Shell’s Colossal Miscalculation in 2011 of Today’s LNG Price: Largest-Ever $12-$17-Billion “Floating Facility” Shut Down, Months After Shipping First LNG. Done in by Long Price Collapse

Built to profit from sky-high LNG Prices in Japan. Sunk by surging US LNG Exports, multi-year collapse in LNG prices, global LNG glut.

By Wolf Richter for WOLF STREET.

The Great East Japan Earthquake and subsequent tsunami in March 2011 triggered a series of events at the Fukushima power plant that led to catastrophic meltdowns in three of its six reactors, which led Japan to take the remaining of its 54 operating reactors offline, as a new regulatory and safety regime was established for reactors to come back on line. This caused a mad scramble to switch to other forms of power generation, including power plants fired by natural gas, which Japan has to import as liquefied natural gas (LNG), which triggered a blistering spike in LNG prices that caused all kinds of enormous long-term investments to be commenced around the world, including in the US and in Australia, in order to export super-lucrative LNG into booming Asian demand.

But in 2014, the price of LNG started sinking, and in 2015, it plunged, and those investments became huge money pits – including perhaps the largest of them all, Shell’s floating LNG-factory, the Prelude FLNG, at a length of 1,600 feet, the largest floating facility ever built, and at an undisclosed cost estimated to have been in the range between $12 billion and $17 billion, now languishing off the coast of Australia (the red hull is the Prelude, the smaller ship in front of it is a huge LNG tanker; image by Shell):

In April 2014, the average spot price of LNG at arrival in Japan was $18.30 per million Btu, according to Japan’s Ministry of Economy, Trade, and Industry (METI). This is as far as its data series goes back.

In July 2020, the average spot price of LNG at arrival in Japan was $4.10/mmBtu, according to METI, but that was up from $2.60/mmBtu in May, which had been the low point. July’s average price, despite the increase since May, still represents a 78% collapse from the price in April 2014:

In the US, natural gas at the Henry Hub traded in 2014 in the range mostly between $4-$5/mmBtu and would later collapse below $2/mmBtu. A similar price differential to LNG for Japan was occurring in Australia. And a lot of money went to work to arbitrage this price differential, in the US, in Australia, and elsewhere.

Shell made the decision to build the Prelude in May 2011, following the March 2011 earthquake, assuming that pricing of LNG would play out long-term as it was playing out at the time in Japan, with South Korea, Taiwan, and particularly China also being huge and growing LNG buyers. The logic was that demand for LNG would go through the roof, as would prices. The hull of the ship was built in a shipyard in South Korea.

In June 2019, the Prelude, by then operating in the undersea-gas-producing Browse Basin about 125 miles off the coast of northwestern Australia, transferred the first load of LNG to a tanker, a momentous event. By that time, the average price of LNG in Japan had dropped to $7.50/mmBtu. A month later, it hit $4.70/mmBtu. Shell has not disclosed how many shipments have occurred since then.

The Prelude, according to Shell, has a production capacity of “at least” 3.6 million tonnes per year of LNG, 1.3 million tonnes per year of condensate, and 0.4 million tonnes per year of liquefied petroleum gas.

Shell owns 67.5% of the Prelude. INPEX, Japan’s largest oil exploration and production company, owns 17.5%. South Korea’s state-owned natural gas company KOGAS owns 10%. And Taiwan’s state-owned oil, natural gas, and gasoline company CPC Corporation owns 5%.

In theory, the advantage of a floating production platform is that there are no land-based approval hoops to jump through. In theory, Shell could just position the ship in a remote area with undersea gas, develop the field, produce natural gas, liquefy it, and offload the LNG cargo onto tankers in a smooth operation.

But that’s not how it worked out.

Australia’s ABC News reported today that the Prelude  had been shut down in February, citing a statement by Shell that also said that “regular offtake of LNG, LPG and condensate cargoes” had taken place until January, and that the shutdown occurred due to “an electrical trip.”

Shell didn’t say why, after six months, the facility was still shut down and declined to say when production would restart, but said, “This is the final phase in the multi-stage, multi-faceted, restart process.”

“We will be in a stronger position to talk about timing of production and cargo once that has been completed,” Shell said, according to ABC.

“Prelude is a multi-decade project and its success will be measured by delivering sustained performance over the long-term,” Shell said.

ABC “understands” that Australia’s National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA) is assessing Prelude’s revised safety management systems, following three incidences that the agency described as “dangerous occurrences,” including two that involved “loss of hydrocarbon containment.”

Now there is a vibrant discussion going on among observers whether the highly complex and immensely costly engineering marvel has a future in a world that is experiencing an LNG glut, after years of huge investments in LNG projects around the world, including in the US, which has become a major LNG exporter over the past few years.

This ramped up production of LNG globally has caused prices to plunge in prior years, as the chart above shows, despite fairly strong demand. But since the Pandemic kicked off, demand has also plunged.

After US LNG exporters hit a record of 8.0 billion cubic feet per day (Bcf/d) in January 2020, the Pandemic cut demand globally, and by July US LNG exports had collapsed by 60%, to 3.1 Bcf/d, as global prices had dropped, making exports of US LNG at spot market prices uneconomical.

But the highly-complex engineering marvel, now white elephant moored by eight huge chains to the seabed off the coast of Australia, having already swallowed billions of dollars, requires very high prices of LNG to be economical, such as those seen from 2011 through 2014, but not seen since.

While LNG prices have ticked up from the lows, and while they may rise further, they remain very low, and even if they rise further would still be very low. And given the excess and growing production capacity globally, prices are not likely to return to 2014 levels.

So Shell will need to figure out what to do. The original plan was to keep the Prelude at the location for 20-25 years to develop gas fields. But in April, Shell said in a statement cited by ABC that, “due to the global economic downturn, including the sharp drop in oil price, declining markets and uncertainties with regard to the COVID-19 pandemic,” it would delay a final investment decision on developing a gas field needed to keep the Prelude operating in future years.

It comes down to costs and being bypassed by technological innovation, amid stagnating demand for electricity. Read… US Coal Consumption Plunged to Lowest Since at Least 1973. Why There’s No Hope for Coal

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  57 comments for “Shell’s Colossal Miscalculation in 2011 of Today’s LNG Price: Largest-Ever $12-$17-Billion “Floating Facility” Shut Down, Months After Shipping First LNG. Done in by Long Price Collapse

  1. nick kelly says:

    I hate to say this but maybe all the opposition that stalled LNG pipelines and terminals on BC’s coast has saved the industry a lot of money.

    • Paulo says:

      Maybe, but Kitimat is still under construction and I believe Howe Sound is as well.

      Other people’s money….but jobs for locals. The pendulum continues to swing. Current low energy prices aren’t forever, that is a certainty.

      • char says:

        Not that many jobs for locals.

        Prices are low now but will demand be low in a few years. a lot of jobs have gone so all the state are thinking about creating work for the unemployed. And the solution they have come up with is building a lot of green energy which kills gas demand.

      • raxadian says:

        As long as fracking exists and as long as Solar Energy and Wind power keep getting cheaper..

        HAHAHA!

        • Joe Saba says:

          always thought these were easy targets for terrorists
          big round ball – at least it would make nice fireworks

      • kam says:

        Paulo:
        Lots of jobs for China. Nothing is made in B.C.
        Canada, at best, is an assembly plant for China, including the LNG plants.

      • Trinacria says:

        And, I’m sure the management will get generous bonuses for their brilliance in strategic planning. Are there consequences anymore, whether is be large corporations, churches, not for profits and, of course goobermint….

    • td says:

      Of course, the obvious thing to do would be to sail that ship to Kitimat and refrain from building a local plant. The gas fields to support it already exist in Canada, whereas they would have to be developed in Australia as per the article. Of course, that assumes a pipeline can be built to the coast which is far from a done deal.

      My bet is that no LNG facilities will be built in Canada in the medium term and that the associated pipelines don’t get built.

      • Garrett Nichols says:

        We the pipeline is getting built as is the kitamat facility, pipe is being welded and laid as we speak

  2. A says:

    Holy crap that thing costs as much as one of the US Navy’s new state-of-the-art aircraft carriers.

    • Prof. Emeritus says:

      I’m pretty sure price tag is not the only thing they have in common:
      -Both have awful cash flow outlooks
      -Greenpeace and pacifists equally despise them
      -They probably both take on hookers at a regular base
      -Both off-shore drilling and aircraft carriers are disasters waiting to happen
      -The general public perceives LNG and the Navy as cool things

    • Keith Bulls says:

      Chevron’s Gorgon project is similarly expensive. Mammoth technical undertaking to build floating infrastructure in expectation of high LNG prices.

  3. Brant Lee says:

    Gosh, too bad the Japanese disaster wasn’t profitable enough, right Shell? I hope there is still a parking (mooring?) spot if the cruise line ships haven’t used them all.
    But, I do think this miscalculation mishap qualifies for a bail-out. Yo, Jerome.

    • Nathan Dumbrowski says:

      Thinking the same thing. Now that they have let the world know that any disaster is worthy of a Trillion $/Euro/Yen/Yuan they should open up the checkbook. Think about all the jobs that could be saved by creating just a few hundred ones and zeros.

  4. DR DOOM says:

    Japan is our bitch. The Hun is stirring and returning to Winnie’s assessement of either the throat or your feet. Putin is enabling the Hun out from under the skirt. Japan is not material and yet is the darling of bobbing talking heads . Myopic analysis yields a narrow result.

    • Tom Pfotzer says:

      “The Hun is stirring and returning to Winnie’s assessement of either the throat or your feet.”

      Stuff your ugly charactizations.

      Germany is doing a very fine job of growing from and through previous mistakes. Too bad “Winnie” and Uncle Sugar haven’t learned as much from their mistakes.

      And neither have you. “Myopic analysis yields a narrow result” … you can mouth the words, but can’t do the thinking and growing.

      Please do rebut. I’m of Germanic descent, and this is a subject that needs a little attention.

  5. polecat says:

    Perhaps Shell should re-cristen the Prelude as the ‘Nostromo’ instead.

  6. Brant Lee says:

    Maybe Shell can retool that boat to brew Sake?

  7. Dan says:

    Ouch!

    That’s gotta hurt!

  8. Ro says:

    Fed needs a new Special purpose Vehicle that can float for 25 more years and ship the floating liquidity to Shell in the meantime.

  9. Anthony A. says:

    This is typical management thinking in the energy industry I worked in for 35 years. Everyone jumps on the “new demand” and builds the $hit out of production facilities until the demand is satisfied and excess capacity comes online right about when the prices for the products drop.

    Then the companies have a fire sale and sell the excess manufacturing plants to lower tier competition that couldn’t afford to build them in the first go around. Once sold, those new competitors undercut the already low prices and make life even more miserable for the Big Guys who overbuilt in the first go around.

    I’ve seen this drill a few times now in olefins, nat gas, crude oil, and now LNG.

    • Old School says:

      We are in a world of extremes.

      Natural gas the same price as 20 years ago, but the world is in an EV stock bubble.

      Stock market at all time high, government bond yields at all time low yields.

      House prices at all time high and record number of people not paying mortgage.

      Record number of obese while politicians tell us people don’t have food.

      Virus probably leaked out virology lab, vaccine to save us made in virology lab.

    • baldski says:

      I agree. Crude oil tanker charter rates exploded in the early 70’s because of the Arabs and the oil majors began building VLCC’s (Very Large Crude Carriers) by the dozens only later to take them from delivery to layup on their maiden voyages.

  10. Anthony A. says:

    But Shell won’t be selling this B*tch….it’s way to big and not land based. It must cost a fortune to run this plant. And, LNG plants are very, very dangerous.

    • polecat says:

      I hear tell that the poor, stressed corals are in need of some ‘infrastructure improvements ….

      ’empty’ infrastructure, of course.

    • LouisDeLaSmart says:

      \\\
      @ Anthony
      To design a specialised system that needs to be sea water corrosive resistant (cost tenfolds), is highly flamable and is suceptible to weather, is imensly costly and complex. I am not even talking about the fact that most of the parts cannot be of the shelf and need to be custom made increasing maintenance a 10-fold. Since you were in the industry can you please help me understand what is the benefit of this kind of structure, cost wise or logisticaly? I dont get it…I really dont?
      \\\

      • Anthony A. says:

        I’d love to see the Capital Appropriation Request for this monster. I’d bet it was justified on some the following benefits:

        1. High LNG prices going out decades (the sales guys estimates, I’m sure).
        2. Captive offshore gas field with lots of capacity.
        3. No land-based pipelines needed with difficult to obtain permits to construct (5 – 10 year permitting process).
        4. Minimal environmental impact from air emissions and no big air permitting process.
        5. Wastewater treated on the unit and authorized to put back into the sea. (Or used onsite after desalination)
        6. “It would be as easy as a large oil/gas producing platform to build”…good luck with that!
        7. “Other offshore gas plants exist” – ARCO had one in the Java Sea offshore Indonesia. I worked on it for a spell…. but it was NOWHERE near as big or complex as this one.
        8. Some exec in Shell got a big bonus for this idea..LOL!

      • polecat says:

        I think HollyWooden needs a hand with a rig here …

        You heard it here first –
        “Augaworld – the Big Kahuna”

        ..because things like this get built, out of equal parts cleverness, avariceness, .. and hubris! ‘Bidness in a nutshell’ .. or in a case such as this, maybe a clamshell is more apt.
        Did wonders for the Titanic now, didn’t it, splitting in two like a cold crab leg.

  11. Realist says:

    I wonder about what the effect on LNG pricing will be if the US doesn’t manage to stop the Nordstream 2 from being completed.

    • char says:

      None, Nordstream 2 is not to bring more Russian gas to Europe but to stop using the Ukrainian gas network to transport gas from Russia to Europe.

  12. Dadbeh Arshid says:

    I believe starting this project was mistake at the very beginning. I when you aim to be the first LNG exporter and building first FLNG platform ever, you have to have ultimate strength at least in technology, human resource or natural gas to guide the market. Besides, production coat and human resource cost here in Australia is much more than production cost in the Middle East. When the LNG and natural gas price drops sharply , end user companies may find the way to pay the cancellation fees and join less cost projects in other regions.

  13. roddy6667 says:

    Maybe the low LNG prices will encourage the usage. In Thailand I noticed that trailer trucks are often LNG powered. Where you would have a sleeper, there are 2 or 3 horizontal tanks. LNG filling stations everywhere. I have seen a few trucks and stations in China, but very few.

  14. Just Some Random Guy says:

    That’s the energy business. It takes years to build facilities during which time the price can swing dramatically.

  15. endeavor says:

    Oh, I don’t know. Will come in handy some day in the future. Especially if warp drive does’t pan out.

  16. Olivier says:

    This is sad. I am on the record as being a bit of a luddite but exceptions must be made for engineering marvels like the Prelude.

    But something made me tick: from the decision to build to “first gas” eight years elapsed. That seems enormous. Granted, the Prelude is one-of-a-kind but still… Did I read that right, Wolf?

    • Wolf Richter says:

      Yes, you read that correctly. This was a huge project. Everything on it was complicated and huge and took a long time. It took a long time to design and plan. No one has ever built any ship of this magnitude, and so there were fundamental problems, such as a regular shipyard couldn’t build the hull, etc. etc. The keel was laid in 2013. In June 2017, the Prelude started its journey from South Korea to Australia. In December that year, it was in position. There was a final assembly and finishing process. A year later, Dec 2018, production started. June 2019, first cargo was shipped.

      These are monster projects. I’m sure it was exhilarating to work on it — all the problems that needed to be overcome. But I sure as heck wouldn’t want to work on it now.

      Unlike a regular liquefaction facility that gets its gas from a pipeline, this facility produces gas from the seabed then processes the mix of gasses to separate natural gas from the other gases and liquids, and then liquefy the natural gas. So there is a lot more going on in this facility than just liquefaction. In addition, you can have some very rough weather out there. If that thing pops when its storage is full of LNG, it’s likely good night for the poor souls on it.

      • kam says:

        And it was assembled in Australian waters by Australians. Huge wage costs.
        And like all Pioneering Projects. The next guy to build one has the benefit of not making all the pioneering mistakes.
        “Jeez, that’s simple, what’s the big deal in building that from scratch?”
        And never forget that Murphy is your partner.

      • polecat says:

        So, in essence .. it’s a collossal floating gas ‘cracker’ installation, subject to rapidly changing atmospheric and oceanic weather conditions .. as it simultaneously fights the incessent effects of corrosion via alien sealife, and seawater.. Got it!

        ‘MOTHER!! I turned the cooling units back onnn!’

  17. wkevinw says:

    There is a terminal (more than one?) in the Gulf of Mexico that was built to import NatGas and now exports it. The whole market is in reverse compared to the original plan.

    Two words:

    – Efficiency
    -Fracking

  18. The only problem here is Shell’s profits. Does anyone see the glass half full here? They invested in LNG to provide clean safe energy and the price came DOWN. Would it be better somehow if LNG prices doubled? This is great news for industry and consumers. The BOJ has no problem buying dodgy assets, they should step right in. I say good news somebody made the right decision.

    • MarMar says:

      LNG is not the kind of thing I would characterize as clean or safe.

      CleanER and safER than oil and coal, perhaps. But not clean nor safe.

  19. t.s. says:

    The cost overruns on this project must be enormous. If Dubai can build a plant for 4 billion and claim it to be expensive and produce diesel, jet fuel and gasoline, then what is really going on?

    • Carlos says:

      Gorgon (Barrow Island – West Aust) ended up at $65B I believe. Initial estimate was $35B.

      The construction camp looked like 4 * resort, and the plant is a monster

  20. 9Booger says:

    Shell recently sold their Marcellus shale midstream operations also.
    I have worked for a nat gas company for 20 years, not that far from the Marcellus. For the first 10 or so years, we would take gas from Canada, and run it south. One the shale took off, it all changed. The nat gas industry constantly changes. The company I work for was looking at an LNG partnership on the East Coast 10, maybe 12 years ago, but it never panned out.

  21. Phillip says:

    Is there hope for an increase in the natgas price once the frackers stop pouring money into the ground? I think the thesis that the fracking revolution was only possible with ultra low financing costs. They never had positive cash flow. But with Chesapeake and other frackers going belly up, and the natgas price being so low, that surely the frackers won’t be able to continue to get more money to drill away and continue to lose money.

    • The enviros are lining up against NG as clean energy, and there is no economy of scale. Doubtful the utilities who threatened to drop NG will actually go through with it. In South America they have dual use Propane and CNG autos. NG is still about half the price per BTU of gasoline? The experts who say gasoline is somehow more practical than NG confound me. All the CAFE standards, different blends of crude, refinery pollution and safety issues, then we outsource some, and export other refinery products? How can anyone believe the current refining system is practical, or safe?

  22. JasonK Canadanoyed says:

    Maybe a quick, expensive conversion to a desalination device making sea ice for Saudi? It processes alot of water anyway, gots lots of power, and eats money. Using pressure-at-depth also, and harvesting H3O2 and the salts to give engineers a good year of work. What are white elephants made for? Remedial work to pad the ponzi machine. More

  23. DanS86 says:

    What hath central bank policy wrought???

  24. Michael Storch says:

    One wonders about the financial implications.

    Q/ Does it matter that it operated at all?

    Q/ What are the accounting impacts, eg, can you depreciate an asset if it never got to be an asset, or must it be immediately expensed ?

    Q/ Who would have borne what cancellation costs if it had never operated at all ?

    There is yet more game afoot, Wolf !

    • Khowdung Flunghi says:

      “Stranded Asset” – (From Wikipedia)
      Stranded assets are “assets that have suffered from unanticipated or premature write-downs, devaluations or conversion to liabilities”.[1] Stranded assets can be caused by a variety of factors and are a phenomenon inherent in the ‘creative destruction’ of economic growth, transformation and innovation, as such they pose risks to individuals and firms and may have systemic implications.[2]

      The term is important to financial risk management in order to avoid economic loss after an asset has been converted to a liability. Accountants have measures to deal with the impairment of assets (e.g. IAS 16) which seek to ensure that an entity’s assets are not carried at more than their recoverable amount.[3] In this context, stranded assets are also defined as an asset that has become obsolete or non-performing, but must be recorded on the balance sheet as a loss of profit.[4]

  25. brobob says:

    no mention of the Russian gas plants in the arctic that China invested in. How has that affected price and demand in asia?

  26. Lee says:

    Interesting story.

    Of course many know that the big three resource exports from Australia are Iron Ore (Current price around US$129 or so), coal (met and thermal), and LNG.

    The only one with its price currently holding up is iron ore. LNG was supposed to over take both iron ore and coal exports in value as a result of high demand and high prices.

    Of course, this is only one of the numerous LNG projects that were built in Australia. Another one, Gladstone, on the east coast uses CSG for its source.

    So what did all this mean to Australia?

    Well, all those nifty projects in the LNG sector pushed up economic growth, wage costs, and the Australian dollar.

    The Reserve Bank of Australia (RBA) pushed up interest rates to ‘cool’ the economy. It didn’t make one bit of difference in the oil/gas/mining/immigration sectors at all.

    What it did do was decimate domestic production in other sectors and increase imports.

    So what about natural gas in Australia?

    Well, Western Australia managed to put in place a requirement that prducers would have to set aside a certain amount for domestic use. So they were/are okay.

    What about the east coast and Victoria?

    The LNG export craze resulted in a shortage of domestic natural gas on the eastern side of Australia and Victoria. Of course, the various state government bans and restrictions on natural gas exploration and development including a ban on fracking and land based exploration/ production of NG here in Victoria didn’t help either.

    New South Wales also implemented some new rules and regs as well which also hit the sector.

    Add in the fact that the CSG projects were coming up short in production amounts to fill the export contracts and that made the situation even worse resulting in more production diverted from the domestic market.

    So here in Victoria natual gas prices exploded upwards. We pay about $A20 per mcf at the retail residential price – thats’s about US$14 per thousand cubic feet.

    (Makes those solar hot water heaters a real good deal!!)

    Industrial entities that had to go on new contracts with the higher prices were in big trouble and lots of them that use natural gas shut down as their costs went up.

    And the most absurd thing of all?

    People are talking about building a LNG IMPORT terminal here in Victoria to import natural gas!!!!

    • Carlos says:

      Supposedly the highest LNG exporter, with some of the highest domestic LNG prices, and as you say plans to import (what may amount to some of our own gas) and barely a peep from the plebs, they have no clue.

      Corrupt to the bitter end ….. just as we deserve !

  27. DC Long says:

    Fukushima fuel pool and reactor breached due to power failure. They survived the Wave and Earthquake intact. Bye bye if you live downwind of one of these gadgets that needs the failing grid to stay stable.

  28. baldski says:

    Joe Saba
    Aug 22, 2020 at 12:38 pm
    always thought these were easy targets for terrorists
    big round ball – at least it would make nice fireworks

    No reply button on post.

    I know you cannot detonate LNG but flameless explosions can occur when LNG hits water.

    • Nick Smith says:

      Natural gas itself makes a lazy fire. The big fires and explosions we see on the news are from compressed natural gas, which when mixed with air in the proper proportions; explode violently and or burn rapidly. The proportions need to be between 5-15% Natural Gas to Air. LNG will not burn (I have extinguished matches and small torches in beakers of this liquid), but a larger torch flame will boil the surface enough to create the gas we use. The gas evaporated from a pool of LNG will burn, but the flame will usually self extinguish when the heat source is removed. If a large enough flame can get going where it can boil the surface while burning off, then the combustion process becomes self sustaining. This still will not explode though, just burn off in a lazy type of imperfect combustion. At this point if water is added (possibly to try extinguish the flame), it will actually boil the LNG surface by warming it above -162 Celsius more rapidly. This creates a much larger amount of gas and therefore a larger flame but it still won’t explode. The linked page shows Methane (Natural Gas) will only support combustion in very low concentrations.
      Lastly, the Coastalgaslink.com website shows 0% of the pipe has been installed in any of the 8 sections which will be required to transport natural gas from the Dawson Creek area to Kitimat. While work continues, it is at a much slower pace than in previous years. It wouldn’t surprise me one bit if this project gets shelved.
      Thanks for the excellent article Wolf.

Comments are closed.