US$200B LNG opportunity awaits, but Canada might miss the boat — again
CALGARY Royal Dutch Shell Plc, the world’s largest LNG trader, believes there will be a massive 275 million tonne shortage beginning in 2020 as an investment decision looms for its proposed plant on Canada’s West Coast.
Shell’s global outlook for liquefied natural gas published Monday estimates that US$200 billion in new investments would be needed to build liquefaction plants around the world as demand “has continued to defy expectations.”
The outlook showed that investments in new LNG plants dropped off in 2014, when global oil prices crashed, and the decline in investment has set up a supply shortfall beginning in 2020 that could grow to create a 275 million tonne shortfall per year. Shell made a massive bet on the future of natural gas with a US$50 billion acquisition of BG Group in 2016.
A number of LNG plants were planned in Canada during the last LNG rush, but most of them were cancelled due to a combination of high cost of building projects in greenfield sites in British Columbia, low gas prices and competition from other jurisdictions such as the United States.
However, Shell — along with partners Korea Gas Corp., China and Mitsubishi Corp. — is nearing an investment decision for the LNG Canada project in Kitimat, B.C., that could alleviate roughly 10 per cent of that shortfall, exporting as much as 26 tonnes per year.
“There’s going to be a supply gap, but Canada will not make it if our ability to deliver gas to these markets is substantially more expensive,” said Susannah Pierce, LNG Canada director of external relations.
LNG Canada is widely considered the one major project in British Columbia that’s most likely to be built, but Pierce said the company is still in discussions with the federal government about antidumping tariffs that could jeopardize an investment decision for LNG Canada.
Shell and LNG Canada have asked the federal government to exempt LNG Canada from paying heavy tariffs for large, pre-fabricated modules that are needed at the LNG plant. Pierce said these modules have never been built in Canada before and the expertise is needed from elsewhere.
Shell and its partners will also need to grapple with new payroll taxes unveiled in British Columbia’s budget as it tries to reduce costs for the facility — which at one point was estimated to cost $40 billion and would be the largest investment in B.C.’s history.
“Our timing on this is we need a decision to help ensure that our economic reviews don’t carry this risk. We need to be getting to the point of clarity. We’re anxious to get to that,” Pierce said.
She added that LNG Canada will likely need an answer from the federal government on relaxing the import tariffs by May as the project’s owners decide whether to invest. “If we don’t have clarity on it, then we would be concerned that it would push the decision out or cancel the decision,” Pierce said.
While Shell’s LNG outlook did not specifically mention LNG Canada, Stream Asset Management chief market strategist Dan Tsubouchi said he believed the company gave out some big hints. “Boy, did they say a lot about it by the way they described how the supply gap is coming big time and that the independents can’t fill it,” he said.
Tsubouchi said the global LNG market is changing, shifting away from long-term, oil-price-linked contracts and shifting more of the risk from the buyer of LNG to the seller. He said this shift will make larger companies, like Shell, more likely to be the suppliers of the future than independent companies.
Tsubouchi said if you look back through Shell’s disclosure in recent months, “They ’re clearly telling us that LNG Canada is investible and that LNG Canada is at the top of their list for LNG projects.”
He added that Shell was right when it predicted LNG markets would be in balance earlier than most financial analysts expected.
Shell noted that emissionsreduction policies in places like China accounted for a large uptick in LNG demand over the course of 2017.
The company’s outlook showed demand for the super-cooled natural gas grew by 29 million tonnes, or roughly 10 per cent, to 293 million tonnes last year as more economies try to transition away from coal-fired power generation and use cleaner-burning natural gas as a substitute.