International
Shell signs SPA for 2 million mt/year offtake from Rio Grande LNG project in Texas: NextDecade
Shell further diversified its access to North American LNG volumes with a long-term offtake agreement Tuesday that provides support for NextDecade’s proposed export terminal in Texas.
The move, announced during the LNG2019 conference in China, will help the portfolio player protect itself against volatility in the market in terms of pricing and shipping costs, while also acting as a hedge against the potential that one or more of the projects it is involved in does not go forward or is delayed.
With a forecast of tightening global supply in the early to mid-2020s, US LNG developers, in particular, are competing with each other for commercial deals with end-users in Asia, Europe, the Middle East and Latin America. Buyers these days are pressing for more flexibility on terms, including cost, length of contract and destination. Integrated majors like Shell are well suited for the next wave of projects, though more deals will be needed for many of the terminals to get built.
“The US is the fastest growing source of new LNG supply, so it makes sense for us to be involved,” Steve Hill, an executive vice president in Shell’s unit that provides natural gas and LNG, said in an interview on the sidelines of the conference. “Diversification helps from several perspectives. You reduce your operational risk on any one project. Having different locations provides different options for which cargoes go where.”
For NextDecade, the deal couldn’t come at a more important time for the developer of the up to 27 million mt/year Rio Grande LNG terminal project in Brownsville, in the southernmost portion of Texas on the Gulf of Mexico.
The 20-year sales and purchase agreement calls for Shell to buy LNG on a free-on-board basis starting from the commercial operation date of Rio Grande LNG, currently expected in 2023. Three quarters of the agreement will be indexed to Brent, with the rest indexed to US gas prices, including Henry Hub, CEO Matt Schatzman said during a briefing at the company’s booth at the conference.
FURTHER LONG-TERM CONTRACTS
Shell becomes the first foundation customer for the project, but NextDecade will need more if it is going to proceed to a final investment decision on up to three liquefaction trains, or approximately 13.5 million mt/year of LNG, as part of the first phase of the project. FID is currently targeted to occur by the end of September.
“We expect to announce more SPAs in the coming months,” Schatzman said.
NextDecade also faces contractor and regulatory hurdles. A deal for McDermott International to build Rio Grande LNG fell through, and NextDecade is currently waiting for final bids from three major contractors. McDermott is part of the bid process, though it must find a joint venture partner if it ultimately takes the job. Schatzman said the company hopes to have secured a contractor to build the facility by late second quarter or early third quarter.
As for US regulators, they have expressed concerns about the cumulative environmental impact of having three LNG export terminals built in Brownsville within a similar timeframe. Texas LNG and Exelon-backed Annova LNG are also proposing facilities for Brownsville.
Market uncertainties also provide challenges for developers like NextDecade. For Asian players such as China National Offshore Oil Corp. and China National Petroleum Corp., more flexible contractual terms and business models will be required to create greater market liquidity.
“Both suppliers and demanders must further strengthen cooperation,” CNPC Chairman Wang Yilin said during a presentation at the conference.
SHELL’S SIZE
Shell has long-term contracts with several major US LNG plants, including Kinder Morgan’s Elba Liquefaction project in Georgia that is preparing to start up, as well as several proposed projects. It is a partner in the LNG Canada project in British Columbia.
Shell, through its acquisition of BG Group, was a foundation customer in Cheniere Energy’s Sabine Pass export plant in Louisiana. The terminal was the first major LNG export facility to begin operations in the US when it started up in 2016.
“I would generally view their appetite for pockets of greenfield offtake as at worst a hedge, and at best almost a venture capital-like strategy via strategically spreading around exposure,” Wells Fargo Securities analyst Michael Webber said during an interview at the Shanghai conference. “If it works, great, but if not, 2 million mt/year is not going to hurt them.”