Impact of LNG Price on Economic Viability of LNG Projects (Based on a Real Case Study)

There are many difficulties associated with economic evaluation of technologically complex mega projects. Given the dependence of the economic viability of such projects on an extensive set of technical and economic information، a major part of which have stochastic behavior and are subject to uncertainty، in this study we use actual data from a particular case study. The case study is the Papua New Guinea LNG (PNG LNG) project، which is forecast to deliver direct capital investment of around US$10 billion in real terms over the 25 year life of the project. Recurrent operating expenditure، including a significant level of local spending on support services، is expected to average $680 million per year. Total operational expenditure over the first 25 years after commencement of production from the project is expected to be around $23 billion. We aim to assess if this costly project would remain economically feasible، if one changes the assumptions with respect to LNG pricesWe assess the market sale price risk by studying the 10 year time series data of crude oil prices، based on the notion of equivalent pricing of LNG and using Monte Carlo simulation. We assess the economic feasibility of the project for different price scenarios. Notions of capital costs (CAPEX) and operating costs (OPEX) are subject to a high level of uncertainty and increasing the margin of error from 5% to 10% can jeopardize the viability of the project. Varying the assumptions on items such as Dollar and Euro exchange rates، LNG price formula، predicted project income، marketing issues and project management in the operational period have major effect on viability of the project. In this study، based on given assumptions on the main variables of LNG price، we calculate the IRR and NPV of the project and its sensitivity to changes in the value of this variable.