BUSINESS

Shell proposes B.C. LNG project alongside Korean, Chinese, Japanese partners

05/15/2012 04:15 EDT | Updated 07/15/2012 05:12 EDT
CALGARY - Royal Dutch Shell PLC and three Asian partners plan to build a liquefied natural gas export terminal in Kitimat, B.C. that would connect Canada's vast supplies with energy-hungry markets on the other side of the Pacific.

The Anglo-Dutch energy giant announced Tuesday that it will have a 40 per cent stake in the project, called LNG Canada. PetroChina, Mitsubishi Corp. and Korea Gas Corp. will each hold a 20 per cent interest. No pricetag was disclosed.

"Our combined expertise, and our focus on technological innovation in delivering safe and environmentally sound LNG projects around the globe, ensures that our LNG Canada project would be well suited to deliver long-term value for British Columbia and increase access to new export markets for Canada," Shell vice president Jose-Alberto Lima said in a release.

LNG Canada will initially have two production units each making six million tonnes of LNG per year, with the possibility of expansions down the road. The project would start up toward the end of the decade, assuming it obtains regulatory approval.

Liquefied natural gas, or LNG, is gas that has been chilled into a liquid state, enabling it to be transported overseas by tanker.

Demand for the fuel is voracious in Asia, where natural gas fetches a price five or six times higher than it would in the oversupplied North American market.

"Even with the transportation costs, we would say that there is a significant opportunity to sell gas at a better price in Asian markets, and at the same time diversify your customer base," said Lance Mortlock, with Ernst & Young's global oil and gas practice.

"Canada primarily right now is focused on the U.S. as the primary customer and any strategist would tell you that that's a bad strategy long term for the country and for the economy."

With the handful of projects currently on the table, Canada has the potential to export 11 or 12 million tonnes of LNG a year by the 2015-2016 time frame, doubling that once the Shell-led project comes on later in the decade.

Even still, Mortlock said Canada will remain a relatively small player on the global LNG scene, eclipsed by countries like Australia, Qatar and Russia.

And the United States, with its burgeoning shale gas industry, is the big "elephant in the room," with seven LNG terminals in the works.

What Canada's LNG sector may lack in size compared to its peers it makes up for in other aspects, said Mortlock.

"Canada is viewed as politically, socially, fiscally stable," he said.

Many Asian companies are also active in producing natural gas from prolific fields in northeastern B.C. — all three involved in the Shell deal have made upstream investments alongside Canadian partners — and Mortlock said Canada can leverage those relationships into LNG deals.

The gas also has a shorter way to go to get to Asia from Kitimat than it would from the Middle East, for instance.

"Our sense is that Canada becomes an attractive proposition, albeit a small one," said Mortlock.

Shell and its partners are all well versed in the LNG industry.

Shell pioneered LNG technology for the world's first commercial liquefaction plant in 1964. It has eight projects in operation in seven countries, with others on the go.

Kogas is the world's largest LNG importer, supplying power plants and utilities throughout South Korea with fuel.

PetroChina, one of China's three major state-owned energy companies, is working with Shell on the Arrow LNG export project in eastern Australia.

Mitsubishi handles half of Japan's LNG imports and has nine non-operated LNG export investments around the world.

The four companies aren't the only ones planning to ship LNG from the northern B.C. deepwater port of Kitimat.

Encana Corp. (TSX:ECA) and U.S. partners Apache Corp. and EOG Resources plan to start up their Kitimat LNG plant in 2015, with an initial capacity of five million tonnes a year.

Another proposal called BC LNG, owned by the Haisla First Nation and Houston-based LNG Partners, expects its first shipment in 2014.

Calgary-based Progress Energy Resources Corp. (TSX:PRQ) sold part of its B.C. shale lands to Malaysia's Petronas last year and the two companies are looking at an LNG terminal, too.

Talisman Energy Inc. (TSX:TLM), Nexen Inc. (TSX:NXY) and Imperial Oil Ltd. (TSX:IMO) are in the early stages of weighing LNG projects of their own.