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Shell damps down Prelude LNG expectations

by Angela Macdonald-Smith: Nov 29, 2017

Royal Dutch Shell has sewn doubt in the market about an early 2018 start-up of the oil major’s innovative Prelude floating LNG project off the coast of north-west Australia, with chief executive Ben van Beurden signalling that the project will only start contributing noticeably to cash flow in 2019.

While the ramp-up of the $US54 billion (71 billion) Gorgon LNG project in Western Australia was named by Mr van Beurden as among projects named to help grow cash flows next year, Prelude was included in the later batch.

“Beyond 2018, in the 2019-2020 period I would expect another $US5 billion additional cash flow from operations,” Mr van Beurden told investors in a briefing in London late Tuesday Australian time.

“This would then include further start-ups in Brazil, the Gulf of Mexico and the ramp-up of Prelude and others.”

Shell still expects Prelude – the progress of which is being closely watched worldwide – to contribute to cash flows in 2018, a spokesman in Melbourne said.

Consultancy Wood Mackenzie is assuming start-up “towards the latter end of Q3 2018,” said analyst Saul Kavonic, who has estimated the project may cost about $US2 billion more than the original $US12 billion estimate.

“Despite now being on site and commissioning, we believe carry-over work at the facility risks further delay and additional cost escalation, as carry-over work on site can cost several times as much as work done in the yards,” Mr Kavonic said.

“As with most LNG projects, it can take three to six months post first cargo before a plant ramps up to full production capacity, pushing attaining full production into 2019, and being a pioneering FLNG technology suggests that the overall commissioning and ramp-up schedule estimates would err on the conservatively slower side.”

Biggest floating structure 

The Prelude vessel, the world’s biggest floating structure, arrived at its mooring site in the Browse Basin in July from a South Korean shipyard. Shell originally gave the go-ahead on the 3.6 million tonnes a year LNG project more than six years ago.

The energy giant used the investor briefing to outline new environmental hurdles for its operations to fit with a target to cut its “net carbon footprint” by 20 per cent by 2035, and by 50 per cent by 2050. The measurement covers emissions from Shell’s own operations as well as those produced when using its products.

Mr van Beurden said that while Shell had already exited coal and has been shifting more towards gas from oil, all its investments needed to be “first quartile” in terms of carbon emissions per unit of production.

New investments in LNG, meanwhile, need to meet a target of “all-in” supply costs towards $US5 per million British thermal units, said head of integrated gas Maarten Wetselaar.

The cost target is expected to prove a challenge for the Browse LNG venture, which Shell’s partner Woodside Petroleum is aiming to develop through the North West Shelf LNG plant in Karratha.

Mr Wetselaar made little mention of Browse apart from as one of Shell’s “medium-term investment options”.

New Energy plan

Shell meanwhile increased its investment earmarked for its New Energy business, to $US1 billion-$US2 billion a year until 2020. That investment, which could include acquisitions, would be mostly split between the power value chain and the fuels value chain, said chief financial officer Jessica Uhl.

Shell expects to generate returns from its New Energy investments of 8 per cent to12 per cent, Ms Uhl noted, saying many companies in the sector are “not making money today”.

The New Energy strategy is partly built around Shell’s expectation of a gradual electrification of the economy, which was the motivation behind a partnership announced this week for the fast-charging of electric vehicles with IONITY, a venture that includes BMW, Ford and Audi. In October, Shell struck a deal to buy Netherlands-based NewMotion, one of Europe’s largest charging providers.

Shell also set the scene for further asset sales even after its $US30 billion divestment program for 2016-18, which has been bolstered by its exit from Woodside this month. Mr van Beurden said Shell would continue asset sales at an average rate of more than $US5 billion a year until at least 2020.

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