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Shell backs out of Lake Charles LNG venture with Energy Transfer

Royal Dutch Shell PLC will walk away from the proposed Lake Charles LNG project in Louisiana in a decision that casts fresh doubt on the prospects of the project getting commercially sanctioned anytime soon.

Energy Transfer LP, Shell's partner in the 50/50 joint project, said it would move forward as the sole developer. But Shell's decision to drop out of the project could fuel questions about whether the dozen or so developers of new U.S. LNG facilities will get their projects over the line this cycle.

In a March 30 statement, Shell cited "current market conditions" and its plans to cut spending following the oil price crash as the reason for its decision at this time, especially when the economic fallout of the coronavirus pandemic is adding to the significant supply and demand uncertainty in global gas markets.

"Whilst we continue to believe in the long-term viability and advantages of the project, the time is not right for Shell to invest," Shell's Maarten Wetselaar, director of integrated gas and new energies, said in a statement.

Energy Transfer said in a separate statement that it would consider downsizing the project, which was designed to have three liquefaction trains with a total LNG production capacity of 16.45 million tonnes per annum. Instead, the partnership might try to develop two trains with a total capacity of 11 mtpa. Energy Transfer said it would also evaluate bringing in "one or more equity partners."

"We continue to believe that Lake Charles is the most competitive and credible LNG project on the Gulf Coast," Energy Transfer's Tom Mason, executive vice president and president of LNG, said in a statement. "Having the ability to capitalize on our existing regasification infrastructure at Lake Charles provides a cost advantage over other proposed LNG projects on the Gulf Coast."

Lake Charles LNG has had certificate approval since 2015 but had not announced any commercial deals or made it to a final investment decision.

But the project still had advantages that gave market observers reasons to suspect it could get across the finish line. For one, it was one of the few existing U.S. regasification facilities proposed for development into an export terminal, which has cost and logistical advantages.

Another advantage was Shell's involvement. As a major portfolio player, Shell brought financial and technical strengths to the table, along with an ability to absorb LNG off-take into its own business.

Other projects with similar support have gotten over the line, including the Shell-backed LNG Canada, which reached a final investment in October 2018 without announcing long-term supply agreements beforehand.

Golden Pass LNG in Texas, sponsored by Qatar Petroleum and Exxon, took a similar approach. But there is a limited pool of players that participate in the entire LNG value chain and have strong enough balance sheets to pursue that strategy.

Shell said it would continue to support Energy Transfer with an ongoing bidding process for an engineering, procurement and construction contract for Lake Charles LNG and then a planned phased handover of the project's remaining activities.

Energy Transfer said it continues to discuss potential off-take agreements with "several significant LNG buyers" in Europe and Asia.

"In light of the advanced state of the development of the project, we remain focused on pursuing this project on a disciplined, cost efficient basis and, ultimately, the decision to make a final investment decision will be dependent on market conditions and capital expenditure considerations," Mason said.