On March 30, 2020, Shell announced that it is pulling out of the Lake Charles liquefied natural gas (“LNG”) project.[i] Just a few weeks ago, it was reported that Shell’s 50% share of the quantities from the 16.45 MTPA project will be supported by existing sales in its 75 million mt LNG portfolio (i.e., it need not negotiate new long-term offtakes for those quantities) and that Shell will fund its 50% share of the project using cash.[ii] In response to Shell’s announcement, Energy Transfer Partner, the other partner in the Lake Charles LNG project, reiterated its commitment to the project and potentially reducing the project size to 11 MTPA and seeking other equity partners.[iii]

The double whammy of COVID-19 and low oil prices have already delayed other LNG export projects, including ExxonMobil’s $30 billion Area 4 Mozambique LNG project (15.2 MTPA), Woodside’s $20.5 billion Browse LNG project (12 MTPA) and $11.4 billion Scarborough unit to the Pluto project (5 MTPA), and Woodfibre’s Canadian LNG project (2.1 MTPA).[iv] Some or all of these projects likely have been included in various supply and demand forecasts as probable additional export capacities. Could these announcements signal a potential acceleration in the rebalancing of worldwide LNG supply and demand?

WILL LNG PLAYERS STEP UP?

The answer may become clearer in the upcoming months based on the industry’s reaction to today’s announcement. Since BG and subsequently Shell have held exclusive export rights to the Lake Charles LNG project, there has not been an opportunity for other LNG players to participate in the project.[v] As a brownfield project, the capital cost for the project has long been touted as among one of the most competitive on the U.S. Gulf Coast. The project also has the further advantage of being fully permitted, and the tender process for the construction contract was recently initiated.

Thus, even amidst the current buyers’ market in LNG, the project may be attractive for LNG players seeking to procure more U.S. LNG supplies or those with capital to take over part or all of Shell’s participating interests. With a smaller initial size, the project would be more nimble to achieve final investment decision, which was previously anticipated to take place as early as end of this year. Following on the footsteps of all other project delays mentioned above, could today’s announcement also incentivize LNG players to come to the table with the remaining second wave LNG projects?

HOW WILL THE DOUBLE WHAMMY AFFECT DOWNSTREAM LNG DEVELOPMENT?

The answer will also depend on the effect of COVID-19 and low oil prices on downstream LNG development. The double whammy can only be best described as an outlier in any model. At least one industry observer suggests that low oil prices may delay fuel switching to LNG in countries that are especially cost-sensitive, such as India, but support fuel switching to LNG in countries with long-term oil-index LNG supply contracts, such as Japan and South Korea.[vi] It is also encouraging that signs of recovery from COVID-19 are emerging in China (where the largest LNG demand growth is expected), with faster than expected rebound in manufacturing and services sectors.[vii]

TAKEAWAY

While the answer is not yet clear, today’s announcement reiterates what industry insiders already know. Given the long development time for export projects, the LNG industry tends to be cyclical, fluctuating from an over-supplied to an under-supplied state. And a single event can shift the cycle. Today’s announcement is likely to trigger a re-examination by both LNG sellers and buyers of forecasted LNG supply and demand and re-evaluate whether the industry has or will soon reach the end of the current buyers’ market cycle.

[i] Shell Exits Proposed Lake Charles LNG Project, LNG Global (Mar. 30, 2020)

[ii] Harry Weber, Shell to Use Portfolio LNG Volumes to Support Louisiana Export Facility, S&P Global Platts (Feb. 13, 2020).

[iii] See footnote 1.

[iv] Coronavirus, Gas Slump Put Brakes on Exxon's Giant Mozambique LNG Plan, Reuters (Mar. 20, 2020); Australia's Woodside Slashes $2 bln in Spending, Delays Key Gas Projects, Reuters (Mar. 27, 2020); and Canadian Woodfibre LNG Faces Delays, Natural Gas World (Mar. 25, 2020).

[v] Aside from a brief stint in 2017 when Shell tried to engage Kogas’s participation in the project and those to whom Energy Transfer Partners reached to sell LNG from its half of the project. See David Hunn, Shell, Korean Gas Co. Ponder LNG Partnership with Energy Transfer Partners, Houston Chronicle (June 29, 2017).

[vi] Wood Mackenzie, What Does the Oil Price Fall Mean for the Gas Market? (March 2020).

[vii] China Factory Activity Unexpectedly Expands, but Economy Unable to Shake Off Virus Shock, Reuters (Mar. 30, 2020).