UNIQUE QUALIFICATIONS
LNG chain projects involve feedgas, pipelines, liquefaction, shipping, regasification, and end-user facilities and are typically extremely capital intensive (US$ 2 - 15 billion).

LNG chain projects require a very long period of capital expenditure during the design, procurement, and construction phases (3 - 5 years) before there is any income, and, due to their large size and complexity, are nearly always multi-participant projects. It has become very common to use project financing for these projects since their large required investment exceeds the available internal financing of all but the very largest international energy companies. Securities issues are also available as an alternative financing facility for many LNG projects.

Most large energy projects have a loan collateral basis that can be evaluated – the recoverable hydrocarbon reserves that will be produced by the project. Due to the very large investment and the large volume of energy reserves that will be processed by the typical LNG project, the project’s recoverable hydrocarbon reserve collateral cannot be considered liquid in the normal sense. This leads to a project without a prime source of loan collateral for project financing.

The only source of collateral to the investing or financing participant is the firm long term LNG or power sales contract between sellers and buyers although the sales contract must be to buyers that are regarded as very financially sound companies. This type of exposure for both the equity participants and the international financing community traditionally requires conservative project evaluation and risk analysis.

A LNG chain project that is not complete (including all the segments) and capable of meeting its sales contract requirements has essentially no value as an asset against the loan. The salvage value of even the best available gas processing/shipping/regasification technology is very low without something to process. The only loan value is essentially the sales revenue generated after the chain begins operation.

Although historically this has always been a problem for LNG projects, the problem has become critical since about 1980 for several reasons.

• The size (and cost) of a world class base load LNG plant has dramatically increased since the industry began in the late 1960’s. This is largely a result of utilizing economies of scale through ever larger facilities in order to obtain minimum unit costs.
• The LNG facility is built of high cost critical new technology components that have tended to have the highest inflation rates although overall inflation rates have been very low since 1988.
• The facilities are constructed using mostly the highest skill level construction workers that are in short supply the world over, their wage rates have tended to increase with the greatest rate of acceleration.
• The onstream time for all the facilities in the chain is critical to project economic return. All the chain components tend to be extremely conservative in providing redundant backup equipment and this philosophy became extreme during the 1980s.
• Newest proven technology and increased automation have been steadily implemented in LNG projects to reduce operating and maintenance costs as well as to improve onstream operating factors. This has tended to increase initial capital investment.

For all these reasons, the LNG project participants have increasingly used outside third party technical consultants to evaluate project costs, technical risks, project schedule, and efficiency of design. Merlin Associates was in fact started to fulfill this demand. Merlin has been the technical consultant to the financing community on nearly all LNG base load grassroots installations and LNG expansions built since 1983. We have also provided similar services to several of the equity participants on the same projects during this same period. Merlin has also provided consulting services for preliminary feasibility studies for many operating companies considering entry into the LNG business and to several LNG buyers during this period.

Merlin is in the unique position of having a very detailed and inclusive LNG capital cost database as a result of providing consulting services to nearly all the existing LNG projects in the areas of efficiency improvement and debottlenecking combined with our work in support of LNG project financing. Most companies who would have this information are either the major energy companies operating the facilities or the very large engineering companies who have provided the detailed engineering for the LNG projects. Neither of these parties is an easy source of cost data. The operating companies must protect their competitive positions and will not willingly share expensive information. The engineering companies will provide the services but at a very high price – their equivalently experienced personnel are most efficiently used in directing and managing detailed design of very large projects, not providing consulting services where the major charge is only for their own time.

Merlin has detailed cost breakdowns for nearly all the LNG projects installed. We do not provide the actual data from our database but do use it to provide our consulting services to our clients. We carefully and rigorously protect our client’s confidential information but are able to provide a valuable service in a timely manner due to being a small and specialized consulting engineering company. We pride ourselves on being very efficient through the use of leading edge computer technology and have the most current process engineering, CAD, mathematical and statistical analysis software programs, and a very large library of standard business software packages.

Merlin Associates have equivalent experience and expertise in the areas of offshore and onshore oil and gas production facilities, pipelines, and natural gas processing.

Merlin have used imaginative and innovative methods of adapting standard software packages to quickly provide capital cost estimating that is fully backed up and supported down to actual bills of material for our highest quality cost estimates.

Merlin has been a leader in developing a consistent methodology for project technical, capital, and schedule risk analysis for LNG projects. This developing methodology has been utilized to develop our proprietary cost estimating models.