Shell stays course on Trinidad, Venezuela gas

Shell was asked by Trinidad and Tobago to study development options for an offshore natural gas field that straddles the maritime border with Venezuela, while it continues work on Venezuelan offshore gas, the European major told Argus.

The cross-border Loran-Manatee field, estimated to hold about 10 trillion cf of gas, has long been seen by Trinidad as a key source of feedstock for its extensive gas-based industries, led by the 14.8mn t/yr Atlantic liquefaction complex. Trinidad's domestic gas production has been recovering since late 2017, but demand still outstrips supply, forcing costly curtailments.

"Shell continues to pursue the Loran-Manatee development, for the benefit of T&T and Venezuela. The T&T government has asked us, as their contractor, to consider options for phased development, but it is too early in the process to comment further," Shell said.

Loran-Manatee covers block 6 on Trinidad's side of the border, and block 2 on Venezuela's side.

Shell acquired a 50pc operating stake in Manatee, on Trinidad's side, from fellow major Chevron in June 2017. Chevron still holds the remaining 50pc.

Despite robust commercial incentives for both countries, negotiations on developing the field have dragged on for years, even after a 2013 bilateral agreement allocated 73.75pc of the reserves to Venezuela and 26.25pc to Trinidad.

Trinidad needs the gas to supply its industries, while Venezuela needs export revenue and has no infrastructure to monetize the gas on its own. Before farming out part of the asset to Shell, Chevron had proposed operating the cross-border field as a single unit, and presented a development plan to the two governments in November 2016. Now the field is in the hands of Shell, which is already Trinidad's second-largest gas producer and a leading shareholder in Atlantic. Once Loran-Manatee moves ahead, smaller cross-border fields, 310 Bcf Kapok-Dorado and 740 Bcf Manakin-Coquina, would be next in line.

The commercial logic of developing the Dragon field in Venezuelan waters is equally compelling for both sides. Shell, Venezuela's state-owned PdV and Trinidad's gas counterpart NGC signed a term sheet in late August 2018 for Trinidad to purchase 150mn cf/d of gas from Dragon. Production was supposed to have begun in 2019-20, with volumes later ramping up to 300mn cf/d. The gas would be delivered by flowline to Shell´s Hibiscus platform in Trinidad's East Coast Marine Area (ECMA) and tied into the national distribution network managed by NGC.

"Shell continues work related to the Dragon Interconnection Project, as established through a Term Sheet signed in August 2018 and a Heads of Agreement in March 2017," the company said.

Protracted political and economic turmoil inside Venezuela, and escalating US sanctions aimed at forcing President Nicolas Maduro to step down, have thwarted the gas developments. Shell, like Chevron, has been careful to reiterate that its "activities relating to Venezuela are in strict adherence to all applicable laws, regulations, trade controls and sanctions."

Dragon is seen as more challenging to develop than Loran-Manatee because it requires a separate agreement between PdV and Shell. PdV officials have told Argus that Venezuela would effectively sell the gas to Shell, which in turn would process it and sell it to Trinidad. Shell would also build a short flowline to Trinidad and purchase the gas on Trinidad's side through NGC.

The export terms are critical for Shell. On the western side of Venezuela, two other European firms, Spain's Repsol and Italy's Eni, control 100pc of the giant Perla offshore gas field in the Cardon 4 joint venture, in which PdV is the sole offtaker. In recent years, the partners have been forced to shut in most production because PdV cannot pay for it, or even absorb it because its nearby oil refineries that use it are barely operating.

In contrast to its stricter oil legislation, Venezuela's gas legislation that allows PdV to hold up to 35pc in joint ventures is considered relatively attractive for the private sector. But as the Repsol-Eni Cardon 4 project shows, PdV has no capital to farm in. Cardon 4 is the only 100pc private-sector hydrocarbons joint venture in Venezuela.

PdV has long neglected its abundant gas reserves in favor of oil, despite enormous suppressed demand from domestic refineries, power stations and petrochemical plants. According to BP's 2019 Statistical Review of Energy, the Opec country holds 223.8 Tcf of proven gas reserves — more than three-quarters of South and Central America's total. Most of the onshore gas is associated with crude, and an estimated 2 Bcf/d -- double the production of neighboring Colombia -- is now flared. Shell signed a separate agreement with PdV last year to try to capture some of that lost gas in northern Monagas state.

Little is expected to change in the near term. Venezuela's oil-based economy is nearly paralyzed against the backdrop of a power struggle between Maduro's government and the US-backed opposition. Under a transition government that National Assembly leader Juan Guaido is campaigning to establish, legislative reforms would open the door for foreign oil companies to quickly tap dormant Venezuelan hydrocarbon deposits.