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Kinder Buys Out Shell's Stake in Elba Island Liquefaction Project

Kinder Morgan Inc. (KMI) is buying out Shell's equity interest in Elba Liquefaction Co. LLC, owner of the Elba Liquefaction Project proposed to be constructed and operated at the existing Elba Island LNG Terminal near Savannah, GA.

KMI currently owns 51% of the joint venture with Shell holding the remaining 49%. Shell subscribes to 100% of the liquefaction capacity to be created by the project. Acquiring Shell's 49% stake will cost KMI about $630 million, bringing its total investment in all liquefaction and terminal facilities at Elba to about $2.1 billion.

"This is a good opportunity to leverage the proven track record of both companies to deliver an innovative LNG export project in the United States," said Ton Ten Have, Shell Upstream Americas vice president for LNG operations and growth. "Shell and Kinder Morgan have successful relationships in North America based on Kinder Morgan ownership with Shell as a customer and we believe this will be a successful model at Elba as well."

During a KMI earnings conference call Wednesday, KMI CEO Steve Kean was asked about the acquisition of Shell's stake in the Elba project.

"Costs have been increasing on it, and scope has been adjusted," he said. "I'm not going to speak for Shell at all, but you don't need to be a rocket scientist to see that they bought BG [Group plc (see Daily GPIApril 8)], that the market outlook on LNG has changed a bit. [Shell] wanted to restructure the contract. We were certainly willing to restructure it on the terms that we got here and invest additional capital, $2.1 billion in total now, on the project at the return that we're getting for it.

"...Shell is retaining certain risks. We are picking up certain risks, but they are risks that we are comfortable dealing with in today's market environment for materials and construction services and the like...[W]e get control now. This is not a two-headed thing anymore. We've got control over this project and its development and construction, and we'll get it built. And we're happy to have Shell as the customer on the facility..."

In 2012, the project received authorization from the U.S. Department of Energy to export to free trade agreement (FTA) countries. An application to export to non-FTA countries is pending. Under full development, the Elba Liquefaction Project is expected to have capacity of 2.5 million tonnes per year of LNG for export, which is equivalent to 350 MMcf/d of natural gas.

The project was announced in January 2013 by Southern Liquefaction Co. LLC, a unit of Kinder Morgan, and Shell to add liquefaction and export capability to Southern LNG Co. LLC's existing LNG regasification terminal at Elba Island (see Daily GPIJan. 29, 2013).

Permitting continues for the export project, which consists of 10 small-scale liquefaction units to be purchased from Shell. They are to be integrated with the existing Elba Island facility and would enable rapid construction compared to traditional large-scale plants, according to KMI. The next step in the regulatory approval process is for the Federal Energy Regulatory Commission to issue a draft environmental assessment. Subject to regulatory approvals, construction could begin in fourth quarter, with initial production expected to occur in late 2017. 

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