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    Shell Announces LNG Canada FID (Update)


Other partners had already committed to fund the project. First LNG is expected by the mid-2020s.

by: Mark Smedley/Dale Lunan

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Shell Announces LNG Canada FID (Update)

(Adds comment from LNG Canada, from Petronas and PetroChina at end, and WoodMac in middle)

Shell has taken the decision to build LNG Canada, it said October 2. It has a 40% interest in the Kitimat, British Columbia project.

As LNG Canada’s joint venture participants had already taken the final investment decision (FID), the Anglo-Dutch major said that construction will start immediately, with first LNG expected before the middle of the next decade. Other partners are Petronas 25%, PetroChina 15%, Japan’s Mitsubishi 15% and South Korean state Kogas 5%. 

Each joint venture participant will be responsible for providing its own natural gas supply and will individually offtake and market its share of LNG. All but Kogas have significant gas reserves in western Canada, primarily in the Montney shale gas play of northeastern BC.

The long-awaited decision, for what will be the biggest private sector investment in Canadian history, is a significant shot in the arm for the beleaguered Canadian energy industry, which is struggling to cope with low commodity prices and, more importantly, an inability to get its products to global markets.

And significantly, Canadian prime minister Justin Trudeau and LNG Canada CEO Andy Calitz said, it came to fruition with the full co-operation of Canada’s First Nations, which in the past have been strongly opposed to other energy projects.

“Today’s announcement by LNG Canada represents the single largest private sector investment project in Canadian history,” Trudeau said. “It is a vote of confidence in a country that recognizes the need to develop our energy in way that takes the environment into account, and that works in meaningful partnership with Indigenous communities.”

“The final investment decision taken by our joint venture participants shows that British Columbia and Canada, working with First Nations and local communities, can deliver competitive energy projects,” Calitz said. “This decision showcases how industrial development can co-exist with environmental stewardship and Indigenous interests.”

Shell’s 40% share of the project’s capital cost is within Shell's overall group capital investment guidance of US$25-$30bn/year. 

LNG Canada will initally export LNG from two trains totalling 14mn metric tons/yr, with the potential to double up to four trains in the future. Shell said it would benefit from abundant, low-cost natural gas from British Columbia and the relatively short shipping distance to North Asia – which it said is about half the distance from the US Gulf and avoids the Panama Canal.

TransCanada Corporation will build, own and operate the C$6.2bn (US$4.8bn) Coastal GasLink pipeline that will supply the feed gas. The 670-km(420-mile) pipeline is designed to transport natural gas from the Montney gas-producing region near Dawson Creek, BC to the LNG Canada facility in Kitimat, and will have an initial capacity of about 2.1bn ft3/day, with the potential for expansion to 5bn ft3/day. Construction is expected to begin in early 2019, with a planned in-service date in 2023.

A joint venture of JGC-Fluor Corporation has been selected as the project’s engineering, procurement and construction (EPC) contractor and brings extensive experience. JGC has delivered 48 LNG trains globally, and Fluor has 60 years of construction experience on complex hydrocarbon projects in Canada.

LNG Canada will be built under a single EPC lump-sum contract at an estimated cost of some US$1,000/mt/yr of LNG, said Shell, using a modular LNG train design and built in Asian yards with recent experience delivering LNG modules on budget and on schedule. The project has a 40-year export licence in place and all major environmental permits are in place for the plant and the pipeline.

The overall project's cost has been estimated at US$31bn (C$40bn). Construction of the liquefaction terminal and the Coastal GasLink pipeline are expected to employ about 10,000 workers, while ongoing operations at the terminal will provide 900 permanent jobs, LNG Canada said.

Consultancy Wood Mackenzie's North America gas director Dulles Wang put the initial project cost estimate at $18bn for the LNG plant investment and $3.5bn for the pipeline, with upstream costs to be incurred by each of the project partners. 

“This is the first LNG export project to reach FID in Canada and the first greenfield LNG export project globally in five years," Wang said, adding: "Sanction of LNG Canada marks an abrupt turnaround from 2017, when Petronas cancelled its Pacific NorthWest Project and Shell postponed an FID on LNG Canada in 2016."

Although Shell did not disclose LNG Canada's overall project cost in its statement, both it suggested and Mitsubishi stated that the initial 14mn mt/yr liquefaction plant alone could be built for about $14bn, excluding mid/upstream costs. Each joint venturer will be responsible for providing its own feed gas supply and will individually offtake and market its own LNG. Shell’s Groundbirch asset in northeast British Columbia will be the main source of its feed gas. Shell said its full-cycle side (so including upstream through to trading) of the project can achieve a netback delivered ex ship Tokyo of US$8.50/mn Btu at 2018 LNG prices. 

Shell group CEO Ben van Beurden said: “We believe LNG Canada is the right project, in the right place, at the right time... Global LNG demand is expected to double by 2035 compared with today, with much of this growth coming from Asia where gas displaces coal... LNG Canada is expected to deliver Shell an integrated internal rate of return of some 13%, while the cash flow it generates is expected to be significant, long life and resilient.” The company said the project had been developed in consultation with Canadian indigenous people and regional authorities.

Separately, Shell said it completed the sale of its downstream business in Argentina to Raizen for $916mn cash, subject to final price adjustments.

Petronas, which dropped its own LNG project in British Columbia, welcomed the "significant milestone" now reached. Its CEO Tan Sri Wan Zulkiflee Wan Ariffin said the FID is a "testimony of the strong collaboration among our partners and stakeholders who share the same aspiration of delivering long-term value via LNG, in line with our commitment to sustainable and responsible development of resources.

“This is the first LNG project in Canada and the project will pave the way for us to add value to our world-class gas resources in the North Montney area and strengthen our supply portfolio for LNG to the Asian markets,” Wan Zulkiflee said.

PetroChina said it had invested upstream in Canada since 1992 and now has a mix of oil and gas assets in Canada including oil sands, tight gas and shale gas. It estimated start up of LNG Canada in 2024. Mitsubishi said its feed gas would come from an upstream Montney shale project in British Columbia being developed through its participation in the Cutbank Ridge Partnership.