July 17, 2020 Read More →

Shell’s big bet on floating LNG may not pan out


It was the last of the large LNG projects that put Australia in the lead for global LNG exports. It was the biggest jewel in Shell’s LNG crown. But this jewel hasn’t produced any LNG since February, and its future is unclear.

The Prelude floating liquefied natural gas project, with an annual capacity of 3.6 million tons, began shipping LNG last June. The first cargo shipped more than eight years after the final investment decision was made, and two years after the FLNG vessel arrived at the site, one Wood Mac analyst pointed out at the time. In February this year, production was stopped following a technical problem.

Production at the world’s largest FLNG installation still hasn’t been restored, and it remains unclear when this will happen. Building it and putting it into operation cost between $12 and $17 billion, according to external estimates. Now, there are concerns that it may flop.

The gas market situation is difficult enough. Just like in oil, there is a substantial glut in natural gas, and demand is lagging far behind. According to Rystad Energy, global natural gas output is set for a 2.6-percent decline this year because of the coronavirus pandemic. Next year, demand should begin to improve, driven by the low prices currently plaguing the sector. But that’s only if the pandemic goes away for good and without a fight, which at the moment is not happening. In this situation, it may not be that bad that Prelude is not operating at the moment. There is an oversupply of LNG, prices are low, and Shell said in a recent update that it will take a hit because its 2019 term sales contracts for LNG were tied to oil prices.

That hit may be nothing compared to what Prelude may need to break even, at least according to analysts from Goldman Sachs quoted by Tim Treadgold in an article for Forbes. According to them, the commercial breakeven price for gas produced at Prelude is as much as $20 per thousand cubic feet. This compares with prices between $2 and $3 per thousand cubic feet in April in the United States. The difference is impressive, and it certainly would explain why, as Treadgold notes, Shell is in no hurry to restart operations at Prelude.

Prelude is an impressive achievement, regardless of its problems. As the largest floating LNG facility in the world, it has a total capacity of 5.3 million tons of hydrocarbon liquids annually, including, besides the LNG, 1.3 million tons of gas condensate and 400,000 tons of liquefied petroleum gas. Floating LNG was to be a game-changer: boosting the efficiency of gas production by adding the processing to the place of extraction. But now it has to prove it is cost-competitive with other, more traditional approaches to LNG production.

[Irina Slav]

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