Shell to become first major US LNG exporter

OREANDA-NEWS. April 09, 2015. With its planned \\$70bn takeover of BG, Shell will become the first major exporter of US LNG and have rights to four North American LNG export projects that have not reached final investment decisions (FIDs).

Shell also will become the largest holder of US LNG import capacity, which has little value because of the country's massive shale gas assets.

BG has signed 20-year contracts for up to 5.5mn t/yr of LNG, equivalent to 756mn cf/d (21.4mn m?/d) of gas, from the Sabine Pass LNG export project being built in Louisiana.

Of those volumes, 3.5mn t/yr would come from train 1, which is scheduled to send out its first test cargo in late 2015 and start commercial operations in February 2016. Shell will pay the lowest liquefaction charge of any US exporter for that capacity, as BG secured a rate of \\$2.25/mmBtu for train 1 from Sabine Pass owner Cheniere Energy, in exchange for taking the risk to sign the first long-term US liquefaction capacity deal.

Shell will pay a liquefaction charge of \\$3/mmBtu for its remaining 2mn t/yr of Sabine Pass capacity. Of that, 710,000 t/yr would come from train 2, which is scheduled to start commercial deliveries in June 2016; and 660,000 t/yr would come from trains 3 and 4 each, which are scheduled to start operating in April 2017 and August 2017, respectively.

Shell will not have to take US LNG if it does not make economic sense for it to do so, but it will have to pay Cheniere fixed fees of \\$724mn/yr whether it takes LNG or not, once all four trains start commercial operations. If Shell wants LNG from Sabine Pass, it will pay an additional fee of 115pc of the monthly Nymex Henry Hub settlement price for a month in which a cargo is scheduled.

Only Indian state-owned gas utility Gail will have more US LNG export capacity than Shell from projects under construction, as Gail has signed 20-year deals for a combined 5.8mn t/yr from Sabine Pass (3.5mn t/yr) and the Maryland's Cove Point facility (2.3mn t/yr).

But Shell is positioned to become by far the dominant US LNG exporter with the acquisition of BG, as BG also has the right to all the 15mn t/yr of planned export capacity at the Lake Charles LNG export project in Louisiana.

The Lake Charles facility is owned by US midstream company Energy Transfer, which would sell long-term liquefaction capacity rights. BG and Energy Transfer planned to make separate FIDs on the project. In February, BG delayed its FID date to 2016 from 2015 because of falling oil prices. The project has a relatively low estimated cost of \\$11bn because it would be built at the site of the existing Lake Charles import terminal.

Shell also is developing a smaller LNG export project at the existing Elba Island import terminal in Georgia. The \\$1.5bn project would have baseload capacity of up to 2.5mn t/yr and peak capacity of up to 4mn t/yr. Shell has said it would come on line in phases, from late 2016 to 2018.

It is unclear if Shell may consolidate the US projects with the acquisition of BG.

With the acquisition of BG, Shell will own 4 Bcf/d of US LNG import capacity for which it will pay fixed fees, even though such capacity is virtually worthless.

Shell now owns 945mn cf/d of import capacity at Elba Island and 333mn cf/d of import capacity at Cove Point. It would acquire BG's 2.1 Bcf/d of import capacity at Lake Charles and BG's 630mn cf/d of capacity at Elba Island.

Shell's acquisition of BG could also lead to the consolidation of two western Canadian LNG export projects. It is unclear if any of the dozens of Canadian LNG export projects will be built in the foreseeable future because of competition from cheaper US projects and falling oil prices.

Shell in March said it will make an FID no earlier than 2016 on the LNG Canada project it is developing with Asian partners in in Kitimat, British Columbia (BC). The project is scheduled to have initial capacity of 12mn t/yr and could be expanded to 26mn t/yr, at a total cost of \\$22bn-35bn.

In October, BG said it was "pausing" development of its proposed 21mn t/yr Prince Rupert LNG project in BC because it raised its estimate of US LNG exports to 90mn t/yr by 2025, up from its previous forecast of 60mn t/yr. Prince Rupert has an estimated cost of \\$16bn, excluding the estimated \\$4bn-6bn cost of a pipeline to bring gas from western Canadian shale gas formations.