July 28, 2022

WWW.ENERGYINTEL.COM

Shell Unlikely to Seek Stake in New Sakhalin-2 Operator

Shell CEO Ben van Beurden on Thursday said it was “highly unlikely” that his company would apply for a stake in the new Russian operator of the Sakhalin-2 LNG project.

The UK-based supermajor — and No. 1 LNG portfolio player — had in February announced plans to exit its 27.5% interest in the project following Russia’s invasion of Ukraine.

But before it had managed to sell the stake — raising some funds on the way out — Russian leader Vladimir Putin on Jun. 30 issued a decree creating a new Russia-registered operating company for the scheme, which is located in the Russian Far East.

The foreign partners — Shell, Mitsui and Mitsubishi — had one month to apply to retain their current shareholdings in the new firm alongside Russia's Gazprom.

“It’s highly unlikely that we will buy into a Russian entity if the interest that we have in Sakhalin Energy is being transitioned to that,” van Beurden said, adding that Shell was still waiting for more details to come out.

“That’s not in line with our intentions to leave our asset position in Russia. Of course, it throws a little bit more uncertainty on how exactly we will exit but we are pretty clear on our intent.”

In its second-quarter earnings statement, the company said it was “assessing its rights and still working towards reaching an acceptable agreement that enables Shell to withdraw” from Sakhalin-2.

Second-Quarter Volumes

Shell’s liquefaction volumes in the second quarter were 7.66 million tons, down 4.3% from 8 million tons in the first quarter after the company derecognized Sakhalin volumes on its books.

And Shell is guiding for lower liquefaction volumes again in the third quarter due to higher planned maintenance and uncertainty over how long the strike at its Prelude floating LNG in Australia will last.

Shell’s total LNG sales in the second quarter were 15.21 million tons, down 16.8% from the previous quarter.

Prelude Labor Pains

Van Beurden said it was “disappointing” that Prelude workers had rejected a A$30,000 (about US$20,900) increased pay offer but that talks were continuing.

“We think this needs to be resolved through negotiations. But in the meantime ... we have to discontinue operations because of the union strikes and there is no way we can of course continue, also from a safety and security perspective. “

The financial implications of the strike are "a big unknown," van Beurden added. "It depends on how long it will take.”

Europe's Supply Crunch

On Europe’s looming gas supply crunch, the Shell boss said the company was doing everything it could to deliver more volumes, with first gas from the Pierce blowdown in the UK North Sea expected in the autumn.

“So that will bring new gas to market and of course we will bring LNG supplies from around the world wherever we can,” he said.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact
Tom Daly, London

Total Eyes Short-Cycle Projects, Opportunistic M&A

TotalEnergies said on Thursday it plans to use some of the surplus cash generated by high commodity prices to invest in short-cycle oil and gas projects and pursue opportunistic M&A deals.

The French major reported adjusted second-quarter net income of $9.8 billion, up 9% from the first quarter and almost triple its earnings for the same period of last year.

It also announced a new impairment charge of $3.5 billion based on its assessment of the potential impact of sanctions on the future value of its stake in Russian LNG producer Novatek.

CEO Patrick Pouyanne made clear that large-scale low-carbon energy acquisitions are still off the table for Total, given the expensive valuations for such assets.

He said Total would instead prioritize investment in short-cycle oil and gas projects in various countries and keep an eye out for other attractive M&A opportunities.

Pouyanne said the company would act opportunistically "at a more tactical level," for example, by moving floating storage and regasification units (FSRU) for LNG to France and potentially Germany as Europe seeks to wean itself off imports of Russian gas.

Meanwhile, analysts at RBC suggested that Total's plan to hold its share buyback guidance steady at $2 billion in the third quarter had disappointed some investors, given the current favorable macro environment for oil and gas companies.

Inflation Risks

The war in Ukraine and sanctions against Russia pushed refining margins to record levels in the second quarter and also drove retail fuel prices higher.

Under pressure from the French government, Total recently extended its fuel discount program for French consumers through the end of this year.

Total's boss said he expects producers will struggle to develop additional spare production capacity for both oil and LNG over the coming year. "This implies medium-term support for high prices," he said.

He also noted that global demand has picked up as countries reopen after the pandemic, while warning that the resulting inflation could trigger a recession.

Short-Cycle Projects

The company raised its capital spending budget for this year to $16 billon — $1 billion more than it had estimated three months ago.

Pouyanne insisted that this was not linked to soaring inflation across the value chain, saying the additional money was earmarked instead for "opportunistic M&A activities, which fit our strategy, and accelerating short-cycle capex."

However, he added that the jump in the cost of raw materials such as steel had recently led Total to postpone an order for the East Africa Crude Oil Pipeline in Uganda "to wait and see some deflation."

Total announced on Thursday that it has sanctioned the $850 million Begonia oil project in Angola's Block 17/06 as part of a "multi-energy" approach that includes a solar power project.

Begonia comprises five wells that will be tied back to the nearby Pazflor production facility. It will be commissioned in late 2024 and will increase output by 30,000 barrels per day.

Total is also a partner in the Eni-led development of the Quiluma and Maboqueiro gas fields to provide additional feedstock for Angola LNG.

Floating LNG

Total is also in talks with German authorities about deploying an FSRU at Lubmin in northeastern Germany for use by Deutsche ReGas. The location is close to the landing point of the Nord Stream 1 gas pipeline.

"I'm very comfortable bringing in a floating unit because if the market moves because policymakers want to change their policy around natural gas, we can move it. If you build an onshore [regasification] terminal, you make a longer commitment."

Total will present a strategy update at its Sep. 28 investor day in New York and this will not include its Russia business — which represents around 5% of capital employed and cash flow — "because we have no more growth in Russia, no new projects."

“There will be a volume impact but not really any financial impact on performance, and the return of shareholders will not be affected," Pouyanne said.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact

Total Q2'22 Earnings Results
($ million)Q2'22Q2'21%Chg.Q1'22
Revenue70,46041,64269%63,938
Operating Cash Flow16,2847,551>1007,617
Net Income5,6922,206>1004,944
Adjusted Income9,7963,463>1008,977
Exploration & Production*4,7192,213>1005,015
Integrated Gas, Renewables & Power*2,555891>1003,051
Refining & Chemicals*2,760511>1001,120
Marketing & Services*46641712272
Liquids Production ('000 b/d)1,4831,46411,527
Gas Production (MMcf/d)6,8357,017-37,162
Oil and Gas Output ('000 boe/d)2,7382,747--2,843
Refinery Throughput ('000 b/d)1,5751,070471,317
LNG Sales (million tons)11.710.511%13.3

Deb Kelly, London

Technip, Linde Continue Russian Exit

France’s Technip Energies and Germany’s Linde said Thursday they are sticking to plans to scale back operations in Russia, where both engineering giants have played key roles in major LNG developments.

The exodus of key contractors, investors and lenders because of the Kremlin’s war in Ukraine and Western sanctions against Russia puts Moscow’s ambitious plans to produce up to 140 million tons per year by 2035, up from some 30 million tons/yr in 2021, at major risk.

Russia’s privately owned LNG export champion Novatek believes the target can still be reached despite the need to shift to domestic technology and competence, while state-run gas giant Gazprom says the targets must be revised. Although Gazprom's motive might be a desire to convince the Kremlin that gas should primarily be monetized through pipeline supplies and petrochemicals, something upon which Gazprom is strategically focused.

Technip Suspends Most Arctic LNG Work

Technip Energies has suspended “the vast majority of the work” within Novatek’s Arctic LNG 2 project, as the French company continues to implement an “orderly exit” from the sanctions-hit 19.8 million ton per year scheme in Russia, CEO Arnaud Pieton told an investor call on Thursday.

“The exit process will likely take several more months due to the contract terms and the inherent size of the project,” he said.

After the Kremlin invaded Ukraine on Feb. 24, Technip Energies said in March it would not seek new business opportunities in Russia. In late April, it admitted that its involvement in the existing Arctic LNG 2 project will be reduced due to the EU sanctions imposed that month, banning the export and transit of key liquefaction equipment for Russian LNG projects.

Technip Energies removed approximately €2 billion (2.03 billion) of Arctic LNG 2 backlog in the first half of 2022, which represented the scope of work specifically under sanctions and a scope “for which we have reached an agreement with the customer as part of what we are calling our orderly exit,” Pieton told an investor call.

An €800 million Arctic LNG 2 backlog remains, consisting of close-out and exit activities that are still under discussion, Pieton said, adding that “this is not necessarily physical work happening on site.” The remaining backlog will be further adjusted as “we progress through the agreement with the client,” he added.

Novatek Looks for Replacement

Technip Energies builds liquefaction trains and topside modules for Arctic LNG 2 together with Italy’s Saipem and Russia’s Nipigas. Saipem’s Saren joint venture with Turkey’s Renaissance Heavy Industries also builds concrete gravity-based (GBS) structures for the project.

Saipem said in its first-half 2022 report on Wednesday that it will conclude activities under both Arctic LNG 2 contracts “with a timing consistent with the provisions of the sanctioning framework," while also exiting from two other non-LNG projects in Russia.

Russian newspaper Kommersant reported on Thursday, citing sources, that due to the exit of foreign contractors, Novatek plans to give both topside and GBS contracts to Nipigas’ Nova Energies subsidiary and little-known UAE-registered firm Green Energy Solutions.

Novatek did not comment on this to Energy Intelligence. Technip Energies used to hold 50% in Nova Energies, but in early July transferred its stake to Nipigas, which is now Nova’s sole owner.

Linde Deconsolidates Russia

Linde is actively working to “safely and economically scale back operations” in Russia, CEO Sanjiv Lamba told investors on Thursday.

Linde is involved in Gazprom’s 1.5 million ton/yr Portovaya LNG plant, struggling to complete the commissioning stage. Linde is also involved in the 45 billion cubic meter per year gas processing and 13 million ton/yr LNG facility at Ust-Luga, and the 42 Bcm/yr Amur gas processing plant.

The company has deconsolidated its Russian gas and engineering business entities as of Jun. 30, Linde said in a six-month financial report. The deconsolidation has resulted in net Russian asset impairments of over $900 million in the first half of 2022, CFO Matt White said. He added that these assets have increased almost 25% in the last few months due to the strengthening of the ruble.

Deconsolidation means that Linde stops reporting any business activity of the Russian assets in financial statements, but it still owns the assets and will continue to scale back operations while working to divest some industrial assets, White said.

“We will only recognize cash that can be repatriated from Russia into a consolidated Linde entity,” he said.

“We are laser focused to continuously extract economic value [from Russian assets], consistent with every other business we own,” White added.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact
Staff Reports

Adnoc Seeks EPC Interest For Fujairah LNG

Abu Dhabi National Oil Co. (Adnoc) is taking the next step towards implementing its plans for a new LNG facility in the emirate of Fujairah on the Arabian Sea.

The new facility will make the United Arab Emirates the Mideast Gulf's second-largest exporter of the super-cooled fuel.

Adnoc this week invited contractors to submit expressions of interest in bidding for the main engineering, procurement and construction (EPC) work on the $2 billion-plus LNG facility, an industry source told Energy Intelligence.

The EPC contract is due to be awarded in 2023 after the completion of front-end engineering and design (Feed) work, which is being carried out by McDermott International.

McDermott in May won the Feed contract on the planned Fujairah project, which will add some 9.6 million tons per year of new LNG export capacity. This would come on top of Adnoc’s existing liquefaction trains on Das Island with combined capacity of 5.8 million tons/yr.

Created with Highcharts 9.0.0(million tons)DAS ISLAND LNG EXPORTSJapanIndiaPakistanChinaSouth KoreaTaiwanOthers20172018201920202021202201234567Source: Kpler

Contractor Team

International contractors, including McDermott, Chiyoda and Technip Energies, are expected to be among those bidding for the EPC contract.

KBR is understood to be the project management consultant on the project, which Adnoc plans to establish as one of the world's lowest-carbon LNG export facilities.

Unlike Adnoc's current LNG output, whose sulfur specifications are too high for Europe, the new volumes could potentially head west and help replace Russian supplies.

Adnoc wasn't immediately available to comment.

Regional Position

The Fujairah expansion would lift Adnoc's overall LNG capacity to around 15.4 million tons/yr, likely by around 2026.

That would see the UAE move ahead of neighboring Oman, which has around 11 million tons/yr, to take the No. 2 LNG producer spot in the region.

It will still remain well below Qatar's liquefaction capacity of about 77 million tons/yr, which is in the process of being expanded to 126 million tons/yr in two phases until 2027.

Mideast Gulf LNG Landscape

ef220621_Gulf_Oman_Qatar-UAE-Fujairah.svg


Rafiq Latta, Nicosia and Oliver Klaus, Dubai


In Brief

US Lawmakers Push Codification of Small-Scale LNG Approvals

The US Department of Energy (DOE) said it would work with lawmakers to cement an expedited approval process for small LNG shipments into law.

A bill in the Senate Energy and Natural Resources Committee “appears to codify into law a Department of Energy rule that expedites the approval process for facilities that export small-scale shipments of LNG,” DOE Assistant Secretary Kathryn Huff said. “While the department does not have a view on this bill, the DOE is ready to provide technical support as needed.”

The DOE in 2018 finalized a rule allowing small-scale LNG exports to be approved in an expedited process, bypassing the lengthier procedure needed for LNG exports delivered on conventional tankers to countries with which the US does not have a free trade agreement. The DOE considers all exports to countries with which the US has a free trade agreement in the “national interest.”

The main recipients of small-scale exports are countries in the Caribbean with low demand that does not warrant imports via larger tankers.

The bill defines “small-scale” as 51.75 Bcf/yr — in line with the existing DOE rule. The bill’s sponsors — all Republicans — include Louisiana senators Bill Cassidy and John Kennedy; Florida senators Marco Rubio and Rick Scott; and Oklahoma’s Jim Inhofe.
Emily Meredith, Washington


Data Snapshot

LNG Netbacks at Key Receiving Terminals

LNG Exporter Netbacks Between Key Receiving Ports
($/MMBtu)AlgeriaAustralia WestAustralia EastMalaysiaNigeriaNorwayOmanPeruQatarRussiaTrinidadUS GulfUS East Coast
Dahej, India40.1340.5940.2140.5839.7939.6241.0639.2740.9740.2439.4639.1839.55
Sodegaura, Japan40.7942.1942.2142.3040.7637.3241.8239.6841.6842.6540.0139.1640.96
Zeebrugge, Belgium61.1859.2958.8559.3960.5960.9960.1658.8560.0058.8660.7359.6560.83
Huelva, Spain46.5244.8444.4544.9245.9745.7545.6044.3545.4744.4546.0244.9846.04
Isle of Grain, UK41.7340.0439.6740.1241.2441.5640.9439.6640.6839.6741.3340.3941.43
Everett, US6.615.255.585.306.356.230.015.965.764.946.79----
Created with Highcharts 9.0.0($/MMBtu)QATAR TO NORTHEAST ASIANetbackNetback21. Feb7. Mar21. Mar4. Apr18. Apr2. May16. May30. May13. Jun27. Jun11. Jul25. Jul102030405060Energy Intelligence

LNG Market Indicators

Spot LNG Pricing
Latest WGIDailyDaily Chg.Chg. From Latest WGI
NE Asia0.0043.410.0843.41
SW Europe0.0047.20-1.2247.20
Futures Pricing
($/MMBtu)Chg.LatestPreviousWeek Ago
Henry Hub, US (futures)-0.428.138.557.93
NBP, UK (futures)-6.5738.6245.1936.01
European Spot Pricing
Chg.LatestPreviousWeek Ago
Dutch TTF-1.7259.5461.2644.97
Zeebrugge (Belgium)-2.9433.3536.29--
German NCG-1.3759.7961.1544.32
NBP (UK)-1.2242.5643.7734.69
US Markets
US Spot Prices
Sabine Pass, Louisiana-0.018.668.678.00
Corpus Christi, Texas-0.398.158.547.62
Cove Point, Maryland-0.467.598.058.89
Elba Island, Georgia--------
Nymex Henry Hub Futures
Near Month-0.428.138.557.93
Second Mth-0.418.128.537.82
Third Mth-0.408.208.607.78
Created with Highcharts 9.0.0($/MMBtu)GLOBAL GAS PRICINGUS NymexDutch TTFNE AsiaAug '21Sep '21Oct '21Nov '21Dec '21Jan '22Feb '22Mar '22Apr '22May '22Jun '22Jul '22020406080Energy Intelligence