Shell will start taking cargoes in May from Louisiana's Sabine Pass LNG export terminal.
Shell could face a roughly $1.13mn fee for each cargo it does not take before its 20-year supply contract starts in November.
Shell on February 15 completed its acquisition of BG, which had signed 20-year contracts for up to a combined volume of 5.5mn t/yr, equivalent to 760mn cf/d (21.5mn m³/d) of gas, from Sabine Pass. Up to 3.5mn t/yr of those deliveries are scheduled to start in November, when the first liquefaction train starts long-term commercial operations, terminal owner Cheniere Energy told Argus.
BG's contract stipulated that if Cheniere starts producing from train 1 under the correct specifications before November, BG would buy cargoes under essentially the same terms through so-called pre-commercial operations.
According to the October 2011 contract between BG and Cheniere, which Cheniere submitted to the US Securities and Exchange Commission, Cheniere must offer to BG the first 500,000 mmBtu/d (483mn cf/d) of production from train 1 under pre-commercial operations. That is roughly equivalent to one cargo per week.
Cheniere expects to start pre-commercial operations in late April or May, when contractor Bechtel is scheduled to complete commissioning of train 1 and hand over operations to Cheniere.
A typical LNG cargo is equivalent to about 3 Bcf of gas, so 3.5mn t/yr is roughly equivalent to one cargo per week.
If Cheniere offers a cargo at least 60 days in advance of the delivery window, then Shell must pay a liquefaction fee of $2.25/mmBtu even if it declines to take the cargo, or roughly a fee of $1.13mn for each cargo. If Shell takes the cargo, it would also pay $115pc of the Nymex Henry Hub monthly settlement price for the month in which the cargo is delivered.
Under such a scenario, Shell would have incentive to take Sabine Pass cargoes even in the current weak global LNG market. Even it loses money marketing the cargo, it could at least get back some of the liquefaction fee of $2.25/mmBtu.
If Cheniere offers a cargo to be loaded less than 60 days in the future, Shell could reject the cargo without paying a liquefaction fee. Under such a scenario, Cheniere could try to sell the cargo to a third party, but it could not sell it to its affiliate Cheniere Marketing. If Cheniere procures more than a $2.25/mmBtu liquefaction charge by selling to a third party, it must pay Shell the excess liquefaction charge.
Those terms give Cheniere incentive to offer cargoes at least 60 days in advance, which in turn give Shell incentive to take all pre-commercial production at a rate of about 3.5mn t/yr.
Cheniere said Shell, through its BG operations, has indicated it would like to take pre-commercial cargoes, but it declined to say how many. Cheniere also declined to comment on terms of the pre-commercial contract.
Train 1 sent out its first commissioning cargo is February and is expected to export six to eight text cargoes before Cheniere starts pre-commercial operations. The facility has so far exported four cargoes.
Gas flows to Sabine Pass have averaged 729mn cf/d so far in April, compared with 393mn cf/d in March.
Source: Argus Media
Date: Apr 5, 2016