Shell puts LNG plan on hold until end of year
The punches keep coming for the Canadian oil and gas industry. The latest uppercut came from Royal Dutch Shell Plc. on Thursday, as it postponed a decision on its US$ 40billion liquefied natural gas export project in Kitimat, B. C., likely to the end of the year.
Like most energy companies, Shell is reining in spending amid a severe oil and gas crash. The Hague- based oil and gas major is also distracted by a US$ 70- billion acquisition of rival BG Group Plc. set to be completed by Feb. 15.
“Only the most competitive projects are going ahead,” CEO Ben van Beurden told analysts on a conference call to announce fourth- quarter results, noting that he expects “to get better value from the supply chain in this downturn.”
Frankly, the news from Shell this morning was no surprise to us here on the ground given current market conditions.
Shell posted a 44- per- cent drop in earnings in the last quarter as oil prices plunged 45 per cent in 2015. The company, which is building LNG Canada on the West Coast with Korea Gas Corp., Mitsubishi Corp. and PetroChina Co. Ltd., had talked about a final investment decision ( FID) on the West Coast LNG project early this year, but had not set a firm date.
“We are all working toward an FID decision in 2016,” said Susan Pierce, executive director at Vancouver- based LNG Canada, downplaying the postponement. “Frankly, the news from Shell this morning was no surprise to us here on the ground given current market conditions. It gives us the time to make the project competitive and de- risk it further.”
The staff of about 100 working on the project will not be affected, while work continues apace, Pierce said.
The massive project, one of 20 proposed for the West Coast, has already secured key licences, including a permit to build an LNG facility from the B. C. Oil and Gas Commission and an environmental assessment certificate.
The venture still needs to secure a Federal Fisheries Authorization certificate and local permits so that it can begin the site work, Pierce said.
The delay is the latest setback for an industry beset by low prices, cancelled projects, regulatory quagmires and cumbersome new policies announced by the federal and provincial governments.
The Shell postponement also dents the B. C. government’s hopes of kicking off an LNG boom after it had invested political capital and incentives to LNG developers over the past few years.
“Shell’s continuing to work towards a final investment decision for the last quarter of 2016 and that hasn’t changed,” Rich Coleman said in an interview.
The delay hasn’t surprised analysts given the combination of a supply glut in the LNG market and depressed prices.
“At the end of the day, it’s the bankers that will decide whether they are willing to put the money into these projects,” said David Austin, a lawyer with Clark Wilson LLP based in Vancouver.
“At this point in time, there is enormous amount of uncertainty in energy markets around the world.”
LNG prices in Japan slid to US$ 8.5 per million British thermal units, from US$ 16 per mMbtu two years ago, World Bank data shows.
Shell’s pullback propels Malaysia’s Petronas Bhd. to pole position in the race to build a major LNG project in Canada. But its project is stuck in an environmental review and faces opposition from First Nations. Petronas and its partners gave the project a conditional FID last year granted it secures an environmental certificate.
Last month Petronas said it would slash US$ 11.4 billion over the next four years and defer some projects, without disclosing more details.
While some smaller projects may still proceed, some analysts believe Canada may have missed the window of LNG build- out as competitors have leapfrogged the fledgling domestic industry.
“It’s fair to say ( we have missed the window),” said Mary Hemmingsen, a partner at KPMG, who still believes Canadian natural gas has a role to play in Asia. “We were originally targeting in Canada a 2017- 2018 time frame, and then the U. S. beat us to the punch. And then nobody anticipated the meltdown in price that has challenged the affordability of these large capital projects.”