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LNG Supply FIDs Starting to Happen, Does Shell Need to Get LNG Canada Phase 2 FID in the Queue To Protect Its Brownfield Advantages?

By Dan Tsubouchi

Asian LNG buyers and now LNG suppliers are responding to the abrupt change in LNG supply/demand outlook in April. Unplanned delays to the start up of 5.0 bcf/d of Mozambique LNG put a major hole in all LNG supply plans/forecasts for the 2020s creating a new and larger LNG supply gap. This first drove Asian LNG buyers to abruptly pivot to lock in stable long term LNG supply and now, LNG suppliers are taking FIDs (ie. Woodside on Scarborough yesterday) and looking at the next round of potential FIDs on both brownfield and greenfield LNG projects to fill that gap. This increase is happening at a time of increasing competition/demand for global fabricators, metals, and services that are also being impacted by the general global supply chain stresses. There has been no chatter that Shell will be considering FID on the brownfield LNG Canada Phase 2 (capacity 1.8 bf/d). But, unfortunately for LNG Canada Phase 2 or any major industrial project, these global/domestic stresses reduce the time to think about any FID. We think this means the timing is likely in the next few months for Shell to look at FID on LNG Canada Phase 2 if it wants to get in the queue to ensure it can maintain its brownfield cost advantages. LNG markets have seen the cost and timing advantages of a continuous construction cycle ie. like Cheniere does at Sabine Pass LNG. By now, we mean within the next few months, and not the next year. Any FID is a major undertaking and far from certain especially for a leader in the Energy Transition like Shell. But, we think the answer to the question is more likely a Yes, than a No. And if so, it would be huge for the value of Canadian natural gas.

The reality check at COP26 meant there is no clear phase out of fossil fuels, especially natural gas. COP26 was extended an extra day to end on Saturday but did result in an agreement signed by over 200 countries. The deal was universally viewed as far less than the aspirations leading up to COP26. It seemed that reality won or at least delayed the aspirations. One highly notable item was the watering down of “get rid of coal” to” phase out” of coal to the approved text of a phase down.  The best description came from COP26 President Alok Sharma (UK) concluding media statement. He said “I would say, however, that this is a fragile win. We have kept 1.5 alive. That was our overarching objective when we set off on this journey two years ago, taking on the role of the COP presidency designate. But I would still say that the pulse of 1.5 is weak.” It is important to remember that the actual commitments made by some key countries will be much less than the commitments in the already criticized Glasgow Climate Pact  [LINK] because there are always side deals or understandings that aren’t public that were made just to get countries to sign on to the Glasgow Climate Pact so there can be a global commitment.

Rather more world Energy Transitiony leaders are either directly or indirectly saying the energy transition plan isn’t working. Perhaps the best sign that the energy transition plan isn’t working is that the Net Zero leaders are changing their messaging. They want to be able to be on record in the future that they warned people. (i) Its not working and the reality that the plan needs to change. The most vocal is Macron who warns the energy transition aspiration has to be modified/reduced or else there will be years of an energy crisis. Even more importantly, he wants to bring a more pragmatic Energy Transition plan to the EU.  On Nov 9, we tweeted [LINK] on Macro’s address to the nation [LINK] that closed with his call for a more practical approach to the CO2 emissions and one that will include Europe.  Macron said “But France will not be strong alone. With the European Union: We will be able to build a credible strategy for reducing our CO2 emissions, compatible with our industrial and technological sovereignty.” The Macron release had at the bottom a reminder “Next January, it is a new model of investment and growth that the President will defend with the French presidency of the Council of the European Union.”  The day before COP26 started, we tweeted [LINK] on Macron’s comments to the FT [LINK] that was a clear view on higher fossil fuel prices for the foreseeable future.  Macron said, “on demand for fossil fuels isn’t going away for the foreseeable future.”  Macron said “What is happening now is ironic, because we are building a system where in the medium and long term fossil energy will cost more and more, that’s what we want [to fight climate change].” he said,” Japan is another calling for a pragmatic time frame.  On Nov 9, we tweeted [LINK] on Japan’s release [LINK] on its conference with IEA Executive Director Faith Birol.  Japan wrote “The two sides also exchanged views on acceleration of decarbonization efforts following COP26, and shared the importance on measures with pragmatic time frame based on individual circumstances that each countries face including its renewable energy potentials”. (ii) Others just want to be able to say they warned people it would be expensive for years to come. The US is the best example. On Nov 8, we tweeted [LINK] on Energy Secretary Granholm’s MSNBC Morning Joe comments. Biden never warned votes that the energy transition will happen but will lead to higher prices on oil, natural gas, and electricity for years to come. We created a transcript of her saying “So the long-term strategy is that.  and yes we have a short term cost issue because the economy is still coming back on.  we have a supply, demand that does not, the supply doesn’t meet the demand. that is an issue we are going through. The president is all over this both in the short term and in the long term.”  

COP26 did not hurt the outlook for natural gas, rather Europe is helping the financing for natural gas. One of our COP26 themes was that pro Net Zero companies and governments would wait until after COP26 to announce or approve items that wouldn’t go over well at COP26. One of the climate change side criticisms of the EU is that the EU is shifting their relaxed position on nuclear and natural gas. On November 4, there was an excellent interview in Belgian news, L’Echo with Frans Timmermans, VP of the European Commission, who they describe as the “Mr. Climate” of the European Executive. Timmermans pointed to the shifting position on nuclear and natural gas so both could be considered as green investments for financing purposes. L’Echo asked “The Commission must clarify its position on the taxonomy which defines the investments which can be categorized as “green”. According to a press leak, nuclear and gas are in the project: will they stay there?” Timmermans replied “We have not yet made a decision, we will do so in a few weeks. Nuclear power is by no means green in the sense that it would be sustainable: there is a necessary fuel and waste. The principle of green energy is that it does not need fuel and does not produce waste. As for natural gas, your country is a good example: if you want renewable energies, in the transition you may need natural gas. You need to define its importance as transitional equipment, and you also need to avoid being locked into natural gas forever.”

It’s been a great year for LNG prices and LNG supply/demand looks strong thru 2030. We feel for the Net Zero fans the Europe energy/natural gas crisis just happened to show up in 2021 ahead of COP26 and Europeans realized that intermittent wind/solar can lead to big electricity and natural gas spikes, and even return to coal. It was also the year that natural gas followers realized the linkage of global natural gas markets and how Europe gas storage is the key indicator for the near-term direction of LNG and natural gas prices. It was a cold winter and Europe gas storage never caught up and still hasn’t caught up. We first described this concept back in September 2017 and said Europe is the dumping ground for surplus LNG cargoes. When Europe isn’t getting a lot of LNG cargoes, it means those LNG cargoes are wanted/needed in other parts of the world. It was the highest linkage of oil to natural gas markets to electricity markets in a long time. Natural gas and LNG prices hit records and are still exceptionally strong and winter hasn’t even started. The outlook for LNG looks strong through the 2030 for the reasons noted later in the memo.  Below we pasted Cheniere’s current LNG long term supply outlook and most long-term outlooks are similar. LNG markets are very tight thru 2025 and need new supply thereafter. The problem with tight supply is that if anything disrupts supply, there are price spikes. Here is what Cheniere said on its Q3 call “We now estimate that this tight market could extend well through 2025 and potentially tighter seasonal swings over the midterm period, especially for production from legacy plans remains inelastic and the current constraints on the coal supply cycle persist.” 

Europe Gas Storage as of Nov 12, 2021

JKM, TTF and HH Prices

Global LNG Supply Outlook

There are no strategic LNG reserves or immediate fix to draw upon if any existing LNG supply goes down, or under construction LNG supply gets delayed. Earlier today, the US and others drew up their strategic oil reserves ie. the oil reserves that are stored away never to be touched unless there is an emergence supply shortage. These strategic reserves are separate from working commercial crude oil inventories. There are no such “strategic” reserves for LNG. The only way to replace a negative LNG supply surprise is to draw on existing LNG commercial storage, existing LNG supply capacity elsewhere or cut back on demand. There is no such thing as having new replacement LNG supply show up in a year or two or three. Rather new replacement LNG supply takes at least 3 or 4 years to hit the market and that is only if there is an existing brownfield expansion that is effectively ready to go like a Cheniere Corpus Christi LNG Phase.

A number of unplanned supply interruptions from in-service LNG supply projects help create the today’s tight LNG market. There have been many interruptions in the past year from existing LNG supply projects. No surprise, it seems to happen to older LNG supply projects.  These are temporary so only impact the near term LNG supply/demand balance, but it also reminds that most older LNG supply projects export well below capacity. They also remind Asian LNG buyers that there is risk to existing LNG supply.  Lastly, it is important to remember that the issue for all older LNG supply projects is that, unless they are drilling to add more reserves, the natural gas reserves supply the LNG will eventually come to an end.  A few examples of interruptions.  (i) Equinor’s Melkoeya 0.63 bcf/d in Norway was shut down for 18 months due to a fire. A massive fire led to the Sept 28, 2020 shutdown of the 0.63 bcf/d Melkoeya LNG facility in Norway. The original restart date was Oct 1, 2021 but that was revised to March 31, 2022 with the caveat “there is still uncertainty related to how the Covid-19 development will impact the project progress.”  (ii) Algeria’s 0.5 bcf/d Skikda LNG Plant had an unplanned 8-week shut down due to failure of gas turbine control mechanism. Skikda also had an unplanned 6-mnth shut down in 2020. (iii) Petronas Bintulu LNG in Malaysia, there have been multiple reports that Petronas has been seeking approval for the cancellation of some winter cargoes due to upstream natural gas quality issues. (iv) Chevron Gorgon LNG. This was the high profile unplanned outages that caused each of the three trains to have unplanned repairs staring in H1/20. Even another one last week. On Nov 16, Reuters reported “”Train 1 was shut down due to a small gas leak,” the spokesperson said, adding that it was too early to tell how long the unit would be down. “We are preparing plans for investigation and repairs.” The leak was detected on piping associated with the dehydration unit on Train 1 and the unit was shut down as a precautionary measure. As of this morning, still no word on how long it will be down. The three trains have a total capacity of ~2.3 bcf/d. Gorgon produced ~2.3 bcf/d in 2019 but was down to 2.0 bcf/d in 2020.  (v) Last November, the 1.03 bcf/d Qatargas LNG Train 1 had a 3-week unplanned shut down for a compressor repair. (vi) There have been many more LNG  supply interruptions or reduced LNG cargoes from in-service LNG supply projects, whether it be from hurricanes, or production issues at Chevron Wheatstone or, even yesterday Bloomberg reported that the 0.9 bcf/d capacity Brunei LNG export project “requested to reduce volumes for winter delivery to long-term buyers due to an upstream natural gas production issue, according to traders with knowledge of the matter.”

LNG Plant Utilization Rates (As of November 14, 2021)

The game changer for LNG supply was the delay of 5.0 bcf/d of Mozambique LNG that was originally expected to start exporting in 2024. We think the market didn’t appreciate the full impact of TotalEnergies April 26 declaration of force majeure on its 1.7 bcf/d Mozambique LNG Phase 1. Surprisingly, markets didn’t look to the broader implications, which is why we posted our 7-pg Apr 28 blog “Multiple Brownfield LNG FIDs Now Needed To Fill New LNG Supply Gap From Mozambique Chaos? How About LNG Canada Phase 2?[LINK]  We highlighted that Mozambique LNG delays were actually 5 bcf/d, not 1.7 bcf/d. This 5 bcf/d of Mozambique LNG supply was built into all, LNG supply forecasts.  The delay in TotalEnergies Phase 1 would lead to a commensurate delay in its Mozambique LNG Phase 2 of 1.3 bcf/d. TotalEnergies Phase 2 was to add 1.3 bcf/d. There was no firm in service date, but it was expected to follow closely behind Phase 1 to maintain services.  That would have put it originally in the 2026/2027 period. The original in-service for Phase 1 was 2024, which was then pushed back to 2025. In the Sept investor outlook, TotalEnergies said “This forecast of upstream production in 2026 includes Mozambique LNG production only in 2026. This relies on the assumption that the project activity will review in 2022.”  In its Oct 28 Q3 call, TotalEnergies seemed to suggest any restart wouldn’t be in early 2022. Mgmt said “we remain fully committed to develop this project, the resource coming from Area 1. But only of course when the condition will allow. We, for obvious reasons, a stable and peaceful environment to be able to mobilize our staff. And its not possible at the present time. We will see if it will be possible next year, in 2022, and if it’s the case, production could be there in 2026, exactly what we indicated in September during the investor day. So we are committed to this project.  It’s there of course, so now we have to be patient and see how the situation will improve in the coming months”. If Phase 1 is pushed back 2 years to at least 2026 so will the follow up Phase 2, so more likely, it will be at least 2028/2029. The assumption for most, if not all, LNG forecasts was that Phase 2 would follow Phase 1. Exxon Rozuma Phase 1 of 2.0 bcf/d continues to be pushed back in timeline especially following Total Phase 1. Exxon’s Mozambique Rozuma Phase 1 LNG will add 2.0 bcf/d and, pre-Covid, was originally expected to be in service in 2025 but was always expected to follow TotalEnergies Phase 1. In the Oct 29 Q3 call, Exxon mgmt gave no indication of any movement on its Rozuma LNG with mgmt saying “paused simply because of the security situation on the ground, which we will continue to look at and revisit over time”. If we assume the same one-year delay, it would put Exxon Rozuma at 2027/2028 at the earliest instead of its original 2025. What this all means is that the Mozambique LNG delays are not 1.7 bcf/d, but 5.0 bcf/d of projects that were in all, if not most, LNG supply forecasts.

Mozambique force majeure didn’t attract the big attention because the major LNG suppliers didn’t highlight the Mozambique impact for the first two months. It was difficult for markets to see the bigger issue when the major LNG suppliers weren’t making a big deal of Mozambique for the first two months. In our May 9, 2021 Energy Tidbits memo, we said we had to chuckle when we saw Cheniere’s response in the Q&A to its Q1 call on May 4, that they only know what we know from reading the Total releases on Mozambique and its impact on LNG markets.  It’s why we tweeted [LINK]Hmm! $LNG says only know what we read on #LNG market impact from $TOT $XOM MZ LNG delays. Surely #TohokuElectric & other offtake buyers are reaching out to #Cheniere. MZ LNG delays is a game changer to LNG in 2020s, see SAF Group blog. Thx @olympe_mattei @TheTerminal  #NatGas”.  We previously wrote how could Cheniere not be talking to LNG buyers for Total and /or Exxon Mozambique LNG projects. In the Q1 Q&A, mgmt was asked about Mozambique and didn’t know any more than what you or I have read. Surely, they were speaking to Asian LNG buyers who had planned to get LNG supply from Total Mozambique or Exxon Rozuma Mozambique, or both.  Mgmt is asked “wanted to just kind of touch on the color use talking about for these supply curve. And are you able to kind of provide any thoughts on the Mozambique and a deferral with the project of that size on 13 and TPA being deferred by we see you have you noticed any impact to the market has is there any impact for stage 3 with that capacity? Thanks.” Mgmt replies “No. Look, I only know about the Mozambique delay with what I read as well as what you read that from total and an Exxon. And it’s a sad situation and I hope everybody is safe and healthy that were there to experience that unrest but no I don’t think it’s, again it’s a different business paradigm than what we offer. So, we offer a full value product, the customer doesn’t have to invest in equity, customer doesn’t have to worry about the E&P side of the business because, we’ve been able to both the by at our peak almost 7 Dee’s a day of US NAT gas from almost a 100 different producers on 26 different pipelines and deliver it to our to facilities. So we take care of a lot of what the customer needs”.

But at the end of June, major LNG suppliers came out with bullish mid/long term talk or action. (i) Our July 4, 2021 Energy Tidbits memo noted that it looks like Cheniere has stopped playing stupid with respect to the strengthening LNG market in 2021.  We can’t believe they thought they were fooling anyone, especially their competitors. That week, they came out talking about how commercial discussions have picked up in 2021 and it’s boosted their hope for a Texas (Corpus Christi) LNG expansion. On Wednesday, Platts reported “Pickup in commercial talks boosts Cheniere’s hopes on mid-scale LNG project[LINK]  Platts wrote “Cheniere Energy expects to make a “substantial dent” by the end of 2022 in building sufficient buyer support for a proposed mid-scale expansion at the site of its Texas liquefaction facility, Chief Commercial Officer Anatol Feygin said June 30 in an interview.” “As a result, he said, ” The commercial engagement, I think it is very fair to say, has really picked up steam, and we are quite optimistic over the coming 12-18 months to make a substantial dent in that Stage 3 commercialization.”   Platts also reported that Cheniere noted this has been a tightening market all year (ie would have been known by the May 4 Q1 call). Platts wrote “We obviously find ourselves at the beginning of this year and throughout in a very tight market where prices today into Asia and into Europe are at levels that we frankly haven’t seen in a decade-plus,” Feygin said. “We’ve surpassed the economics that the industry saw post the Fukushima tragedy in March 2011, and that’s happened in the shoulder period.”  It’s a public stance as to a more bullish LNG outlook. (ii) On June 23, Qatar Petroleum was clear that they saw an LNG supply gap. We tweeted [LINK]1/3. #LNGSupplyGap coming. big support for @qatarpetroleum expansion to add 4.3 bcf/d LNG. but also say “there is a lack of investments that could cause a significant shortage in gas between 2025-2030” #NatGas #LNG”. And importantly, this is after QPC accounts for their big LNG expansion. The QPC release said “However, His Excellency Al-Kaabi voiced concern that during the global discussion on energy transition, there is a lack of investment in oil and gas projects, which could drive energy prices higher by stating that “while gas and LNG are important for the energy transition, there is a lack of investments that could cause a significant shortage in gas between 2025-2030, which in turn could cause a spike in the gas market.”

Markets felt reassured by Qatar’s massive expansion without realizing India alone needs 3x the Qatar expansion LNG capacity. Qatar’s LNG expansion is huge and plans to add 4.3 bcf/d capacity. However, India alone needs 3x that amount of LNG. On Oct 22, Petronet CEO Singh presented at the India Energy Forum on Friday. As soon as we saw the reports, we tweeted [LINK]Bullish for #LNG #NatGas in 2020s. #Petronet CEO fcasts India LNG imports +12.4 bcfd to reach 15.8 bcfd (120 MTPA) in 2030. In line with his June est, see below SAF Group June 20 Energy Tidbits #Petronet sees LNG imports +13 bcfd to 2030. Thx @JournoDebjit @rajeshsing13 #OOTT”. Bloomberg’s India energy team reported “India’s import of natural gas is expected to hit 120 million tons/year by 2030 as the nation targets an energy mix goal, Akshay Kumar Singh, CEO of Petronet LNG, said at the India Energy Forum by CERAWeek. NOTE: India aims to boost use to natural gas to 15% of primary energy mix from about 6% now. * India’s current annual LNG import is about 26 million tons”. Singh is forecasting India’s LNG imports to grow from current 26 MTPA (3.4 bcf/d) to 120 MTPA (15.8 bcf/d) in 2030. That is an increase of 12.4 bcf/d to 2030. This is 3x the massive Qatar expansion capacity.

The late June/early July sea change in Asian LNG buyers contracting is the best validation of the LNG supply gap and gamechanger for LNG supply FIDs. Analysts can make forecasts, but the best evidence of the supply gap is Asian LNG buyers are putting money up to change their contracting moving away from spot/short term to locking in long term LNG supply through 2030. This is an abrupt turn from Asian LNG buyers contracting strategy in 2019 and 2020, when the Asian LNG buyer weren’t trying to extend long term contracts, rather, the push was to try to renegotiate down its long-term LNG deals.  The reason was clear, as spot prices for LNG were less than long term contract prices. This led to their LNG contracting strategy – move to increase the proportion of spot LNG deliveries out of total LNG deliveries. Shell’s LNG Outlook 2021 was on Feb 25, 2021 and showed this pre-Mozambique force majeure trend.  But post Mozambique LNG force majeure, clearly Asian LNG buyers did the math, saw a new, sooner and larger LNG supply gap and were working the phones in March/April/May trying to lock up long term supply. They were clearly working the phones with a new priority to lock up long term LNG supply. Major long-term deals don’t happen overnight, so it makes sense that we started to see these new Asian long term LNG deals start at the end of June.  Its why wrote our 8-pg July 14 blog, “Asian LNG Buyers Abruptly Change and Lock in Long Term Supply – Validates Supply Gap, Provides Support For Brownfield LNG FIDs” that started off “The last 7 days has shown there is a sea change as Asian LNG buyers have made an abrupt change in their LNG contracting and are moving to lock in long term LNG supply. This is the complete opposite of what they were doing pre-Covid, when they were trying to renegotiate Qatar LNG long term deals lower and moving away from long term deals to spot/short term sales. Why? We think they did the same math we did in our April 28 blog “Multiple Brownfield LNG FIDs Now Needed To Fill New LNG Supply Gap From Mozambique Chaos? How About LNG Canada Phase 2?” and saw a much bigger and sooner LNG supply gap driven by the delay of 5 bcf/d of Mozambique LNG that was built into most, if not all LNG supply forecasts. Asian LNG buyers are committing real dollars to long term LNG deals, which we believe is the best validation for the LNG supply gap.” Since late June, there have been at least nine Asian LNG buyer long term deals with total volumes of 2.57 bcf/d with an average term of 15 years. In addition, there are reports of Asian LNG buyers about to join this group such as Hokkaido Gas who is looking for 5-10 year LNG supply starting after 2025.  Note that in addition to the Asian LNG buyers deals, there have been European long-term deals including PGNiG (Poland) agreement to purchase an additional 2 mtpa (0.26 bcf/d) for 20 years from Venture Global.

Spot LNG deliveries and Spot deviation from term price

Asian LNG Buyers Long Term Deals Signed Since July 1, 2021

An even stronger validation when the world’s largest LNG importer, Japan’s JERA, is paying $2.5b to buy 25.7% in Freeport LNG to secure stable LNG supply. Entering into long term supply contracts is a big validator but there was an even bigger validation on last Monday Nov 15, when Japan’s JERA announced [LINK] it was spending $2.5b to acquire a 25.7% interest n Freeport LNG “to secure a stable LNG supply”.  This is an even stronger validation that a long term contract. JERA is the world’s largest LNG buyer. JERA announced it “JERA will not only be involved in the entire existing Freeport LNG project (three trains with an annual production capacity of approximately 15.45 mtpa) but will also work with FLNG to advance new LNG projects including production capacity expansion and the development of Train 4.” The existing three LNG trains capacity is 2.0 bcf/d.,

Long term LNG supply deals provide the needed anchor for new LNG FIDs. The return of long-term LNG supply deals provides the financing capacity or financial comfort to commit to new LNG supply FIDs. These are critical for the independent LNG supply players who will not FID without a certain minimum long term contract coverage.  We recognize supermajors, like Shell, have their own financial capacity and do not need the financing potential of long-term LNG deals to FID a project. Rather the long-term contracts provide the financial comfort to make a FID.  Whether is financial comfort or capacity, the abrupt change for Asian LNG buyers to commit to long-term LNG supply deals are a game changer for LNG markets and sets the stage for LNG FIDs.

And it looks like we are seeing the start of FIDs on both brownfield LNG and stalled greenfield LNG – we expect more in the coming months.  It looks like LNG supply projects, both brownfield and greenfield, are now moving to FID or are trying to get to FID in the coming months. Yesterday, Woodside Petroleum announced it made FID on its $12.0 billion LNG development at Scarborough/Pluto Trains to add up to 1.05 bcf/d with first LNG cargo in 2026. Woodside highlighted they estimated >13.5% IRR and payback of 6 years.  Prior to this FID, over the past few months there were clear comments/signals from other LNG players on the potential for near term FIDs on new LNG supply. In our July 14 blog, we said “We expect these decisions to be looked at before the end of 2021 for 2022 capex budget/releases. One wildcard that could force these decisions sooner is the already stressed out global supply chain. We have to believe that discussion there will be pressure for more Asian LNG buyer long term deals sooner than later.”  More on the supply chain later, but we did not expect to see any major LNG announcements during COP26. Rather we expect the window is for the next few months.

  • Cheniere Corpus Christi Stage 3. Cheniere has been publicly calling for FID in 2022 with most expectations being for early in 2022.
  • Cheniere Corpus Christi Stage 4. In the Q&A of the Q3 call on Nov 4, Cheniere was asked if they are even thinking about the Corpus Christi Stage 4 at this point. Mgmt replied Yes.
  • Woodfibre LNG. We look at Woodfibre LNG as the British Columbia LNG supply project that minds its own business and just keeps advancing to FID. There is one train with capacity of 0.3 bcf/d and is supported by 15-yr sales contracts with BP. Earlier today, Woodfibre announced [LINK] that it signed an EPFC contract with McDermott International. In the release, Woodfibre said “In addition to the EPFC work, McDermott will also be responsible for commissioning and start-up services. Pre-installation work for the project is planned for early 2022 and will gradually ramp up to September 2023, when major construction is targeted to begin. Major works will continue through to substantial completion, expected in Q3 2027.
  • Perhaps the best indicator of how Mozambique force majeure changed the LNG outlook. Tanzania LNG went off the radar when Equinor wrote off its investment in 2019. Post Mozambique force majeure Equinor and Shell wrote Tanzania that there was a limited window if Tanzania is to have a change at resurrecting the LNG potential. On Nov 8, Tanzania Energy Minister Makamba tweeted [LINK] he has started negotiations with Shell, Equinor, Pavillion, ExxonMObil and Ophir to work to an LNG FID in the next 6 months. Its not clear if they were working for a broader LNG area but, prior to this year, the Equinor/Shell potential Tanzania project was a potential 1.3 bcf/d LNG export project.
  • BP Mauritania FLNG Phase 2. In the Q&A of the BP Q3 call, mgmt replied “And Tortue, we’re going well with Phase one. And we’re taking a look at Phase two and trying to come to agreement with partners, government and our own engineers on what is the right thing to do. So stay tuned.” Mauritania is a 4-phase FLNG, Phase 1 is 0.33 bcf/d capacity.
  • Tellurian Driftwood LNG. We have trouble following the public comments and videos from mgmt, but we continued to see reports that FID is now expected to be in H1/22.
  • TotalEnergies Papua LNG 0.74 bcf/d is back on track. On June 8, we tweeted [LINK] “Timing update Papua #LNG project. $OSH June 8 update “2022 FEED, 2023 FID targeting 2027 first gas”.  $TOT May 5 update didn’t forecast 1st gas date. Papua is 2 trains w/ total capacity 0.74 bcf/d.”  We followed the tweet saying [LINK] “Bigger #LNG supply gap being created >2025. Papua #LNG originally expected FID in 2020 so 1st LNG is 2 years delayed. Common theme – new LNG supply is being delayed ie. [Total] Mozambique. Don’t forget need capacity>demand due to normal maintenance, etc. Positive for LNG.”

Does the increasing competition/demand for global fabricators, services, etc mean Shell will have to get LNG Canada Phase 2 FID in the queue if they want to protect its brownfield cost and timing advantage. We recognize that LNG Canada Phase 2 FID is not on radars and most North American LNG outlooks don’t even mention it as a possibility. But we believe the continuing global supply chain stresses and movement by others to look at new FIDs are likely to have Shell consider FID for LNG Canada Phase 2 in the coming few months and not wait a year. We think the issue for Shell to FID LNG Canada Phase 2 has moved from a market risk to an execution risk ie. how/can they ensure Phase 2 can have the cost and timing benefit of a brownfield projects.  All anyone knows from the outside is that the Asian LNG buyers want security of supply and LNG suppliers are now moving now to add supply to fill the increasing supply gap. Those aren’t market guesses; they are simply a reflection of what the people who have to commit capital are doing.  Their financial actions/commitments are the best indicator for this increasing supply gap. Plus, the one thing that is clear from LNG supply is that the risk is almost always to downside to unplanned delays or interruptions. The LNG market looks to be there so the key risk factor Shell on LNG Canada Phase 2 is execution risk. The risk to any major construction project has heightened with the pandemic causing global fabricator, global metals, steel, experienced services, and other supply chain issues.  The challenges facing major industrial projects is more than the general supply chain issues. The reason why we think Shell is faced with a near-term decision for FID on LNG Canada Phase 2 is that, if they want to have a chance to have the brownfield cost and timing benefits in a world of increasing supply chain issues, we believe they will have to have what we call a continuous construction cycle for Phase 2, ie. retain the spot in the queue for the global fabricators, global and domestic suppliers and trades from Phase 1 and move seamlessly to Phase 2. On Oct 7, LNG Canada announced [LINK]Three years after taking a final investment decision (FID) on Canada’s first major liquefied natural gas project, the LNG Canada consortium said October 6 the C$40bn (US$31.7bn) project was more than 50% complete. “We’re moving swiftly towards commissioning and start-up, and to fulfilling our promise of delivering a world-class LNG facility in Kitimat.”  There are different services, trades, people, fabricators, steel, equipment, etc at different phases and LNG Canada would want to retain the options for these services if they want to have the cost advantage of brownfield costs and time to completion. And maintaining a continuous construction cycle is even more important given that there are more global LNG supply projects now moving to FID. We have to believe LNG Canada will want to exercise any options with services and maintain any overseas fabricator slots to keep alive the possibility of a continuous construction cycle. This is the model that Cheniere has used successful in delivering its LNG phases on time and on budget. Its why we believe its now the time for Shell to FID LNG Canada Phase 2. If they are unable to retain any overseas fabricator slots, international service companies and domestic services/trades, it would add to the cost and timeline of LNG Canada Phase 2 vs the costs of a continuous construction cycle. Don’t forget they are looking at a much stronger LNG outlook for the 2020s today than a year ago.

LNG Canada Phase 2 will lift the overall project returns. LNG Canada Phase 2 would add two additional trains and capacity of ~1.8 bcf/d and increase the project capacity to ~3.6 bcf/d. We do not know the internal LNG Canada project returns. Phase 1 would have lesser returns as it is burdened with some one-time costs and added costs to set up for the potential of Phase 2. Phase 2 as the brownfield leg would have significantly higher returns and adding Phase 2 would bump the returns of LNG Canada in total.

Sounds like momentum on TC Energy and LNG Canada resolving their cost overrun dispute – If not, then we don’t see how there will be a FID on LNG Canada Phase 2.  We continue to believe that a key business issue holding back any Shell FID on LNG Canada Phase 2 has been the unresolved cost and timing dispute with TC Energy on the construction of the Coastal GasLink. This is the sole pipeline to deliver natural gas to LNG Canada. The Coastal GasLink pipeline was designed to be able to expand capacity to have enough capacity to support both Phase 1 and 2. But we have believed (and still believe) that LNG Canada would not proceed with Phase 2 until there was a resolve on the cost dispute with TC Energy. There had been no indications pointing to a resolve until the TC Energy Q3 results on Nov 5. In the Q3 report, TC Energy disclosed they had “committed to provide additional temporary financing to the project, if necessary, of up to $3.3 billion as a bridge to a required increase in project-level financing to fund incremental costs.” In addition, in the Q3 call Q&A mgmt gave the most optimistic comments we have noted on the potential for resolve. Mgmt said “we can of course discuss the details of any discussions on cost and schedule in the issues between us because they’re confidential. But what I can say is that we’re very hopeful that ultimately we’re going to reach an agreement between us on those issues and that of course will lead to the resolution of some of the temporary financing as well.” There is no guarantee of a resolve, but it seems like there is momentum to get to a resolve. And resolving this cost dispute is needed for any LNG Canada Phase 2 FID. Don’t forget, similar to LNG Canada, Coastal GasLink overall economics will get a boost with the full capacity to supply Phase 2 ie. there is economic upside to TC Energy to get the expansion.

Shell has given no formal indications of looking at FID, but it feels like Shell’s CEO has been showcasing LNG Canada for some reason. We often find that big companies will drop hints of some things that might come. Shell did this on LNG Canada Phase 1, we highlighted the hints we saw coming from Shell on our expectations for FID several months ahead of others because of these hints. Shell has given no formal indication that they are considering FID of LNG Canada Phase 2. We believe Shell is one of the leaders in the Energy Transition and Shell CEO van Beurden brings a common-sense view to that leadership. Shell has highlighted how lower emission LNG will be critical to provide long term cash flow to fund the emissions reductions. So, his recent comments seemed to showcase LNG Canada as one of the key long term cash flow sources and we do not believe he would have showcased LNG Canada in this manner if it was only going to be Phase 1. It would seem to us to be disproportional showcasing.

  • On Oct 6, Shell CEO van Beurden made a point of showcasing LNG Canada and saying he expected it to still exist in the 50s and later. Phase 1 starts up in the mid 2020s (most assume no later than 2025) and we don’t expect he would be showcasing a 30+ year Phase 1 to be operating in the normally big company CEOs showcase a project for a reason. Platts reported [LINK] “LNG and certainly chemicals and products are going to be relevant for a long time to come — LNG, think of it as a stayer in our portfolio,” he said, adding Shell had been “proven right” in its expectation of 4% annual demand growth for LNG. “In the long run — think second half of this century — many of our LNG positions will still be in play. Building LNG Canada at the moment, I don’t expect that to be wound down in the ’40s, I expect it to still exist in the ’50s and later,” Van Beurden said. “Whatever we build, we’d better make sure it’s carbon competitive, it’s first quartile, it can be decarbonized, and therefore it’s still relevant in a world that hopefully by then is a net-zero world.”
  • In the Q&A of the Q3 call Oct 29, it seemed that CEO van Beurden showcased LNG Canada. He was asked if putting the emissions targets out there has any implications to grow the LNG business or does that imply a shift from equity volumes to be an offtaker for LNG. Van Beurden replied “But on your other point, the LNG plants, yes, indeed, I do have a — and sort of quantum of automations. And of course, the ones we operate, which are quite a few actually come onto our account. So we’ve been very clear that if we want to build new LNG plants, that better come with very competitive carbon footprints on the operational side. And we have to find ways to offset this and offset not with nature based solutions, but offset it with savings elsewhere. So I’ve been very clear with our organization. If we are to do another energy brands, say for instance in Canada, it needs to come either without emissions or you need to find a way to reduce emissions elsewhere, because we are on a trajectory to bring down our emissions to net zero by 2050”. We don’t think van Beurden had to include his “for instance in Canada” in his response. It just seemed to be another example of van Buerden showcasing LNG Canada as a place for future growth in equity LNG volumes.

An LNG Canada Phase 2 would be a huge plus to Cdn natural gas.  LNG Canada Phase 1 is a material natural gas development as its 1.8 bcf/d capacity represents approx. 20 to 25% of Cdn gas export volumes to the US.  The EIA data showed US pipeline imports of Cdn natural gas as 6.83 bcf/d in 2020, 7.36 bcf/d in 2019, 7.70 bcf/d in 2018, 8.89 bcf/d in 2017, 7.97 bcf/d in 2016, 7.19 bcf/d in 2015 and 7.22 bcf/d in 2014.  An LNG Canada Phase 2 FID would be a huge plus for Cdn natural gas. It would allow another ~1.8 bcf/d of Cdn natural gas to be priced against pricing points other than Henry Hub. It would provide demand offset versus Trudeau if he moves to make electricity “emissions free” and not his prior “net zero emissions”.  Both Asian LNG buyers and LNG suppliers are making big capital commitments to secure long term LNG supply. The LNG outlook has changed and COP26 did not disrupt this outlook. An FID for LNG Canada Phase 2 would provide big support to Cdn natural gas for the back half of the 2020s. And perhaps if LNG Canada is exporting 3.6 bcf/d to Asia from two phases, it could help flip Cdn natural gas to a premium vs US natural gas especially if Biden is successful in reducing US domestic natural gas consumption for electricity. We think the next few months are likely the right time for Shell to look at FID for LNG Canada Phase 2 as, in a world of increasing supply chain shortfalls, they need to make sure they can commit to fabricators, services and trades for a continuous construction cycle to maintain brownfield costs and time to completion ie. a Cheniere type advantage. Who knows what Shell will decide, CEO van Buerden’s recent showcasing of LNG Canada reminds us what happened in 2018 ahead of the LNG Canada Phase 1 FID.  Just imagine the future value of Cdn natural gas if there is visibility for 3.6 bcf/d of Western Canada natural gas to be exported to Asia.

This is far from an easy decision for Shell, but we think the likely answer is Yes, and not No. We recognize that there has been no chatter that Shell is or will be considering FID on LNG Canada Phase 2 and it may not be the ideal time. Shell is a leader in the Energy Transition but has also been extremely logical/rational in how to accelerate emissions reductions. LNG looks very strong thru 2030 and Asian LNG buyers have abruptly shifted to looking for long term LNG supply. Woodside went FID on its Scarborough/Pluto LNG project yesterday, and other LNG suppliers are pointing to FIDs on multiple brownfield and greenfield FIDs in the coming year. Shell has an advantage that LNG Canada Phase 2 is a large brownfield 1.8 bcf/d phase. The timing may not be ideal, but we believe the world of increasing demand stresses on global fabrications, services, etc mean that it will be important to get LNG Canada Phase 2 in the queue for global and domestic services/fabricators. Everyone in western Canada will hope so because a FID will be a huge game changer to western Canada natural gas valuations. LNG Supply FIDs are starting to happen, does Shell need to get LNG Canada Phase 2 FID in the queue to protect its brownfield advantages? Only Shell knows, but we believe the abrupt positive changes to the LNG market in the face of continuing global supply chain stresses mean the answer is Yes and the timing is the next few months and not the next year. This would be big to Cdn natural gas.