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Shell’s Floating LNG Endeavor Is About To Begin

 Oct. 2, 2017 5:45 AM ET


  • Shell’s floating liquefied natural gas project, the Prelude FLNG venture, will come online within a year.
  • Cash flow generation expected to begin in 2018, two years later than initially planned.
  • Going over the details of Royal Dutch Shell’s Prelude FLNG development.

Royal Dutch Shell plc (NYSE:RDS.A) (NYSE:RDS.B) is getting closer and closer to finally completing its Prelude FLNG project off the northwestern coast of Australia. FLNG stands for floating liquefied natural gas, a marine vessel that can commercialize gas finds that are too small to justify building a new onshore LNG facility to develop. Let’s dig in.

FLNG overview

The purpose of turning gaseous methane into liquid form is that LNG takes up 1/600th of the space as a liquid, making exports economically viable. By cooling the natural gas down to negative 260oF, Shell can economically supply gas to consumers all over the world. The real genius of FLNG vessels is the ability to fit a processing plant on a ship in a fraction of the space that conventional processing facilities take up, along with Shell’s Dual Mixed Refrigerant unit that can cool the gas down.

While it doesn’t explicitly say it, I would assume Shell’s Prelude FLNG vessel has a miniaturized cryogenic processing plant (separates dry gas from wet gas) that enables the company to profit from the rich-gas nature of the Prelude and Concerto fields by marketing liquid gas products.

Liquefied natural gas (methane) and liquefied petroleum gas (butane and propane) will be loaded on to tankers from the FLNG vessel’s side while condensate (ultra-light sweet oil) will be loaded from the bank, enabling Royal Dutch Shell to avoid loading related bottlenecks.

The FLNG vessel will have the ability to export 3.6 million metric tons of LNG per year on top of 1.3 million metric tons of condensate and 400,000 tons of metric tons of LPG. Making this endeavor about much more than just LNG.

I was unable to find commentary regarding whether or not this production will be sold under long-term contracts. However, in light of Shell teaming up with INPEX (OTCPK:IPXHY), a Japanese oil & gas firm, and Korea Gas Corporation, both of which own LNG regasification terminals in their home countries, I assume there must be some sort of agreement between these three firms.

Development overview

Discovered in 2007, the Prelude rich-gas field was found by the Prelude-1 exploration well in Australia’s WA-371-P offshore permit area. Two years later, the Concerto-1 exploration well discovered the rich-gas Concerto field in that same permit area. Rich-gas means there is a material amount of condensate and natural gas liquids within the natural gas field. Estimates point towards those two fields housing three trillion cubic feet of recoverable rich-gas.

Both discoveries are located in Northwestern Australia’s Browse Basin, with the Prelude FLNG vessel sitting in the nation’s WA-44-L permit area (roughly 200 kilometers, 125 miles, off the coast of Australia). The city of Broome is supporting Shell’s operations.

Shell used to own 100% of this permit area before farming out its stake to INPEX (17.5%), KOGAS (10%), and OPIC Group (5%), pushing the energy giant’s stake down to 67.5%.

As those permit areas hold little meaning without a map, I’ve highlighted three regions below. The WA-371-P permit area is not contiguous as you can see.

Source: Australia’s Department Of Mines And Petroleum (Includes additions from the author)

The exploration program consisted of 12 wells but most of those didn’t find a commercial amount of natural gas resources, which is why Shell didn’t release info on those endeavors. This put Shell in a bind as it didn’t have enough resources to develop through an onshore LNG facility, but still had found a lot of natural gas. Analysts have put out 5 trillion cubic feet of recoverable gas resources as the floor of what is required to make economic sense to develop through conventional LNG projects.

At this point, the idea of using a floating liquefied natural gas vessel capable of developing smaller offshore gas finds came into being. With a smaller total development cost, these projects could be viable. At least in theory anyway.

The Noble Clyde Boudreaux drillship was moved over to the region back in 2013 to begin a two-year drilling program that would drill seven production wells as part of the Prelude project. Wells drilled in block WA-44-L have to go through 200 meters to 300 meters of water first, and there aren’t any major obstacles to drilling outside of Western Australia’s weather conditions (the FLNG vessel was built to withstand a Category 5 cyclone/hurricane). By offshore standards, 1,000 feet of water is fairly shallow.

There are coral reefs that need to be kept undistributed, but the closest one is 40 kilometers away at Browse Island, so under expected conditions, there should be no impact on that environmentally sensitive area.

With the production wells and most of the subsea infrastructure already in place, the goal is to turn the FLNG venture online by next year which includes shipping off its first LNG cargo. Shell announced that the US$5 billion FLNG vessel left South Korea in late-June of this year with cash flow generation expected in 2018. Commissioning and connection related work should take between nine and twelve months to complete.

Shell has been coy as to what the ultimate cost of the Prelude development will be. Analysts estimated back in 2013 the cost would be between US$10.8 billion and US$12.6 billion, but that was when a 2016 start-up was envisioned. With Shell now aiming for its first LNG cargo two years later, the ultimate cost may be higher than anticipated (showing up as higher DD&A expenses) at a time when energy prices are weak. Shell sanctioned the project back in 2011 and construction began a year later.

As most of the project’s costs were incurred before the downturn, Shell’s ability to capitalize on significant reductions in oilfield services and development costs during the ongoing downturn remains limited.

Long-term upside

Farther out Shell has the Crux Field, located to the northeast of the Prelude development, in permit area AC/RL9. The Crux Field is expected to house 1.8 trillion cubic feet of natural gas and 66 million barrels of condensate according to a 2011 presentation, but I’m not sure if all of that is recoverable. Shell owns an 82% interest in that block after reaching a deal with Nexus Energy (OTC:NXEYF) and Osaka Gas (OTC:OSGSY) in 2012.

There isn’t a good reason to develop the prospect as a standalone development if Shell doesn’t have to, which is why I see it being more of a long-distance tie-back opportunity.

Final thoughts

Floating liquefied natural gas vessels are an engineering masterpiece. Now that we know these projects are mechanically feasible, the question now comes down to are the economics viable. Royal Dutch Shell’s integrated gas unit, which includes its LNG division, has been consistently profitable during the downturn which speaks favorably to its ability to make gas finds economical. This is a new space for Shell, but it is one that the company has shown great prowess in.

I will still caution that cost overruns, weak LNG spot prices, and the lack of commentary on long-term contracts securing the project’s utilization rates are a big negative. Positive cash flow generation is very likely from the Prelude FLNG asset, but profitability is debatable. On the flip side, higher Brent prices will directly benefit the project’s condensate and LPG realizations, along with indirectly bolstering spot LNG prices. By the early 2020s, some analysts see the glut in LNG shrinking quickly as facilities supported by old fields see utilization rates plummet and as demand continues to climb higher and higher, which would make it easier to secure better prices and long-term contracts (again, there could be some in place that aren’t being touted).

To read more about Royal Dutch Shell, check out why $55 Brent is so important by clicking here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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