Shell Confirms FID on C$40 bn LNG Canada Project

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The developers of a C$40-billion ($31-billion) project to export Canadian natural gas are taking on a bold strategy: build now and worry about buyers later.

After a decade of planning and negotiations, Royal Dutch Shell and four partners have given their final investment decision (FID) to build the gas-liquefaction and export terminal in British Columbia, the partners announced. The partners will divide the production and sell their share to whomever and however they please, according to Andy Calitz, CEO of the joint venture, LNG Canada.

LNG Canada is unique in the industry for having taken a FID without committing all or most of its output to 15- or 20-year supply contracts. From Australia to Africa, LNG developments typically have been underpinned by long-term sales contracts to minimize financial risk on multibillion-dollar investments that can take half a decade or longer to construct.

Back in April, British Columbia’s socialist government, had introduced a series of tax cuts aimed at ensuring a the positive FID that took until October to be announced.

The partners plan to construct two 6.5 mta liquefaction trains at a terminal site near Kitimat in the first phase. Should market conditions warrant it, two further 6.5 mta trains could be built at a later stage. 

“What you are essentially seeing is speculative development, of using a model that has not been traditionally the model for developing big LNG projects in the past,” Jason Feer, head of business intelligence at Poten & Partners Inc. told Bloomberg. “Most LNG projects that went to FID had pre-sold a significant percentage of their output via long-term contracts.”

Shell holds the biggest stake in LNG Canada at 40%, with Malaysian oil giant Petroliam Nasional owning 25%. Mitsubishi and PetroChina each own 15%, respectively, while the remaining 5% is held by Korea Gas.

Canada gained an edge over the U.S. LNG sector after China slapped tariffs on American gas last month. Canadian producers also hold a geographic advantage because it’s an eight-day tanker journey from British Columbia to Tokyo, versus 20 days at sea for Louisiana cargoes.

Western Canada “is closer to 75% of the global LNG market in Asia than any other non-Asian supplier,” Madeline Jowdy, senior director of global gas and LNG at S&P Global Platts in New York, told Bloomberg in an email.

Five of the many LNG export schemes planned for British Columbia on the Canadian Pacific Coast have been shelved over the past year. The cancellations suggested that project developers had been overly optimistic about the ability of their proposed export plants to compete in the global marketplace, given British Columbia’s previous government’s more stringent tax regime and the impact of low gas prices.

The breaks offered in April by BC’s New Democrat Party (NDP), which has formed a minority coalition government with the Green Party, include foregoing up to US$4.7Bn in potential tax revenues over 40 years and exempting projects from a scheduled US$15.60 per ton of carbon levy until 2021, the website www.lngworldshipping.com reported.

Project developers will also be exempted from having to pay provincial sales taxes up front, in exchange for paying back the due amounts over 20 years once they start to report profits. In addition, government-owned BC Hydro will reduce its power rate for LNG facilities, levying instead standard industrial charges for electricity.

The financial carrots on offer were particularly aimed at the LNG Canada scheme, which had been due to make its FID in 2016 but the decision was repeatedly delayed because of adverse market conditions. 

British Columbia hopes that its incentives will yield a positive outcome, pointing out that under the new tax regime the government will still collect US$17.6Bn over the planned 40-year lifespan of the LNG Canada terminal. The NDP is also highlighting the proximity of the LNG Canada terminal to the main Asian markets and the healthier gas prices now pertaining as factors favouring a positive decision on the scheme.

LNG Canada is also being touted as one of the most environment-friendly LNG export projects ever tabled, due to the range of emission control measures that have been specified. On a cautionary note, however, the Green Party, NDP’s coalition partner in the BC government, has expressed concerns about the relaxations in the carbon levy proposed in the new tax regime.

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