Shell’s Gargantuan White Elephant Remains Shut Down

Shell’s massive floating LNG factory off the Kimberley coast has been in shutdown since February and industry analysts are divided on whether the $12-17 billion facility has a future.

Many businesses, and business leaders experience challenges in the normal course of commerce. Even the biggest of the big-boys are prone to a misstep here and there.

It seems that Shell, one of the world’s Oil producing behemoths and most well regarded corporate entities, has erred on a massive scale.

Prelude, a 600,000-ton monster which is five times the size of the largest U.S. aircraft carrier, is designed to produce liquefied natural gas (LNG) and other petroleum liquids.

Royal Dutch Shell’s Prelude floating liquefied natural gas (FLNG) vessel in a Korean shipyard before being towed to Australia. SEONGJOON CHO/BLOOMBERG.

Installed atop a remote gas field 300 miles off the northwest Australian coast, the 535-yard long Prelude is a bold experiment by the oil major, Royal Dutch Shell.

Unfortunately, the hugely expensive Floating LNG (FLNG) vessel, which is technically a barge because it cannot propel itself, is not performing as designed and hasn’t produced any LNG since early this year.

With Natural Gas (NG) prices at multi-year lows, the market for expensive production, no matter how unique, is seriously compromised. The oversupplied LNG market, led by Qatar, which has seen cargoes sold close to record lows below $US2 per million British thermal units, has led to cancellations of US cargoes while other plants have extended maintenance shutdowns.

The idea behind Prelude was a stroke of genius. Build what is effectively a floating production plant, and relocate the production capital, rather than having to onshore production, for which the planning and construction process is almost always mired in environmental and political delays.

Shell have never revealed the cost of construction, but even at the estimated figures of $12-17 billion, and with no land-based approvals needed, floating LNG seemed to solve the problems that plagued building new onshore facilities.

“There is little justification for bringing higher opex LNG projects online over the next few months as current record low prices may struggle to simply cover operating costs,” said Credit Suisse energy analyst Saul Kavonic, while declining to comment specifically on Prelude.

Shell’s Prelude floating LNG facility has been shutdown since February 2020.(Supplied: Shell Australia)

The ambitious project has been sitting, from all accounts, idle since February 2020, after incidents that the offshore energy regulator (NOPSEMA) described as “dangerous occurrences” — two of which involved “loss of hydrocarbon containment”.


The immediate issue is for Prelude to satisfy Australia’s offshore oil and gas safety regulator, the National Offshore Petroleum Safety and Environmental Authority (Nopsema) that problems such as the failure of a backup diesel power unit have been fixed and LNG production can restart.

Hopefully, for Shell, the regulator can be placated, and their gigantic project can be launched, and begin to deliver a return to shareholders. Undoubtedly, the business case will still stack-up, but if delays and problems persist, the payback timeline will be stretched significantly.

What option does one have when one has spent a rumored $12billion, on a project that may not produce a penny in the near future.

At the very least, we can hope to see Nat Gas Futures come off multi-year lows and in turn provide some respite for weary investors.

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