowadays complex. Each opportunity could be seen as
completely different to those which have gone before the geology, the fiscal and political
systems, the stakeholders, the local content needs or, as in the case of brownfield projects, the
operational needs of the asset you are constructing around.
To deliver a mega project, safely, its all about what we do and how we work.

Mega LNG projects are often developed and constructed in remote areas, quite often in extreme
weather conditions either extremely hot or extremely cold. They are executed in multiple
locations, the design and the fabrication of modules could be in one or more parts of the world,
these are then transported to the construction site to be integrated and transported to the final
location. As a result, the supply chains associated with these projects are complex.
To provide a snapshot of the challenges mega-projects face its useful to think about:
Managing and integrating project execution in multiple locations.
Design and material choices needed to withstand the extreme weather conditions for
example special steel selection, design for snow weight on roofs, heat tracing for
winterisation, cooling systems for hot conditions.
The intricate logistics related to the staging and transportation of modules, equipment
and material at site.
The early construction of basic facilities like accommodation, leisure facilities and living
spaces for people working on the project.
Recruiting skilled labour and getting them to site.
And last but definitely not least the emergency response design and effectiveness.

And all of this must be done safely and by carefully looking into the needs of the country where
these projects are developed.
In all projects we develop and execute, we deal with many different stakeholders, both internally
and externally; and much of the projects success, or not, is influenced by these different
stakeholders.

It is vital to acknowledge and properly include these aspects in the project execution plans. For
example, in the Sakhalin 2 LNG Project we actively engaged with the communities to inform them
about the LNG plant impacts (i.e. visual impact on the beach, road traffic increase, etc.). And lets
not forget the environmental impact that our developments might have: in the Arrow LNG
Project, extensive studies were conducted to ensure the preservation of the biodiversity of the
area, which influenced the LNG plant design in several parts, including the layout, the choice of
equipment, the lighting to be used, etc.

Moreover, as discussed, our projects are embedded in and are part of a wider social, cultural,
economic and political context and in order to deliver them we work with many different
contractors. The delivery of these projects through local contractors and suppliers is key, as their
local knowledge is essential to understand the business environment in which we operate and
effectively comply with the local regulations.
Shell has a good track record in project delivery and, thanks to a number of improvement efforts
in recent years, we see a steadily improving trend on externally benchmarked cost performance.

However, like many of our peers, in the last few years, we have struggled with soaring project
costs, increasingly complexity, more stringent regulation and declining productivity levels in
design and construction. To complete this picture, new players are entering the LNG Industry and
we know that we must adapt to market realities and do so quickly.

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CHALLENGING ENVIRONMENT FOR MEGA PROJECTS

Our industry as a whole has seen significant cost increases over time. Some, but by no means
the majority, can be explained by inflation.
The rest of the increase in project development and delivery cost is in our opinion due to 3 main
reasons:
Firstly, portfolio choices; that is, the reality we operate in. We are working in more
remote & difficult locations, there are more stringent local content requirements and
often more non-technical risks due to regulatory constraints or more complex
partnership arrangements.
Secondly, market factors. There have been tight markets for bottleneck inputs such as
labour, steel or equipment and from supply chain perspective equipment and materials
costs increased while the reliability decreased.
Thirdly, a significant drop in productivity, especially in engineering and construction,
where the increase in owners team size is not always directly proportional to the higher
documentation workload or the increased complexity in supply chain.

Even if the changing macro-economic climate increased the urgency with which we have to act,
as capex availability is restricted, this is not the root cause of projects becoming less affordable.
We must find ways to increase the overall efficiency and productivity of our projects delivery.

In addition to increasing costs, our competition does not stay still and we are seeing new
entrants to the LNG Market, who are looking at LNG projects in a different way. These new
players are looking at developing projects in a cost effective way, for example making use of
existing facilities or infrastructures and converting them to LNG production facilities.

In the US brownfield LNG terminal conversion projects, we understand that these new players are
looking into using certain infrastructure that are already in place, such as storage tanks, transport
access via jetties and shipping channels, accommodations that might already exist, or easier
accessibility to already skilled labour. All these items will in turn reduce the scope and complexity,
and therefore reduce the cost and schedule, of any project.

Another area we are learning from is the idea of mid-scale LNG plants and how could this
approach make LNG projects more affordable, less complex and enable a shorter time to market.

LOOKING FORWARD, WHAT IS NEEDED FOR SUCCESS?

To address the challenging environment and help us continue as a leader in the Integrated Gas
space, we are deploying a continuous improvement programme which focuses and prioritises our
improvement initiatives under four transformation themes:

1. Competitive scoping - addressing project scopes and eliminating late changes by using
target costing, more standardisation and reducing complexity in the project scope;
2. Efficient execution - looking principally at the execution stage of the project cycle and
aiming to improve field productivity, reduce construction times and simplify processes
and standards that govern the way we work;
3. Supply chain transformation - essentially this is about spending money on third parties
more efficiently and more effectively; and
4. Affordable technology, ensuring that our technology continues to make its contribution to
Shell's projects and assets and is deployed more decisively and consistently.

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COMPETITIVE SCOPING AND EFFICIENT EXECUTION

How we define the scope, execute and manage our projects will determine if the fundamentals of
safety, cost, schedule and quality are delivered. This is true now and will be remain so in the
future.

Safety is key to all that we do and will always remain our top priority. Our mission is to have
everybody going home safe and to prevent leaks to the environment from our operations: we put
a lot of effort, technology and passion to make this a reality. Recently we used 4D and 5D CAD to
simulate the topside lifts for Shells Prelude FLNG, being therefore able to optimize the planning
of construction sequencing, with greater improvement in safety and efficiency.

To improve the affordability of projects in an increasing competitive landscape, the scope

definition of the project needs to be rigorously controlled. To do this we have created a
competitive scoping framework where we set the costs target first and we scope on the base of
it, for instance reducing the plot size or using a standardised approach to safety distances for
onshore LNG export facilities.

The size of our owners teams grew in last few years, as previously said, without bringing a
substantial increase in value to our projects. To avoid value erosion we have created a
benchmarked suite of owners teams archetypes and are now applying them to our projects.
These archetypes clearly state what size of team, skills and experience is needed per project type
with the aim to reduce owners costs.

Over the years we have refined our processes: we have one system for doing projects, which is
flexible enough to be scaled for each project size and type and we are reviewing them further to
ensure they are fit for purpose, enabling us to be leaner and more nimble in todays competitive
environment.

Both at the project or asset level but also on the macro scale, standardisation and replication are
key to unlocking and sustaining competitive projects. To really focus on delivery we have taken a
thematic approach. We have different categories of projects, one for each of the major areas of
Shells business, including integrated gas.

Within each category we have a dedicated team, or theme office, which oversees the project
funnel, drives technology innovation, defines standard and replicable solutions, establishes long
term relationships with suppliers, and enables our people to develop their project expertise.

The team is tasked with finding the common areas, creating the right size and level of standard
building blocks both at the engineering and the construction phases in order to improve speed
to market, quality and safety. Each project benefits from this pre-work and this approach also
helps ensure that lessons learned are retained and applied to the next opportunity.

So in each thematic area we have the engineering, long-term supplier relationship and
construction building blocks, which we adapt for the particular opportunity.

On LNG (including FLNG) we followed this programme approach from the start, standardising
where possible, and customising only where necessary for the individual gas field(s).
Furthermore, we built in a philosophy of continuous improvement: reducing risk, cutting costs,
speeding the path to final investment decision (FID).

To improve efficiency in engineering, we are moving to a default base case of international

technical codes and standards and we specify Shell additional requirements when justified. This

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will help us to have more fit for purpose technical standards and enable us to develop portfolio
requirement specification for selected LNG or FLNG equipment and systems.

Another way in which we are improving our efficiency is by changing the way we work with our
key contractors. For example, using Project Vantage, we are moving away from a documentation
centric way or working to a more data centric way of working. We expect key savings in design
and engineering to come from the single-source availability of up-to-date design information
semi-automated data validation and consistency checking across disciplines, locations and
contractors.

Moreover, we are improving construction efficiency by rolling out more controls on workface
planning in order to ensure more efficient start and execution of construction activities,
eliminating waste and increasing productivity.

But lets not forget that the skills and expertise of our people is the key to future project delivery
after all it is people who deliver projects.

Globally we have more than 2,000 Shell project professionals who are located at one of our
project hubs, in the USA, The Netherlands, Nigeria, Malaysia and India, or at design and
construction locations around the world. As mentioned earlier, LNG Mega projects are often in
remote locations with challenging living conditions. To construction projects, we need people to
remain flexible and motivated to travel, live and work in such places.

How we continue to develop people and encourage this flexible way of living has the potential to
become a challenge as lifestyle choices change.

To nurture expertise, we have the world leading Shell Projects Academy. This helps us to
increase the competence level of the project delivery community and to ensure world-class
project management performance standards. Continual investment on our people and their
development is one way of driving competitive performance.

Just as Shell people are key to successful project delivery, so are the communities and host
governments in the places where we operate. Societal expectations of business are increasing.
Shells focus on local employment, local business development and working together with all
those impacted by our activities are therefore critical success factors.

Some of our projects are delivered in the remarkably challenging locations, and the ability of our
project professionals to develop technical solutions, which fit local needs, is another important
consideration.

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SUPPLY CHAIN TRANSFORMATION

To develop an LNG mega project supply chain, contributions are spread out all over the world
and to be efficient and affordable we need to make sure that our suppliers have specific qualities
to satisfy our projects needs.

Above all, our suppliers need to have a safety culture embedded in their ways of working, being
it personal or process safety or attention to the environment. We need to have suppliers that
deliver in a timely manner, with the required quality and a robust product.

As the market around us gets more and more competitive, we need to make sure we are
competitive as well and therefore we need to find ways, together with our suppliers, to be more
efficient and cost-effective.

Finally, our suppliers need to be realistic, in practice to deliver as agreed, to be reliable and
trustworthy.

So what will be the main influencing factors in the suppliers selection on one of these mega
projects?

At the core of it there is of course the project, with its own scope of work, characteristics and
strategies. What kind of categories need to be supplied, and can we make use of the existing
Enterprise Frame Agreements for Suppliers and Contractors.
As these projects are often mega projects, most of the time we are not executing and delivering
them on our own, but we partner with other companies. In doing so, each project has a different
set of agreements and this greatly influences the way the supply chain is executed and managed.

But lets not forget once more where the project is being built, as local requirements can impact
the selection of the appropriate supply chain channels, as discussed earlier on.

Ultimately we execute these mega projects with the help of major Engineering, Procurement,
Fabrication and Construction Contractors and therefore most of the supply chain will be
developed and executed by them.

The complexity around the supply chain in these projects is extensive and is an area of
opportunity. LNG mega projects have a different perspective from the usual supply chain and
below are just few examples of what we are looking for:
HSSE culture embedded in ways of working;
High level of quality control;
Organisation and quality of personnel;
Productivity and schedule performance in Fabrication Yards and construction sites;
Engineering offices, Fabrication yards and construction sites labour capacity;
Integration between engineering, shop drawings and material control.

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AFFORDABLE TECHNOLOGY

We are continuously looking at ways to optimise our preferred technologies and ways of doing
things to maximise value. At the moment, we are looking at the possibilities for standardised
designs across projects, optimised to minimise maintenance and of course new technologies that
can help minimise scope, improve efficiencies or even (as in the case of FLNG) open up a whole
new market.

A good example of this is in the Sakhalin-2 LNG project which pioneered the application of Shells
Double Mixed Refrigerant (DMR) liquefaction process. The process increases efficiency and
flexibility and is very well suited to cold climates.

Conventionally, a turbine powers equipment that acts like a giant refrigerator to cool the natural
gas in two steps. First, a single coolant chills the natural gas to around -35C (-31F). Second, a
mix of coolants that can operate at lower temperatures takes the natural gas down to -162C (-
260F).

But at the Sakhalin-2 LNG plant in Russia, where Shell is a partner, temperatures vary from 34C
(93F) in summer to -35C (-31F) in winter. To take advantage of this wide range in
temperature, a different mix of coolants is introduced in the process to replace the single coolant.
This mix chills the natural gas more effectively, saving energy. The cold also helps the turbines
work more efficiently and produce more power. The combination of the DMR process, the cold
winter and using new equipment makes the Sakhalin-2 plant more energy efficient than an
average LNG plant and therefore reducing the CO2 footprint.

Although Shell DMRs impact is highest in arctic type conditions, its flexibility can be harnessed in
any application, even in tropical climates.

DMR is also helping to open up the next chapter in the history of our industry, floating liquefied
natural gas (FLNG). In the coming years, Shell will start to produce and liquefy natural gas at
sea, enabling the development of gas resources ranging from clusters of smaller and more
remote offshore fields to potentially larger fields. FLNG can open up new business opportunities
for countries looking to develop their gas resources and bring more natural gas to market. DMR is
being used on the Prelude Floating LNG project where its lower refrigerant requirement, low
equipment count and small plot space offer distinct advantages.

Looking further down the value chain, lets talk about the future opportunities we are
transforming in reality in the use of LNG in transport.
We are investing in marine and heavy duty road transport sectors, for example with the
acquisition of Gasnor, a Norwegian company which provides LNG fuel for ships and
industrial customers;
We have launched Greenstream and Green Rhine, which are the first in the world 100%
LNG powered barges to carry goods along the Rhine River;
Shell is the first customer of a new dedicated LNG for transport infrastructure at the Gas
Access To Europe (GATE) terminal in Rotterdam, which will be the platform for further
LNG distribution in Europe.
Shell first three European LNG truck refueling stations in operations since March 2015
and similar initiative is underway in the USA highways and Canada for heavy duty road
customers.
The delivery of an LNG-powered Offshore supply vessel (Harvey Energy) for its
Deepwater ops in the Gulf of Mexico.

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CONCLUSION

In summary there are a few concepts that, in my opinion and experience, are key to executing
and delivering credible and competitive projects:
We are facing a huge energy challenge in the years ahead of us; the world has several
gas resources available; however, accessing and developing them competitively and
affordably is becoming more challenging.
We have seen an increasing trend on the risk profile for large projects. This is largely
due to market volatility, unlocking of more difficult gas, remoteness of project locations,
increasing number of involved stakeholders, each with different needs and aspiration and
availability of experienced and skilled Project Practitioners.

Our ability to deliver projects heavily depends on how safe, competitive, credible and
affordable we are in executing them, this means we need to reverse the complex recipe;
This, in turn, is reliant on the people in our teams, our contractors and our supply chain.
We must strive to make sure that our workforce is safe, competent, credible, affordable
and realistic.
We need to find the right balance between all the factors that hugely influence project
outcomes and focus on delivering projects with a simple, standardised yet technological
and innovative way, making use of the full set of project professionals competencies.
We need to deeply understand the locations where we decide to execute our projects, in
order to minimise the non-technical risks and enhance the advantages and opportunities
those location can offer us.
And last, but definitely not least, the key to success largely resides in our leadership
behaviours, our passion and dedication.

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