Energy Transfer (ET +0.60%) has been trying to move forward with a project to convert its Lake Charles facility from natural gas imports to exports for years. The midstream company has faced several obstacles along the road, including the abandonment of its former joint venture partner, Shell (SHEL +1.23%).
However, Shell has continued to support the project since leaving the partnership, first as a customer and now as an advocate. That backing could help Energy Transfer finally start construction on the project.
NYSE: ET
Key Data Points
One issue after another
Energy Transfer initially received approval from the Federal Regulatory Commission (FERC) to convert its existing Lake Charles import and regasification facility to an LNG export terminal in 2015. It also received a license from the Department of Energy to export 2.33 billion cubic feet of natural gas per day (equivalent to 16.45 million metric tons of LNG).
However, delays and setbacks have prevented the company from making a positive final investment decision to start construction. Intense competition from rival projects made it challenging for Energy Transfer to secure enough customer capacity contracts to move forward with Lake Charles. Meanwhile, difficult market conditions during the early days of the pandemic led Shell to abandon the 50-50 joint venture. These and other issues have delayed the project.
Those setbacks meant Energy Transfer wouldn't finish construction before its regulatory approvals expired. That led the company to apply for extensions. While FERC has granted the midstream giant two extensions, the DOE denied its application for another three-year extension in May, saying the company didn't merit a second one due to its lack of progress.
After a failed appeal, Energy Transfer adopted a new tactic. It applied for a new and expedited export license for Lake Charles in August.
The company hopes this strategy will help the DOE see the progress that it has made toward the project and grant it an export license. It has signed capacity contracts with several customers over the past year, including Shell. Its former partner signed a 20-year sale and purchase agreement for 2.1 million tons of LNG per year. Energy Transfer has contracts for over half of Lake Charles' planned capacity.
NYSE: SHEL
Key Data Points
From customer to advocate
Shell wants to see its former partner move forward with Lake Charles. That recently led the company to write a letter to the DOE supporting Energy Transfer getting a new export license. One of the factors Shell pointed out is that Energy Transfer is reliable.
The global energy giant has seen firsthand the importance of having a reliable partner. It's one of several companies that has filed an arbitration case against Venture Global for failure to supply fuel under long-term contracts. Venture has shipped about 200 cargos to non-contract customers.
Shell isn't the only customer that has taken a stand to advocate on Energy Transfer's behalf. South Korea's SK Gas and leading U.S. natural gas producer EQT have also sent letters to the DOE supporting Energy Transfer's application.
Moving forward with Lake Charles is crucial for Energy Transfer. The company would earn a share of the steady fee-based income generated by the facility. In addition, "we expect to realize significant incremental cash flows from transportation of natural gas on our Trunkline pipeline system and other Energy Transfer pipelines upstream from Lake Charles," according to comments by co-CEO and CFO Tom Long on the project. The increased income from these sources would help support Energy Transfer's plan of growing its distribution (which already yields a hefty 8.9%) by 3% to 5% per year.
Hopefully, the support will help
Energy Transfer continues to work toward making Lake Charles LNG a reality. The support of Shell and other customers could help the company get the extension from the DOE it needs to finally start construction on the project. It would be a needle-mover for the company, potentially giving it a lot more fuel to continue growing its distribution in the coming years.
