Don thy armor! A gas dragon roams the Caribbean

If Shell were a knight, the Dragon natural gas field offshore Venezuela might be a quivering beast, Trinidad and Tobago the damsel in distress. But the setting for this medieval tale isn’t anywhere near Avalon. It’s Caracas, and there rules a capricious monarch on a three-legged throne.

Last week, Venezuelan state-owned oil company PdV, Trinidad and Tobago’s gas equivalent NGC and Shell signed a preliminary agreement to export Venezuelan gas from the Dragon field to Trinidad and Tobago by way of Shell’s Hibiscus platform, a mere 17km away. On paper, the deal is close to perfect — Venezuela is awash in gas that it can’t afford to develop or absorb on its own, and Trinidad and Tobago is replete with under-utilized gas infrastructure and industries. In the middle is Shell, a major oil company with a long history in both countries. The goal is to start with up to 300mn m³/d of exports by 2020.

Dragon is part of Venezuela’s 415bn m³ Mariscal Sucre complex that also encompasses the Patao, Mejillones and Rio Caribe fields. Shell knows this geology well. A quarter of a century ago, the company was a partner in the ill-fated Cristobal Colon LNG project alongside ExxonMobil, Japan’s Mitsubishi and PdV. The stillborn initiative would have liquefied Venezuelan gas for export, diversifying revenue for the Opec oil producer. But a nationalist backlash swept in, bringing legendary Hugo Chavez into power in 1999.

That was the same year that neighboring Trinidad and Tobago, with just a fraction of Venezuela’s gas reserves, established the first Atlantic LNG train, which later blossomed into a four-train, 14.8mn t/yr liquefaction complex, now controlled by Shell. For a tiny country, Trinidad and Tobago developed an enormous gas-based industrial machine that hummed along until domestic gas production started to wane about four years ago, prompting supply cuts and the looming closure of up to four methanol plants.

Venezuela’s abundant offshore gas lay dormant until two other European oil companies, Spain’s Repsol and Italy’s Eni, started producing from the 480bn m³ offshore Perla field in 2015. That gas is fully earmarked for Venezuela. But PdV is an unreliable payer, and there is only so much gas the domestic market can absorb without repairing and developing industrial facilities and pipelines.

Fast forward to December 2016, when the Venezuelan and Trinidadian governments signed an agreement to facilitate the transport and sale of Venezuelan gas to Trinidad and Tobago. Then, last week, Shell signed on to the new agreement that starts the clock on commercial negotiations for Dragon exports.

The geology and logistics of the Dragon project are a no-brainer, but then again the same was true for Cristobal Colon. The challenge lies in structuring the deal financially and commercially, with revenue from future LNG exports likely to provide the basis, while legal conditions ward off any risk of nationalization.

Perla set a precedent for 100pc private-sector participation in Venezuelan gas. And if Dragon succeeds, PdV’s other offshore gas projects — with Russia’s Rosneft in Mariscal Sucre’s second development stage, and Chevron in the cross-border Loran-Manatee field — could be the next to take off.

So there is more than one sword pointed at Dragon, for the bounty exceeds Lady Trinidad’s hand. But only Venezuelan autocrat Nicolas Maduro has the power to summon the elusive creature from its cave, and his is a fickle scepter. The legend unfolds, and knight Shell awaits.

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