Shell exits US Lake Charles LNG project on 'difficult' market conditions

Washington — Shell said Monday it that will not move ahead with its planned equity interested in the Lake Charles LNG project in Louisiana, citing difficult market conditions.

Its partner, Energy Transfer, will take over as the project's developer, and is considering options including scaling back the southwest Louisiana export terminal.

The oil major cast the action as aligned with Shell's overall plans to trim capital expenditures. Shell is among dozens of oil-and-gas exploration-and-production companies, including many in North America, pursuing steep cuts to capital spending as they come under pressure from record-low crude oil prices.

"This decision is consistent with the initiatives we announced last week to preserve cash and reinforce the resilience of our business," Shell's director of integrated gas and new energies Maarten Wetselaar, said in a statement. Shell last week said it would cut its 2020 capex to $20 billion from the roughly $25 billion previously envisaged and operating costs by $3 billion to $4 billion over the next 12 months.

WEIGHING ALTERNATIVES

Energy Transfer confirmed it will take over as lead developer and continue advancing the project, although it is evaluating alternatives including bringing in one or more equity partners and scaling back the project to two trains from three and reducing planned capacity to 11 million mt/year from 16.45 million mt/year.

During the transition Shell said it will help Energy Transfer with the bidding process for the energy, procurement and construction contract, and then plans a phased handover of remaining activities. The two companies signed a project framework agreement last March.

Energy Transfer Executive Vice President and President-LNG, Tom Mason, said the company is in "discussions with several significant LNG buyers from Europe and Asia regarding LNG offtake arrangements as well as, in some cases, a potential equity investment in the project."

"We continue to believe that Lake Charles is the most competitive and credible LNG project on the Gulf Coast," said Mason, highlighting the project's ability to capitalize on existing infrastructure including a regasification facility and Energy Transfer's nationwide pipeline system.

Even prior to Shell's announced withdrawal, the Lake Charles LNG project was not among export terminals included in S&P Global Platts Analytics LNG export forecast. And it had been unclear how quickly Shell, as a major global LNG portfolio player, planned to invest capital in the project, as opposed to keeping it as a future option.

MARKET WOES

Yet the exit announcement by a deep-pocketed oil major with a global LNG portfolio from a brownfield project with relatively low costs added to a string of downside news for North American LNG terminal projects, such as Magnolia LNG, Tellurian's Driftwood LNG, and the Woodfibre LNG project in British Columbia.

LNG project financing has faltered as more participants have entered and global LNG supply has expanded faster than demand. Worsening the supply overhang, the most recent wave of expansions was largely pushed by international oil companies and national oil companies lacking firm demand of their own.

With the onset of the coronavirus outbreak and subsequent oil-price war, it appears that the LNG supply glut may persist well into the mid-2020's, according to Platts Analytics data. The world's largest utility buyers have already secured supplies through the mid-2020s. Non-utility portfolio buyers are struggling to cover fully loaded supply costs. And smaller utilities and emerging market players have a vast array of pre-existing supply options, which can often be taken on shorter-term contracts.

Platts Analytics expects that nearly 16 Bcf/d of LNG export capacity will be online in North America by 2026. This includes projects that have yet to begin exports, such as Calcasieu Pass LNG and Golden Pass LNG in the US Gulf and LNG Canada in British Columbia. All projects in the forecast have secured buyers, reached financial investment decisions, and are under construction.

Shell spokesman Curtis Smith said his company remains confident in the fundamentals of the LNG market.

Shell and Energy Transfer did not disclose whether Shell would be fully exiting an offtake agreement for the Lake Charles LNG project. Smith said, "a transition plan is being progressed and implemented between Shell and Energy Transfer." In the coming weeks, he said "more details will be advanced bilaterally with appropriate parties on the proposed transition of arrangements from Shell to Energy Transfer."