INTERVIEW: Vik Karambelkar, Senior Project Advisor, PETRONAS
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Q: Can you tell us a bit about yourself, your role and your company?
A: I'm working with Petronas, and Petronas is one of the global leaders in the LNG business. It’s a fully integrated company headquartered in Malaysia, but it has operations in many, many countries, and it’s one of the top five global conventional energy companies. I work in their Canadian business, and we are equity partners with and developing a project called LNG Canada on the west coast of Canada. My role is I'm the senior manager here. I'm more like an advisor to the senior management and the board of directors that we report into, on delivering the project on time, on budget, metrics and ensuring the governance and oversight provided by the owner's management team. That’s the high level, 60-second summary of my background and what we're currently working on.
Q: Can you tell us more about the LNG Canada project?
A: There are two components to the project – the LNG Canada liquefaction plant and the pipeline. My scope of responsibility is to construct, commission, and operate the pipeline and the Compressor Station (together “The Coastal GasLink pipeline” project). The scope was contracted to a midstream company, TC Energy Canada, and consists of 420 miles of 48-inch pipeline. LNG Canada has 2 liquefaction trains with a total export capacity of 14MTPA. LNG Canada is the largest private sector investment in Canadian history building the first ever LNG project on the West coast of Canada.
Q: What do you think are the main challenges that are currently impacting successful project execution for major LNG export projects in North America?
A: That's a very open-ended question. Of the main ones I'd pick, the closest one to our heart right now is the manpower availability. These projects need specialized craft, which are in high demand all the time all over the world. That’s just with the nature of the work they do, and they move from project to project. So, I would say currently the industry is facing the labor shortage, and we've faced that throughout the project, over the last two years. And post-COVID hangover, so to say, where everybody has started facing the manpower shortage, in my opinion. I think the second biggest challenge is attracting the labor to work in this part of the world, which is Northern Canada, with Arctic weather, sub-zero temperatures and remote locations. It's not so ideal compared to the Gulf of Mexico where you may be able to attract a pool of labor that can move project to project in perceivably better weather conditions.
Q: The current wave of LNG project development has seen a rapid acceleration of project costs, with some estimates suggesting a near 40% increase in the last five years. What are some of the ways in which project developers can help mitigate these challenges?
A: The entire industry is currently dealing with that and obviously, it’s not an easy challenge to deal with. One aspect of that is we are trying to capitalize on the standardization and optimization. So, if this project were to go to the next phase of development (also called Phase 2), then the plan would be to capitalize on the lessons learned aggressively, capture on those and optimize the design. I think that's where it'll start. We're almost at completion of Phase 1, so we may be able to take that design and replicate to get as many benefits as we can. That would be the first thing to do. The second thing to do is potentially invite the same contractors, (i.e. the builders who built the first phase of the project) because they've gone through some of the painful lessons, if you will, and try and work out some financial, commercial arrangement so that they're motivated to come back and work on the future phase of the project. But essentially, you stay consistent with the design, optimize it and then get the contractors on board. And the last thing would be to make commitments for the long lead items, which could take 3-4 years from order to delivery. So, make some early commitments and lock in those commitments so the prices and deliveries won’t move on the materials and the equipment.
Q: How do you see the expected renewed project boom in 2025 impacting on costs?
A: I've seen this happen before arguably on other large projects within the oil and gas industry. These are mega projects, but mega projects bring on mega challenges. Extrapolating my experience with large projects but not mega, when things get busy, contractors, materials, people – everything – is in short supply, and the demand-supply imbalance comes in and unfortunately that results in delays and costs going up. The costs keep going up while quality suffers and, in the end, as the commodity cycle is on the other side, the rampdown, cancellation and project delays become commonplace. So that's probably the biggest fear I personally have that this boom might lead us for some not so successful projects on commercial and operational front.
Q: When planning a new facility, developers are faced with an overwhelming array of choices when it comes to the size, planning, layout, design and execution of their project. In your experience what are the critical factors to consider when developing your strategy?
A: I already touched on the replication of the design and the layout. That is something that's in your control as a project developer. The execution of the project is probably not directly in your control, because as a developer, you're still exposed to the market forces where contractors, in some ways, influence the way you're going to be able to execute the project. To give you an example from this part of the world, in Canada, the whole lump sum EPC model is not that popular. Even though the developers would like to execute it lump sum and ensure cost certainty, you just cannot get enough motivation for contractors to come in and give you the lump sum price. So, I would say the critical factor is to have your design ready and freeze it so you're not really regurgitating where your starting point is because you've already done that once over. I'm just strictly speaking to the project I'm working on – if someone doesn't have that benefit, then they're starting from scratch. From my lens where we're finishing up Phase 1, and if we were to go for future phases of expansion, what we could control is the layout, the size and the design footprint of the next phase. So, we have that fully optimized within the box, and then I work on my execution with the help of contractors and de-risk the project as I go forward with the execution.
Q: How have you seen approaches to project development change over the last five years? What do you expect to see over the next five years?
A: These are interesting times, because we had COVID in-between. The strategies to execute these projects conceptualized and developed them in the pre-COVID era, and the builders and developers continued on that path and the strategy. However, they quickly realized that the approach is not going to work for various reasons – because of supply chain shocks or labor unavailability or mod yard challenges. And the other part is just the overall question mark on the energy industry itself by activits, investors and special interest groups promoting the renewables. What that did was - it skyrocketed the costs of certain projects and you saw the knock-on effect where not only did costs go up for certain projects, but there were delays and in some instances, you saw some of the contractors going out of business, leaving the project on hold. So, any project that is coming up for approval going forward, in my opinion, will have a different way of dealing with these challenges – cost and schedule delays. And yes, we're looking at that as we go. One of the models we're looking at is balancing the risks between developer versus contractors, as I was alluding earlier. Developers, until now, were interested in the lump sum model, which means they would have a lump sum price to build the project and pass on the risks or premium to the builder. However, the builders are finding out that that is not in their best interest, even though they might seem to be attracting a premium when they win the project. So now I think what's happening is, rather than the builder taking on 100% of the risks, there seem to be shared responsibilities for the risk. That's the model that's emerging. It’s still TBD how it is going to have to be on a project-specific basis, and that will be dictated based on where (geographically) the project is going to be located. Pre-COVID, developers were looking to pay premium to builders for taking all the risk. Now, even with that premium, I'm not sure if the builders are 100% ready to take the full risk. They're looking for developers to share some of the risk and take some burden on their shoulders.
Q: What do you see as the key pillars to successful project execution beyond what you’ve mentioned already?
A: Just to round that out – and here I'm not even touching on the commercial aspects, the offtake and commercial agreements for buyers to buy LNG product for next 15-20 years, whatever that contract is. Because, until you have those commitments, there's really no project. One of the key pillars of successful project execution is repeatable and standardized design that's fully optimized. Second is the understanding of the regulatory evolution. In Canada, our regulatory regime is extremely mindful of the environmental impact, so one needs to know the NTR (Non technical and Regulatory) aspects of the project. Also, the demand for electrification is rising on all these mega projects, to motivate them to implement fewer or zero emissions. So, I would say regulatory regime and understanding the new and evolved regulations that are coming into play, because these things are constantly changing. This is a new industry in Canada – if you can appreciate that, so we're learning as we go. And over the course of five years when this project has been running, we've seen new rules and regulations come into play every year. I would take that into account and keep watch on that. The other portion, which may be different than the USA, would be very active involvement and support by indigenous nations here. The Charter of Rights and the Reconciliation Efforts undertaken by the Government, the Indigenous Nations have strong supportive influence and rights over the lands where developers develop these projects. So, their support, commitment, buy-in and involvement in building these projects is quite important. And then lastly, finding a builder that is willing to partner with the developer for shared risk and more responsibilities.
Q: You mentioned the significance of workforce shortages. What can be done to address this?
A: This is Canada-specific – we currently have three projects on the go: LNG Canada, Cedar LNG and Woodfibre LNG, and there are a few others under consideration. These projects are going to need a lot of skilled and unskilled labourers on-site over the course of the next 3-5 years. Also, one of the interesting trends we're seeing is there are certain conventional industries, such as lumber, or the woodworking and mining industry. Some of these other industries are losing their workforces. Either they're consolidating or there are market forces that are resulting in a loss of workers from that industry. Those can be attracted almost immediately I'd say, with their transferable skills. Second, the conventional oil and gas industry has struggled with the boom and bust cycle over the last 10 years, while the young talent has not entered the industry. What the LNG industry, at least in Canada, can do is going to different community colleges that provide technical skills and technical education and aggressively marketing these projects and opportunities for future employment options for these students, which currently might not be aware of these opportunities. I'd say a mix of these two strategies, and Canada actively is bringing in a lot of skilled immigrants, especially in construction. I know they're bringing in a lot of people from Ireland to supplement the construction industry labour pool. So that would probably ease some pressure on these projects.
If you'd like to hear more from Vik, he will be moderating a panel on our LNG Export engineering & construction track discussing how to 'Assess, Select and Implement the Best Design & Execution Strategy for your Facility' (June 11 - 12, GRB Houston, Tx). Vik will be leading the conversation with senior project leaders from Cheniere and Bron & Claude.