Over the next few years, data indicates a sharp increase in the Liquid Natural Gas industry. To capitalize on this opportunity, IBM has the leading supply chain managment solutions that can quickly establish flexible global business models for an unpredictable, high-stakes future.

1. IBM Global Business Services
IBM Institute for Business Value
Chemicals and
Petroleum
A high-stakes
race against
time
Are investors prepared
to capture the liquefied
natural gas opportunity
that emerges from the
recession?

2. IBM Institute for Business Value
IBM Global Business Services, through the IBM Institute for Business Value,
develops fact-based strategic insights for senior business executives around critical
industry-specific and cross-industry issues. This executive brief is based on an
in-depth study by the Institute’s research team. It is part of an ongoing commitment
by IBM Global Business Services to provide analysis and viewpoints that help
companies realize business value. You may contact the authors or send an e-mail to
iibv@us.ibm.com for more information.

3. A high-stakes race against time
Are investors prepared to capture the liquefied natural gas opportunity that
emerges from the recession?
By Steve Edwards, David Haake and Omar Ishaq
Despite the current global financial crisis, which has led to a fall in energy
demand and prices, the market for liquefied natural gas is expected to regain
its steep growth trajectory in the mid and long terms, spurred by anticipated
increases in demand, particularly in emerging markets. In this update to our
2007 study, we find the exact extent of this surge in demand and related
investments in infrastructure is difficult to project, however, given complex risk
management issues, volatility of natural gas prices and availability of competing
fuels. To capitalize on opportunity when it arises, investors must be prepared to
mobilize quickly and establish flexible business and operational models for an
unpredictable, high-stakes future.
The liquefied natural gas (LNG) industry has Indeed, from 2006-2015, the global market for
developed slowly over the last half century LNG is expected to increase by 70 percent
2
because, in most heavy-consuming nations, and more than triple by 2030. Not surprisingly,
the domestic energy supply has been suffi- investors are anxious to grab their share of this
cient to meet demand. However, as energy opportunity.
consumption has continued to increase
around the world (most dramatically in The rise in energy demand led to a peak in
emerging nations), it has become more diffi­ energy prices around mid-2008, followed
cult for many nations to satisfy their energy by a recession-generated steep decline. As
needs locally. Complicating the situation the short-term impact of the global reces­
further, more than a third of the world’s natural sion subsides, however, natural gas prices
gas reserves are located in low-consumption are expected to stabilize again through
countries, far from where energy demand is 2011 and then increase for the foreseeable
3
1
highest. Increasingly, nations are turning to the future. These higher gas prices will make
mobility and flexibility of LNG to resolve these
it economically feasible for businesses and
imbalances.
1 A high-stakes race against time

4. nations to again invest in LNG. The cumulative the fact that modern renewable technologies
2007-2030 investment in gas supply infra­ may well overtake gas to become the second-
structure is expected to be US$ 5.5 trillion (in largest source of electricity, behind coal, soon
4 6
2007 dollars). Out of this, US$440 billion is after 2010.
expected to be made specifically in LNG infra­
structure.
5 The question is: will investors be able to scale
their LNG infrastructure quickly enough to
However, the same high prices that spur capitalize on this bubble of opportunity? And
frenzied investment in LNG could eventu­ equally important, how can they make their
ally become detrimental to the industry. The businesses flexible enough to withstand the
International Energy Agency forecasts suggest cyclic nature of this industry?
that high natural gas prices may prompt
consumers to turn to other fuels, reflected in
22 IBM Global Business Services
IBM Global Business Services

5. A high-stakes race against time
Are investors prepared to capture the liquefied natural gas opportunity that
emerges from the recession?
Because of its LNG: The opportunity… regional natural gas trade will rise from 52
11
Driven by population and economic growth, percent in 2006 to 69 percent in 2030.
“mobility,” LNG will
global primary energy demand is expected
play a critical role Not surprisingly, investors are anxious to
to increase by 45 percent between 2006 and
in satisfying rising 2030, with 87 percent of projected growth
capture their share of this revenue oppor­
energy demand around 7 tunity. Many were rushing to establish the
coming from non-OECD countries. As a
infrastructure necessary to capitalize on this
the world. But global result, their share of world primary energy
upswing in LNG demand before the reces­
economic conditions are demand is expected to rise from 51 percent
8 sion shocked the world energy market, halting
to 62 percent. China and India are expected
forcing a re-evaluation a great number of these projects (see Figure
to account for 51 percent of incremental world
of investment priorities. 9 1). The industry was considering proposals to
primary energy demand in 2006-2030. Even
more than double the world’s 2008 regasifica­
established nations such as the United States
tion (regas) capacity by 2013, with more than
are likely to see energy use rise by more than
10 100 new plants under planning or construc­
11 percent between 2007 and 2030. 12
tion globally. On the production side, 30
Most of the world’s known gas reserves are new liquefaction plants were in some stage
concentrated in just a few regions – far from of planning or construction to start operation
13
where energy is needed most – and so LNG, by 2013. Investors are no doubt urgently
as a means of delivery, has become a more re-evaluating their portfolio of LNG invest­
attractive alternative in recent years. Industry ments, trying to decide which to reactivate,
analysts anticipate LNG’s share of inter- which to mothball and which to accelerate
going forward.
FIGURE 1.
An investment of US$440 billion is expected over 2007-2030 in expansion of LNG infrastructure.
30 new liquefaction
plants planned or under
construction to start by 2013
Pipeline
Doubling globally
by 2013
Point of
Production Processing and export consumption
Transport LNG Import and regas
Source: “World Energy Outlook 2008,” International Energy Agency; “Natural Gas Market Review 2008,” International Energy Agency.
3 A high-stakes race against time

6. …and the unpredictability Often, governmental control of the supply of
Yet, the demand for LNG – perhaps more than natural gas is used as political leverage on the
other energy sources – is characterized by world stage. Complicating the situation further,
unpredictability. There are inherent uncertain­ many of the particularly gas-rich areas of the
ties in any industry based on constrained world are fraught with political instability. The
natural resources. New natural gas sources facilities and infrastructure that produce and
are increasingly difficult and expensive to find transport LNG are prime targets for terrorism.
and develop, more and more remote, and In some cases labor strife, trade embargoes –
production volumes are harder to anticipate and even piracy – threaten LNG shipments.
and realize.
The most volatile factor influencing demand
Geopolitical issues also aggravate the for LNG is alternative fuel prices. LNG is inher­
economics of LNG supply and demand. ently caught up in a tug-of-war between the
Most nations strive for energy self-sufficiency, price of natural gas and that of oil, with coal
but for many, this desire for independence emerging to dominate in the not-too-distant
is outpaced by GDP growth and its corre­ future. Lower natural gas prices tend to raise
sponding energy demands (see Figure 2). overall demand for gas. The price must also
FIGURE 2.
Most economies are becoming increasingly energy dependent.
125%
100%
Australia
75% Vietnam
Total energy independence
50%
Venezuela
25%
Independence Argentina
0% New Zealand
Dependence UK China
-25% Brazil
Netherlands
-50% France U.S. India
Czech Republic
Germany
-75% Finland
Italy Japan Israel Turkey 2010 GDP
-100%
2005 GDP
-125%
0% 1% 2% 3% 4% 5% 6% 7% 8% 9%
2010 GDP growth
Notes: The size of the two bubbles for each nation represent the size of the country’s gross domestic product in 2005 as compared to 2010. The
position of the bubbles represent their energy independence in those same two years. The energy independence percentage is calculated as the
amount of domestic production in excess of consumption divided by overall consumption. A positive value indicates a measure of independence,
while a negative value represents the degree of dependence on energy imports.
Sources: IBM Corporate Economics analysis; “Annual Energy Outlook 2006,” U.S. Department of Energy, Energy Information Administration.
4 IBM Global Business Services

7. LNG must contend remain high enough to support the higher remained tight overall), LNG shipments to the
costs of LNG delivery, but not increase too United States plummeted, as domestic gas
with the uncertainty
much or consumers will switch to alternative proved a cheaper alternative.
of constrained
fuels. The threat of substitution is substantial:
natural resources, nearly 20 percent of today’s current natural For LNG, this competition among fuels creates
geopolitical issues gas usage in the United States can be easily a window of opportunity. But the extent and
duration of this opportunity are difficult to
and, most of all, fuel switched to other fuels (primarily through dual-
fired power plants that can use either coal or project precisely. The International Energy
prices, making the Agency predicts that high natural gas prices
gas).14
precise window of would ultimately lead to a shift in demand
opportunity difficult As the most “mobile” form of natural gas towards coal. The U.S. Department of Energy
15
to predict. supply, LNG imports are particularly vulnerable forecasts that high LNG prices will spur
to regional and even local price shifts. When domestic supply, leading to a decline in U.S.
higher natural gas prices decrease overall imports over the long run (see Figure 3).16 As a
demand, LNG imports tend to be the first cut. result, LNG industry participants face difficult
When unexpected spikes in demand occur, choices about how much to invest, where, and
buyers often close the gap with LNG. When how fast.
Asian demand spiked in 2008 (while supply
FIGURE 3.
High LNG prices are expected to increase domestic production of natural gas in the United States, leading
to a fall in imports over the long run.
4 History Projections
Net U.S. natural gas imports by
3
source (trillion cubic feet)
2
Overseas LNG
1
Canada
0
Mexico
-1
-2
1990 2000 2010 2020 2030
Source: “Annual Energy Outlook 2009,” U.S. Department of Energy, Energy Information Administration.
5 A high-stakes race against time

8. Complexity and risk As the supply network expands and importers
As the LNG supply chain becomes larger and demand more purchasing flexibility, the indus­
more flexible – with more globally distributed try’s historical long-term contracts are steadily
liquefaction and regas facilities – the nature of giving way to commodity marketplaces. In the
the LNG business is changing, with commen­ 1990s, less than 2 percent of all natural gas
surate increases in complexity and risk. transactions were spot trades; by 2007 that
,
17
figure had grown to 11 percent. We expect
The supply chain – or more precisely, the LNG this trend to accelerate as existing long-term
value chain network – has become inordi­ contracts expire. The industry impact could
nately more complex to manage. Historical be substantial, given that contracts for a large
point-to-point delivery has evolved into an amount of gas sold each year to Asian coun­
intricate network of origination points, trans­ tries will be up for renewal over the coming
portation partners and shipping destinations. decade.A commodity-like market structure
Each player must manage a complex value is quickly falling into place, with LNG pricing
chain of new assets, joint ventures, invest­ mechanisms already established in both the
ments, purchase/supply agreements and Atlantic and Pacific Basins.
logistics – constantly monitoring both physical
and transactional flows in order to react in real­ In addition to the financial complexity intro­
time as situations change (see Figure 4). duced by the expanding commodity market,
LNG ventures face another possible side
FIGURE 4.
This example illustrates the major physical and transactional movements that must be managed as
part of an LNG value network.
Japan
China
Physical movements
Information and transac­
tional movements
Global/regional decision
support center
Reservoir
LNG terminal
Malaysia
Integrated downstream
operations
Customers and
consumers
Australia
LNG tanker
Source: IBM Institute for Business Value analysis.
6 IBM Global Business Services

9. It’s important for effect. The thinner margins that often accom­ venture its own business practices and tech­
pany commodity trades will likely expose nology standards, making holistic assessment
LNG ventues to
operational inefficiencies in the supply chain and management of the business extremely
focus on actions that
previously hidden by higher-margin, long-term challenging.
facilitate long-term contracts.
flexibility. Early readiness, enduring flexibility
As always, production, storage and trans­ So how can industry players and nations
port of a fuel such as natural gas requires protect the investments they are making to
the utmost attention to safety, reliability and meet global energy demand? How can they
regulatory compliance. The general public mitigate risk amid ever-increasing complexity?
and the governments that represent them are
understandably concerned about protecting It is important for new LNG ventures to focus
the environment. Even with superior safety on actions that can accelerate successful
records, LNG ventures face a daunting image scale-up, while positioning themselves for
challenge, given the magnitude and visibility of long-term flexibility. We believe investment
their projects. partners should consider four key actions
early in the joint venture process:
The scale and complexity of the LNG busi­
• Focus constrained joint venture resources on
ness is matched only by the financial stakes
differentiated areas of the new business.
involved. By almost any measure, LNG
ventures are massive, encompassing thou­ • Instill a culture of safety.
sands of acres of shoreline, thousands of • Increase visibility for improved decision
employees to build and operate, millions of making.
design documents and often billions of invest­
• Establish a reusable business model and
ment dollars. Constructing a regas terminal, associated infrastructure.
for example, typically costs about US$900
million – and the price tag for a gas liquefac­ Focus constrained joint venture resources
18
tion plant begins in the billions. Consider also By nature, most joint ventures operate with
that these investments usually have a five-year limited staff. Adding to the challenge, most of
lag for engineering and construction before the specialized skills required by new LNG
payback begins and are based on a 30-year ventures are in short supply. These ventures
business case. are often competing with the petroleum and
utilities industries for a shrinking pool of talent
Because of the magnitude of the invest­ and expertise.
ment (and the risk), most LNG projects are
accomplished through joint ventures. These Thus, it is crucial for investors to focus their
capital projects involve a complex collabora­ scarce resources on areas of the business
tion among engineering firms, equipment that are most strategic, as well as those that
suppliers, producers, pipelines, liquefaction carry the highest stakes because of safety
plants, shippers, regas facilities, and storage risks or the degree of capital involved. Equally
and distribution networks. However, the joint important, investors should consider turning
venture structure, in turn, complicates visibility low-risk, low-investment functions over to
of investments, assets, inventory and finan­ external specialists that can often perform
cials. Each investment partner brings to the those activities more economically and at a
higher level of quality.
7 A high-stakes race against time

10. Instill a culture of safety must make a commitment to safety to the
In the LNG industry, safety must be a core public, employees and regulators. Early hiring
value, designed into the business from the and professional training of operations staff is
start. This can be institutionalized through critical to success.
the implementation of formal, enterprise-wide
safety practices and broadly communicated Increase visibility for improved decision
expectations of safety performance. Where
making
The sponsors and owners of LNG ventures
possible, the expected level of performance
often lack access to operational, financial,
should be explicitly stated and measured
logistical and asset management information
using standard, industry-accepted metrics.
associated with the new business. Conflicting
Clear communication channels – up and down business practices, incompatible processes
the management chain – must be established and technologies, and different information
to surface and correct potential safety issues standards can make it difficult to share infor­
as they arise. Leaders must continuously rein­ mation across corporate boundaries.
force an environment where the disclosure of
It is critically important to flatten these hurdles
problems is encouraged and employees are
early in the venture. All investment part­
motivated to do the right thing, even when it
ners need a common view of information to
might seem difficult.
facilitate decision making and more timely
Practically every decision a joint venture responses to business changes. As they work
makes – from where facilities are located to to improve visibility, investors should implement
whom they partner with – should involve a processes and infrastructure that can transi­
safety element. Achieving a positive return on tion smoothly from design and construction
investment is inexorably linked to safe and reli­ phases to ongoing operations.
able operations. For LNG ventures, safety is
not a cost; it’s an investment.
Establish a reusable business model and
associated infrastructure
A key example of instilling safety is through New joint ventures present partners with
operator training. Many LNG ventures are a fresh start, an entrepreneurial environ­
essentially start-ups, with no operations history ment where they can adopt industry-leading
and few experienced staff. Using design processes, practices and technologies.
data from process equipment, automation Partners can bring the best from their respec­
and information technology, sophisticated tive companies, while escaping ineffective
operator training simulators can be developed processes and current infrastructure limita­
to support comprehensive training for new tions.
hires – long before they must help commission
The goal should be to merge diverse partner
new LNG facilities. Would an airline allow pilots
interests into a flexible business model with
to fly a jet on which they had not been simu­
components that can be reused in future
lator trained and certified? The LNG industry
8 IBM Global Business Services

11. Standarization early in ventures. Standardization – of processes, operations. These key steps in handover of the
business practices, technology platforms facility from the engineering, procurement and
a venture helps mitigate
and such – lays the groundwork for reuse. construction provider to the owner/operator
risk and accelerate
Standardization early in the venture is even can be streamlined and enhanced if technolo­
implementation. more beneficial, as it helps mitigate risk and gies are in place early enough to leverage.
accelerate implementation timelines. Too often,
new ventures postpone process, technology In low-risk, low-investment areas of the busi­
and measurement standardization decisions ness, investors should consider using a
until forced by the construction schedule. centralized services approach or possibly
Agreeing upfront on key processes, infrastruc­ outsourcing to speed implementation and
ture and metrics helps prevent delays that reduce risk (see Figure 5). In strategic areas,
might otherwise occur. investors will also want to invest in infrastruc­
ture for standardization and automation.
Using today’s digital technologies for example, Financial information sharing, asset manage­
it is possible to electronically exploit facility ment and procurement are some of the key
design data within its new operational systems areas to evaluate for standardization opportu­
even before factory acceptance testing, nities.
helping smooth site acceptance testing, plant
commissioning and both initial and long-term
FIGURE 5.
Early investment in standardized aspects of the business model reduces variability and focuses efforts on
accelerating implementation without compromising safety.
Focus investments on
strategic and/or high-
Consolidate Achieve superiority risk areas
• Increase efficiency • Focus the business on
High investment and consistency becoming best-in-class
• Customization and • Invest to gain unique
integration with other competitive advantage
business activities may
limit outsourcing
Manage as utility Leverage specialists
• Operate on specific service- • Use best-in-class partners
level agreements and usage in areas where internal
Low investment capability is not unique
• Use partners with low cost
of entry and high reliability • Seek tightly integrated,
Use standard business exclusive relationships
practice templates/
partners to simplify
and facilitate Low risk High risk
implementation.
Source: IBM Institute for Business Value.
9 A high-stakes race against time

12. Ready for the race? • In which areas of our business could stan­
In those very early stages, when a LNG joint dardization and established governance
venture is initially forming, investors make processes help reduce costs and risk?
critical decisions that impact their long-term Where could we use partners to accelerate
odds of success. Delaying those important start-up, improve performance or share
decisions simply piles risk onto an already risk?
risky endeavor. • How modular and reusable are our
processes and business practices? What
As a participant in a new LNG venture, here specifically do we plan to redeploy in our
are some questions to help you assess your next LNG venture?
level of preparedness:
• Overall, how confident are we that our
• How quickly can we adapt to changing current LNG project will achieve its
conditions? Are we locked into an inflex­ expected return on investment?
ible business infrastructure that cannot be
scaled easily or hard-wired processes that Given the inherent volatility of this business, it
constrain innovation? is uncertain how long the present upswing in
LNG demand will last. We believe focusing on
• What specific steps are we taking to
manage the safety risks involved in our the four key action areas we’ve outlined can
project? Do our employees understand the help investors move quickly enough to capture
safety-related aspects of their roles and the the current LNG opportunity, while remaining
decisions they are making? flexible enough to thrive amid a chaotic and
cyclic industry.
• Do all of our investment partners have
access to the information they need? Do
we have the necessary information to make
fast and accurate decisions as situations
change?
10 IBM Global Business Services

13. DPLNG: Preparing for scale-up from start-up
In 2006, the Guangdong Dapeng (DPLNG) regas terminal received its inaugural shipment: 66,000 tons of LNG
arriving from Australia. The terminal is part of a US$3.6 billion investment that also includes the LNG transpor­
tation infrastructure and pipeline system that connects several fast-growing cities and five new power plants
in Southeast China. DPLNG has 11 shareholders, including the China National Offshore Oil Corporation, which
owns 33 percent of the venture, and BP, the lone foreign shareholder, which controls a 30-percent stake.
DPLNG is China’s first LNG regas terminal. It is a government-endorsed pilot that will serve as a template for
other future facilities. Being first has presented the business with some unique challenges: it had no precedents
for forming a Chinese LNG joint venture or designing appropriate management practices and business
processes. It has been a pioneering effort in almost every way.
In addition to facing first-of-its-kind pressures, the venture must also be capable of scaling operations in
step with the region’s ever-increasing energy needs. Its strategy for achieving this objective has centered on
standardization, optmization and reuse. It selected business processes and technology standards strategi­
cally – not only to support the complexity of its current business, but also to facilitate replication in future regas
terminal projects.
During construction, business practices were created based on business templates so that when the physical
infrastructure was ready, the business infrastructure was available too. This approach allowed the business to
move more seamlessly from construction to operations.
The choice of standardized business processes and supporting technologies made it easier to integrate and
coordinate with the facilities’ myriad upstream and downstream partners. But perhaps more importantly,
designing the business with reuse in mind from the start has led to standard, industry-leading practices that can
be repeated in subsequent ventures.
11 A high-stakes race against time

14. About the authors Omar Ishaq is the IBM Institute for Business
Steve Edwards is the IBM Global Industry Value leader for the Chemicals & Petroleum
Leader for the Chemicals and Petroleum Industry. He has extensive experience in
industries. He has been consulting for over Strategy & Change consulting from the Nordic,
25 years with his recent focus involving and has worked with a number of large
cross-border business transformation and global Chemicals & Petroleum clients. Omar
associated technologies for super major has a dual Master of Science in Strategy/
and national oil companies. Recently, he has Organizational Psychology and Business/
devoted significant time in key oil and gas Economics, and he is considered a subject
territories including Russia, China and India, matter expert on future energy. He can be
as well as in Central and Eastern Europe, Latin contacted at omar.ishaq@no.ibm.com.
America, North America, Australia and the
Contributor
Middle East. Mr. Edwards is a Fellow of the
Krishna Kaushik, strategy consultant, IBM
Institute of Management Consultants and an
Global Business Services
affiliated member of the Institute of Chartered
Accountants in England and Wales. He is a The right partner for a changing
frequent speaker at conferences including the
world
Oil and Money Conference in London, China
At IBM Global Business Services, we
Business Forum Beijing, and Oil and Gas
collaborate with our clients, bringing together
World Economic Forum Moscow.
business insight, advanced research and tech­
David Haake is a Chemicals and Petroleum nology to give them a distinct advantage in
Industry Solutions Executive in IBM Global today’s rapidly changing environment. Through
Business Services focusing on asset our integrated approach to business design
management solutions and value network and execution, we help turn strategies into
management for the LNG industry. Mr. Haake’s action. And with expertise in 17 industries and
career background includes more than a global capabilities that span 170 countries, we
decade in process automation with ABB can help clients anticipate change and profit
and The Foxboro Company (now Invensys) from new opportunities.
focused on capital projects worldwide. He has
spent the past ten years working with business
transformation and technology projects in the
global Oil and Gas Industry. Mr. Haake recently
participated in a panel discussion at the LNG
San Antonio 2007 conference.
12 IBM Global Business Services

15. References
11
“World Energy Outlook 2008.” International
1
“World Energy Outlook 2008.” International Energy Agency.
Energy Agency. 12
“Natural Gas Market Review 2008.”
2
Ibid. International Energy Agency.
13
3
“Annual Energy Outlook 2009.” U.S. Ibid.
Department of Energy, Energy Information 14
“World Energy Outlook 2008.” International
Administration. Energy Agency.
4
“World Energy Outlook 2008.” International 15
Ibid.
Energy Agency. 16
“Annual Energy Outlook 2009.” U.S.
5
Ibid. Department of Energy, Energy Information
6
Ibid. Administration.
17
7
Ibid “Natural Gas Market Review 2008.”
8 International Energy Agency.
Ibid.
18
9 Ibid.
Ibid.
10
“Annual Energy Outlook 2009.” U.S.
Department of Energy, Energy Information
Administration.
13 A high-stakes race against time

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