“We’ll be working with the final bidder to come to a final price and only after that will our joint venture companies – Shell, PetroChina, KOGAS and Mitsubishi – assess the competitiveness of the project and then we will come to the FID,” said Shell Canada's president and country chair, Michael Crothers.
Pointing out site advantages, Crothers listed Kitimat’s deep water channel, existing jetties, access to hydropower and rail supply – a site that is only 8 days shipping distance from Asian markets compared with sites dependent on the Panama Canal route which is at least 3 weeks, and prone to congestion.
“And then we have vast gas supply in the Montney that is potentially stranded and at risk because of US shale gas developments that is eroding some of the Canadian markets,” he added, pointing out the potentially huge, cheap resource base in north-eastern BC.
Asked about the timing of a financial close, Crothers was seeking to buy time. “At this point we actually don’t have a definitive timeline. “Shell has never committed to a FID by the end of this year. Moreover, KOGAS and PetroChina are government organizations so they have their own process to follow,” he said.
Strikingly, Shell’s former rival Petronas joined the US$11 billion LNG Canada project in early June – just a year after the Malaysian company cancelled its C$36 billion Pacific North West project.
Cost concerns remain
Located at Kitimat, the LNG Canada liquefaction plant is expected to cost around US$11Bln using modular construction methods. Additional costs will include feed-gas supplies and an investment in the multibillion-dollar TransCanada pipeline project, the Coastal GasLink.
Though Petronas’ move to join the LNG Canada venture helps accelerate the project, costs will remain a major concern of the project. Wood Mackenzie senior analyst Prasanth Kakaraparthi advised the companies to take advantage of the latest tax breaks announced by the government of British Columbia.
As a sweetener to get some of Canada’s much delayed LNG export ventures off the ground, the Government of British Columbia has offered additional project incentives amounting to US$4.8 billion in provincial income, sales and carbon tax cuts to build the facility. In BC province, around 20 LNG export ventures had been in the making a few years ago, but following many cancellations there are now only two others moving forward, the small-scale Woodfibre LNG venture at Squamish and the Steelhead LNG venture on Vancouver Island.
Petronas, Malaysia’s state oil and gas major, holds nearly 52 Tcf of reserves and contingent resources in Canada. “Consequently, monetisation through LNG is inevitable given the weak outlook for domestic prices,” the WoodMac analyst commented.
Once the Petronas transaction is complete, the Malaysian company will hold 25% of the shares in the LNG Canada venture and Shell will be operator with 40%. The other stakeholders are PetroChina and Mitsubishi of Japan each with 15% and Korea Gas Corp. will own 5%.
Looking ahead, Petronas has signalled its intent to become a portfolio player and has taken steps to diversify its supply sources. According to Wood Mackenzie calculations, once both phases are executed LNG Canada could add up to 7 million of equity LNG into Petronas portfolio – nearly 20% of its 2023 supply.
“Petronas is in Canada for the long-term and we are exploring a number of business opportunities that will allow us to increase our production and accelerate the monetisation of our world-class resources in the North Montney,” said Petronas President and CEO Wan Ariffin. “LNG is just one of those opportunities.”
Should LNG Canada eventually get off the ground Wood Mackenzie analysts believe this to be a positive development for Petronas, Kakaraparthi said, adding. “We expect the global LNG market to tighten post 2022 and this bodes well for the project.”
However, fresh activity has returned to the LNG space with a number of projects expecting to take FID ahead of 2019. A new wave of project sanctions and rising oil prices could push up project costs and dampen the economics.