Royal Dutch Shell Plc  .com Rotating Header Image

One Floating LNG Dream Sinks As Another Gets Ready To Float

Screen Shot 2016-03-23 at 12.29.49

One Floating LNG Dream Sinks As Another Gets Ready To Float

Screen Shot 2016-03-15 at 10.34.57Unfortunately for Shell it formally committed to the Prelude development in May, 2011, a time when oil was selling for around $120 a barrel, three-times the current price of around $41/bbl.

Screen Shot 2016-03-23 at 12.32.16

By Tim Treadgold: March 23, 2016

No-one blinked and share prices barely fluttered when a $40 billion plan by Australia’s Woodside Petroleum ngIf: ticker to develop a floating liquefied natural gas (LNG) project was torpedoed earlier today.

However, the knock-on consequences of sinking the Browse project will be felt most acutely at Europe’s biggest oil company, Royal Dutch Shell ngIf: ticker .

The immediate impact on Shell is that it has a 27% interest in the Woodside-led Browse LNG project, but it is also nearing completion of the world’s biggest floating LNG barge, the $12.6 billion Prelude project.

The question on some lips goes like this: If development of Browse cannot be justified using technology developed by Shell will the Prelude project be profitable.

Not Profitable At Current Gas Prices

At current prices for LNG, which is determined by reference to the oil price, the answer is probably not.

Unfortunately for Shell it formally committed to the Prelude development in May, 2011, a time when oil was selling for around $120 a barrel, three-times the current price of around $41/bbl.

At the time of the decision to build Prelude, which is essentially a 1600-foot barge which means it is roughly one-third longer than the biggest aircaft carrier, there was the incentive for Shell in the LNG price being protected from the oil price by fixed-priced, long-term gas sales contracts.

Over the past few years as a flood of LNG has hit the market, and with more coming from new projects such as Chevron’s ngIf: ticker CVX -0.97% ngIf: show_card end ngIf: ticker $50 billion Gorgon development (in which Shell also has an interest), the LNG price has been falling steeply.

All that Shell can do now is complete construction of Prelude in a Korean shipyard, install it on top of gasfields off the north-west coast of Australia and hope that it works as designed and might make a profit.

Woodside’s decision to not follow Shell down the floating LNG route shows that it is not confident that it can overcome the challenges of new technology and a highly competitive market for LNG.

Deep, Distant and Difficult

Officially, the Australian company is confident that it will eventually develop the Browse gasfields which were discovered more than 40 years ago but are in deep water some 250 miles from the coast.

Woodside chief executive, Peter Coleman, said the economic environment was not currently supportive of a major LNG investment on Browse at this time.

The stock market had been expecting the cancellation of the ambitious project, partly because of the cost, partly because of the over-supplied gas market, and also because the new technology being used to cram what is traditionally a land-based liquefaction process onto a ship.

Woodside shares slipped 1% lower on the Australian stock market earlier today, but so did the oil price, which indicates that the decision to shelve the Browse floating LNG project was seen as a neutral and perhaps a widely expected event.

Attention in the LNG business will now switch to Shell to see whether it can make financial sense of a high-risk offshore gas liquefaction process at a time of low oil and gas prices.

SOURCE

Comments are closed.

%d bloggers like this: