Shell pulls out of Lake Charles LNG amid low oil prices

Shell said today it will pull out of the proposed Lake Charles LNG export project in Louisiana as part of cost-cutting measures meant to counter low oil prices.

US midstream company Energy Transfer will now lead development of the multi-billion-dollar project and will consider bringing in new investors and reducing the size of the planned facility.

Shell announced last week it would cut its 2020 capital expenditures by at least $5bn and reduce its operating costs by $3bn-$4bn over the next 12 months. Shell is among a growing list of oil companies that have slashed spending as oil prices crash from the dual blows of a coronavirus demand shock and a supply surge created by the breakdown of the Opec+ production-restraint agreement.

The Nymex front-month May WTI crude futures contract fell to as low as $19.92/bl in early trading today, down by 7.4pc from its close on 27 March. Nymex WTI crude futures last settled below $20/bl in February 2002. The Argus Northeast Asia (ANEA) assessment for spot LNG delivered to that region reached a record low in February of $2.68/mmBtu and was assessed today at $2.73/mmBtu.

Although Lake Charles is expected to have among the lowest unit costs for projects vying to be part of the second wave of US LNG capacity, it stalled several years ago as Shell was already the largest owner of US LNG offtake. The project advanced last March when Shell and Energy Transfer announced a restructured 50-50 joint venture to develop the Lake Charles project, with Shell to operate the facility. Shell acquired all the offtake rights at Lake Charles through its 2016 acquisition of BG, while Energy Transfer owns the mothballed Lake Charles LNG import facility, where the export project would be built.

Shell, the world's largest LNG trader, said it remains optimistic about the long-term prospects of Lake Charles. It will support Energy Transfer with an ongoing bidding process for a construction contract and then plan a phased handover of the project's remaining activities, Shell said.

Lump-sum bids are expected in the second quarter under a solicitation that Shell and Energy Transfer launched in December.

"This decision is consistent with the initiatives we announced last week to preserve cash and reinforce the resilience of our business," said Maarten Wetselaar, Shell's director of integrated gas and new energies. "Whilst we continue to believe in the long-term viability and advantages of the project, the time is not right for Shell to invest."

Although spot LNG prices have been low because of relatively mild winter temperatures in the northern hemisphere and a global LNG supply glut, Shell said its move was driven by the need to quickly cut spending amid the steep decline in oil prices. LNG demand and prices are widely expected to rebound in the early to mid-2020s, and LNG projects are financed with a longer-term view.

Energy Transfer said it is evaluating various options to advance the project, including bringing in one or more equity partners and reducing the size of the project from three liquefaction trains with combined capacity of 16.45m t/yr, equivalent to 2.2 Bcf/d (22.76bn m³/yr) of gas, to two trains with combined capacity of 11mn t/yr.

Energy Transfer is continuing negotiations "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," said Tom Mason, the company's president of LNG.

"We continue to believe that Lake Charles is the most competitive and credible LNG project on the Gulf Coast," he said, adding that Energy Transfer's extensive US gas pipeline network further strengthens the project.

Without Shell's participation, Energy Transfer likely will need to sign a number of binding long-term customer deals to finance construction. That has become increasingly difficult for US LNG projects amid falling oil and spot LNG prices.Shell likely would have folded the output into its existing global portfolio, a strategy it used to fund construction of the C$40bn ($30bn) LNG Canada in October 2018.

Through its acquisition of BG, Shell also received 5.5mn t/yr of long-term offtake rights at Cheniere Energy's Sabine Pass LNG terminal in Louisiana. Shell also has 2.5mn t/y of offtake at the Elba Island LNG terminal being completed in Georgia and 2mn t/yr of capacity at Venture Global's 10mn t/yr Calcasieu LNG export project in Louisiana, which is under construction and scheduled to start exporting in 2022.

By Ron Nissimov