Canadian deal a turning point in global gas industry
The project will carve out the fastest route to Asia for North American gas
Vancouver -Royal Dutch Shell and its partners have announced an agreement to invest in a multibillion-dollar liquefied natural gas (LNG) project in western Canada — the largest of its kind in years.
The project will carve out the fastest route to Asia for North American gas.
LNG Canada, comprised of Shell, Malaysia’s Petroliam Nasional, Mitsubishi, PetroChina and Korea Gas, confirmed the expected final investment decision in the C$40bn ($31bn) project, Shell said on Tuesday.
Bloomberg News reported on Sunday that the group had approved the investment and an announcement was imminent.
The project marks a turning point for Canada and the global gas industry. Set to be the nation’s largest infrastructure project yet, LNG Canada heralds a new wave of investments for major gas export projects after a three-year hiatus forced by fears of a global supply glut.
LNG Canada will be able to send cargoes from Kitimat, British Columbia, to Tokyo in about eight days versus 20 days from the US Gulf.
"As the market grows, our LNG business needs to grow," Shell CFO Jessica Uhl said in a call with reporters. "Demand has exceeded expectations. We believe that that pattern will continue going into the 2020s."
The venture is expected to start supplying customers with gas before 2025.
The investment case largely rests on the assumption that China will replace much of its coal use with natural gas in attempts to clear pollution and reduce carbon emissions. Shell believes LNG demand will roughly double by 2035.
LNG Canada will generate a 13% internal rate of return to Shell, if gas prices in Tokyo are $8.50 per million British thermal units or higher, according to the company. Prices have been lower than that for most of the past four years, but Uhl suggested there will be a "supply gap" opening up around the time the project starts selling fuel, which will raise prices.
It is a welcome boost for Canadian Prime Minister Justin Trudeau. Selling LNG to buyers in Asia promises higher prices for the country’s gas compared with what it gets selling it almost exclusively to the US via pipeline. It also helps reaffirm Canada’s investment climate.
The investment approval is for two LNG trains with a total capacity of 14-million tons a year. LNG Canada has proposed to eventually export as much as 26-million tons a year.
The green light marks the end of a seven-year effort, including two postponements in 2016 at the depths of the gas market downturn. The outlook for LNG has since brightened as the market could be in deficit as soon as 2022 unless new projects are built, according to Sanford C Bernstein & Co.
Global imports of LNG will set a new record in 2018 of 308-million tons, forecasts Bloomberg NEF.