Shell Plc, Edison SpA, and BP have begun arbitration proceedings against Venture Global LNG, Inc. alleging that Venture Global LNG has sold cargoes on the spot market rather than deliver them to Shell, Edison, BP, and others as required by offtake contracts. How did they get there?
LNG plants, renewable fuels facilities, refineries, wind and solar farms, pipelines, and other such process plants are often built with project specific financings, in a practice known as project finance. Project developers secure feedstock contracts from creditworthy suppliers and offtake purchase contracts with creditworthy customers to lock in—and prove to financial partners—the profitability of the venture. These structured financings reduce risk and uncertainty for all involved and allow banks to provide debt financing. They are commonplace. What is alleged in the arbitration proceedings is not commonplace.
Venture Global LNG’s Calcasieu Pass LNG plant financial closing was announced in an August 19, 2019, press release. It was routine. Stonepeak Infrastructure Partners provided $1.3 billion in equity, and $5.8 billion in project finance lending was provided by a group of lenders including Banco Santander, S.A, Bank of America
Reuters reported the Calcasieu Pass LNG plant began production in January 2022 and began shipping cargoes in March 2022 as part of the plant’s commissioning or shakedown process. After review, the Federal Energy Regulatory Commission, FERC, approved the facility for commercial operation beginning May 2022. LNG is a standard commodity product and not a new jet aircraft or pharmaceutical product for which additional, specific testing is necessary.
But rather than declare commercial operation and trigger sales to its offtake partners, Venture Global LNG began shipping cargoes to the spot market. Reuters reports that the plant had shipped 177 cargoes worth more than $15.3 billion from March 2022 through May 2023—that count is now more than 190 cargoes. According to Energy Intelligence, Venture Global LNG has informed its customers that it will delay declaring the facility in commercial operation until the end of 2024 even as Bloomberg reports that Venture Global LNG is offering spot cargoes for November 2023 to March 2024. In response, Venture Global LNG has complained that its business partners “have chosen to misrepresent confidential long-term contracts.” Know that there are few secrets in the global LNG market. Cargoes are in plain sight, and deliveries are known to all.
Russia’s war on Ukraine brought a bonanza to the global LNG market in 2022 as supplies were diverted to Europe. Prices jumped. The allegations are that Venture Global LNG made the cold decision to grab those high margins in the spot market and ignore their contractual obligations.
Any financial gain to Venture Global LNG from delaying commercial operation will be obvious to the arbitrators. Similarly, the potential economic damages to the offtake partners has been outlined by S&P Global: “The move to commercial service earlier would have eased the cost of filling their own consumption needs and given customers including Shell, Britain’s BP, Spain’s Repsol and Poland’s PGNiG the ability to resell some supplies to capture the wide spread between what they would have been paying Venture Global and what they could have fetched for those volumes on the spot market.” As a result, economic damages may not be as simple as giving Venture Global LNG’s profits to its contracted customers. An unfavorable arbitration decision against Venture Global LNG could result in clawbacks against the lenders and equity providers to the project and inquiries into the company’s communications with FERC and federally insured lenders.
Shell EVP Scott Hill has accused Venture Global LNG of “deceitful actions” and that Venture Global LNG’s failing to live up to the offtake contracts was “damaging and dangerous to the industry.” That statement will be noticed by “ExxonMobil
Breaking contracts can be a hazardous business practice for all involved. Prospective business partners will think twice before fronting billions no matter how tight the legal contracts. Shell, Edison, and BP may be the unwitting example and the hard lesson.