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W|EPC: Force Majeure & The LNG Supply Chain: Scenarios For BH, Kiewit, & Venture Global

Reviewing Satellite Images Of Italian Fabrication Yards & Force Majeure Flow Charts

• Supply Chain Overview Pages 1-2
• Satellite Images: BH’s Fabrication Yard In Avenza, Italy Pages 2-4
• Implications Of Calcasieu’s Unique Contractual/Structural Dynamics Pages 3-5
• Force Majeure Flow Charts: Wrapped vs Unwrapped Pages 4-5
• Pertinent Questions From Here Pages 5-6

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The LNG Supply Chain & Force Majeure Dominoes. Given the continued, rolling implications of the global response to COVID-19, we thought it was worthwhile to examine potential points of friction as it pertains to the implications of Force Majeure (FM) declarations on large-scale, multi-faceted LNG export projects. We believe such a scenario is relevant for Venture Global’s Calcasieu Pass (CPLNG) project given its globally linked supply chain – including its liquefaction modules which are being fabricated at a Baker Hughes (BH) fabrication facility in Avenza, Italy. (Satellite images on Pages 2-4)

Venture Global’s Potential FM Predicament Is Unique. A typical, fully wrapped, EPC contract would typically just keep an owner on the hook for extensions to a contractor’s guaranteed completion date. However, the less expensive, decentralized contracting structure that Venture Global has assembled for CPLNG could potentially expose the project to contractors looking to recover mitigation and prolongation costs. (Pages 2-4)

Implications Of FM Claim For BH, Kiewit, & VG. We believe work on CPLNG’s modules was still progressing last week (with non-essential personnel working from home), given the escalation in restrictions we believe those productivity dynamics are (justifiably) fluid. Should BH file a successful FM claim, it would most likely be granted… (Pages 3-6)

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W|EPC Utilities & Energy – Sempra Deep Dive – Oncor, March 2020

Sempra (SRE) Capital Project Analysis – Oncor March 2020.

As part of our W|EPC Utility & Energy Project coverage, we’ve put together a deep dive into a number of large public utilities, including SRE, SO, D, AEP, CNP, ENB, EPD, ET, KMI, XOM, TOT, RDS:A, and others. We’ve included more information about our W|EPC Utility & Energy project coverage in the back of this presentation.

Given its size, and the sheer volume of projects and jurisdictions, we’re breaking our Sempra (SRE) coverage down into underlying components, with our Oncor deep dive below. Oncor Electric Delivery Company, LLC, is headquartered in Dallas, TX and is a regulated electrical distribution and transmission business. It is owned by two investors, SRE (80.25%) and Texas Transmission Investment LLC (19.75%).

Our Key Takeaways On Oncor:

Out-sized Role In Critical TX Projects
- Oncor is involved with 5 out of the 10 most important projects to provide more efficient electricity dispatch, while supporting the increasing electrical demand in Texas. (Page 5)
Oncor vs. Other Investor Owned Utilities
- Oncor has 156 more projects scheduled to be completed in 2020 than AEP, ET (50% AEP/50% Berkshire Hathaway) and CNP combined. (Page 8)
Final Estimates vs. Final Actual Costs
- Over the last 15 months, Oncor’s reported final construction costs for 190 projects were 12% higher than their final estimated costs. (Pages 9-10)
Lubbock Power and Light
- Oncor’s May 2019 acquisition of InfraREIT included a variety of electricity transmission and distribution projects & assets, which included ~$3600MM joint project with Lubbock Power and Light (LP&L). (Pages 13, 17-20)
Future Project Opportunities
- The integration of LP&L to ERCOT should reduce congestion costs in the Panhandle of Texas and increase demand for new transmission projects in/and around Oncor’s coverage area. (Page 4)

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Noisy Neighbors: A Commonwealth LNG Deep Dive & Venture Global’s Engineering Update

Energy EPC: Venture Global’s Engineering Update & A Detailed Look At Their Commonwealth LNG

Note 1: As expected (and highlighted in our Commonwealth LNG Report below – initially published nearly two weeks ago), Venture Global has filed motion to intervene in Commonwealth’s project development due to its planned activity and dredging in the Calcasieu Ship Channel. We’ll continue to monitor.

Note 2: Over the next few weeks we’ll be rolling out a new line of Energy EPC research, centered around the unique and insightful analysis of EPC Risks. Please let us know if you have any questions, and we’re excited to share more details soon!***

Commonwealth LNG (CWLNG) is a proposed 8.4 MTPA LNG export facility located on a 393-acre site in Cameron Parish, Louisiana. The Project is on the west side of the Calcasieu Ship Channel (“the Channel”) near the entrance of where the Channel spills into the US Gulf of Mexico. The Project is also located directly across the river from Venture Global LNG’s (“VGLNG”) 10.0 MTPA Calcasieu Pass LNG (CPLNG) export facility (Figure 1).

In the 20-pages that follow, we’ve analyzed the CWLNG project and how the Project’s boundaries and shipping operations may be an issue for CPLNG, the State of Louisiana, and the U.S. Coast Guard. (Webber note: again – VG filed a motion to intervene after this piece originally went to clients in late February)

CWLNG’s execution plan is based upon modularizing the LNG process and pre-treatment units as well as the LNG storage tanks. Typically, a full containment 160,000 m3 LNG storage tank takes 36 to 42 months to construct and commission. CWLNG has proposed modularizing six (6) 40,000 m3 single containment LNG tanks…(continued pages 2-22)

Venture Global LNG: Calcasieu Pass Engineering Update – Details, Background, & Key Questions

Key Points:

CPLNG’s engineering, procurement, and construction workflow/ sequencing is not following “traditional” EPC industry standards. (Pages 2-3)
It’s too early to tell if that differentiated sequencing has helped expedite the project or if procurement and construction activities will be impacted in later stages. (Page 3-4)
CPLNG’s recent engineering filings point to significant, relatively late-stage engineering changes (at least by historical standards) that warrant monitoring from a cost and timeline perspective. (analysis on Pages 4-6)

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Venture Global LNG: Costs Ramping At Calcasieu?

Headcount, Parking Data Suggest Material EPC Inflation

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Construction Details: Pages 1-2
Parking & Headcount estimates Pages 2-3
Previous CPLNG Cost Curve Page 3
Our New CPLNG Labor Cost Estimates Page 3
EPC Costs – Expanded Page 4
Key Questions From Here Pages 4-5

Forcasted Ramp In Craft Labor Headcount Indicate Costs Likely Trending Above Plan. Recent filings indicate that Calcasieu Pass LNG’s (CPLNG) average on-site workforce is set to more than double compared to company Pre-FID plans, while also introducing a night-shift. While there are likely several variables in play here, we believe the data (analyzed in the pages that follow), suggests that CPLNG’s on-site craft labor costs could increase materially……(data and our estimates on pages 2-5).

Parking Lot Infrastructure: In addition to the craft labor increases, there’s usually an increase in both indirect construction support infrastructure and the associated cost for that infrastructure. An example of this phenomenon is the reported increases by CPLNG in parking lot infrastructure. While not usually top-of-mind, ancillary factors like parking carry a real cost for projects this large, and significant increase in parking requirements would be felt in a projects budget. This same correlation is true for other indirect costs like lunch tents, lavatories, office spaces, personal protective equipment, health & safety supervision, small tools and consumables, radios and other IT equipment, trash removal, security, craft training, and on and on. That trend in data over the past year shows….(continued on pages 2-3).

While there could be several explanations for the ramp in labor (too many to list within a single note), if we were stakeholders we’d want to understand what’s actually driving the ramp in labor, and how any associated overrun in direct and indirect costs are being accounted for by CPLNG. While our cost overrun estimate (pages 2-3) is just that – an estimate – we’re confident the
fundamental relationship between labor head count and project costs have us pointed in the right direction.
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LNG Update: Frozen 3? Funding Hot Potato For Novatek’s Arctic 2

Keeping An Eye On Budgeting Process For Arctic 2

Who Picks Up The Check For Arctic 2? The timeline for Novatek’s high-profile Arctic LNG 2 (19.8mpta) may have hit a modest speedbump, as the ~$1.9BN request to help finance critical aspects of Arctic 2 [the Utrenneye LNG terminal on Gydan peninsula (page 4), and reloading terminals in Murmansk (for European cargoes) and Kamchatka (for Asia cargoes)] are absent from Russia’s 2020 draft budget. While the project has already reached a positive FID, and is clearly a national priority – we think it’s worth watching whether any squabble over the ultimate funding source ends up delaying its operational timeline (which is already ambitious). The primary options appeared to be (1) the state budget (now absent), or (2) funding from the ~$124B National Wealth Fund, which appears to be a more complicated….

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Webber R|A Call Series: EPC Risks – KMI’s New Elba Island LNG Timeline Likely Slips Materially

Highlights From Webber R|A Conference Call Series W/ EPC Risks CEO, Eric Smith

Diving Into EPC Risk:

Friday we hosted Eric Smith, CEO of EPC Risks for our inaugural Webber R|A LNG Conference Call Series – which we think was particularly timely as the market gradually shifts more of its focus from the binary event-risk (FID risk) that has largely defined the LNG cycle for the past 2 years, and toward LNG project construction/execution risks (EPC risks). Our call with EPC Risks CEO Eric Smith focused on the issues they’re seeing in certain timelines over the near-term (KMI’s Elba Island), the impact that restructuring headwinds (McDermott) can have on project timelines (Cameron LNG/SRE), and the viability of low-cost models like Venture Global’s Calcasieu Pass.

Among the major takeaways:

according to EPC Risks, there’s a zero percent (0%) chance that KMI hit’s the Elba Island timeline they highlighted on their earnings call last week (i.e. – 3 more units in place this year, remaining 6 within H210).

Relevant Companies/Stocks:

Kinder Morgan (KMI), Sempra LNG (SRE), Cheniere (LNG, CQP), Tellurian (TELL), NextDecade (NEXT), McDermott (MDR), LNG Limited (LNGL), Energy Transfer (ETE), Royal Dutch Shell (RDS.A, RDS.B), Baker Hughes (BKR), Fluor (FLR), Chiyoda (6366), IHI (7013), Venture Global LNG (Private), Bechtel (Private).