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Shell to use portfolio LNG volumes to support Louisiana export facility: source

Highlights

Joint venture with Energy Transfer awaits FID

Most US projects struggle to sign new long-term offtake deals

Houston — Royal Dutch Shell will support its half of the joint venture with Energy Transfer to build the Lake Charles LNG export terminal in Louisiana with volumes in its existing portfolio rather than with new long-term offtake contracts tied the facility, a person familiar with the plans said Thursday.

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The decision reflects the advantage the integrated energy major has over most other North American developers in adding liquefaction capacity, thanks to its own operations and relationships in all parts of the LNG value chain, through which it has its hands in one-fifth of the world's production of the super-chilled fuel.

ExxonMobil and Qatar Petroleum advanced Golden Pass LNG in Texas last year without announcing any long-term offtake contracts with external buyers tied to that facility, while the Shell-backed LNG Canada project in British Columbia did the same thing in 2018.

While Lake Charles LNG has yet to make a final investment decision, Shell is confident its about 75 million mt LNG portfolio is sufficient to cover its end of the venture, said the person, who spoke to S&P Global Platts on condition of anonymity to discuss sensitive arrangements. An Energy Transfer spokeswoman did not immediately respond to a request for comment on its plans.

"It's about whether or not you have the portfolio that can be resilient enough to deal with both the buyer side but also on the supplier said," the person said. "It's survival of the fittest."

If FID is reached, Shell plans to use cash to fund its portion of the Lake Charles LNG venture, the person said. Completion of the 16.45 million mt/year capacity terminal is targeted for late 2025. The joint venture partners will have a better idea of exactly when an FID can be made after reviewing bids from construction contractors that are offering to build the terminal, the person said.

MARKET OUTLOOK

Details of Shell's plans come as LNG industry leaders gathered in Houston to discuss at a Platts LNG conference the outlook for additional liquefaction projects in the US, Canada and Mexico, as well as the impact weak prices and demand in Asia, Chinese tariffs and the coronavirus outbreak are having on developers. Most of the proposed US terminals are relying on traditional 20-year take-or-pay contracts tied to their facilities to secure financing for construction. And, virtually all of them are struggling.

"It's truly a year of reflection for all of us," Steve Woodward, a senior vice president at Appalachian Basin gas producer Antero Resources, which supplies feedgas for US liquefaction output, said at the conference. "When is the second wave actually going to kick off? It has all of us scratching our heads as to what the next steps are."

The coronavirus has exacerbated the situation by restricting travel to key Asian commercial markets, forcing some spot LNG cargoes to be diverted to other regions and raising the prospect of Chinese buyers declaring force majeure to try to avoid having to comply with contracts.

"It's all happening in real-time," George Nemeth, director of marketing and business development for Sempra Energy's LNG unit, said at the conference. "We don't know what's going to happen with cargoes that might not be able to find a home. Some will float. Maybe some maintenance gets moved up."

SELLER HUBRIS

In an interview with Platts Wednesday, Freeport LNG CEO Michael Smith said he believes the substantially lower fees that developers of new US LNG export projects are being asked to accept for their supplies compared with what was agreed to for existing facilities, like his Texas terminal, will make it very difficult for most of them to build.

Officials from several of those developers, including Tellurian, Cheniere, and LNG Limited, spoke at the Platts conference Thursday. While none expressed worry of possibly having to abandon projects, they all acknowledged the challenges facing the market, especially for developers relying on new offtake contracts.

"Buyers are spoiled for choice," said Vivek Chandra, CEO of Texas LNG, which has proposed an export terminal in Brownsville. "We are a victim of our own kind of hubris."