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Kitimat go-ahead gives Canadian LNG welcome respite

After years of missteps and doubt, Shell is finally to move ahead with the Kitimat LNG project

The supermajor announced the final investment decision for the C$40bn ($30.1bn) liquefied natural gas venture on Canada's west coast on 1 October. The green light was given after much handwringing from governments, investment bankers and indigenous groups over the economic and environmental merits of the plan. It'll be the largest private-sector infrastructure project in Canada's history when it comes into service after 2023.

Shell holds a 40% stake in the LNG Canada project, in partnership with a consortium of state-owned heavyweights, including Mitsubishi, Kogas and Petronas. All have signed production joint ventures with domestic upstream producers and each party will be responsible for supplying the facility with Canadian gas and off-taking LNG to their respective overseas markets. Kitimat will initially see two trains producing 14m tonnes a year, with two more trains to be added in the future.

Immediately after the FID, pipeline operator TransCanada announced it would proceed with the 670km (416-mile) Coastal Link pipeline, which will link prolific unconventional Montney gasfields from the interior of British Columbia province to the coast.

Despite high fives all around, the outcome was far from certain. Petronas, in particular, scrapped its own plans for a $30bn integrated production and liquefaction venture in July 2017, citing an "extremely challenging environment" for global LNG prices, despite wringing vital financial concessions from both federal and provincial governments. Petronas' reticence, in turn, led observers to pronounce Canadian LNG all but dead, even as the US moved ahead with exports through the Gulf of Mexico.

Petronas tilts balance

Many believed Shell would follow suit. However, Petronas in May of this year quietly bought a 25% stake in the Kitimat project for an undisclosed sum. It was no doubt a turning point, albeit largely unnoticed, given the pessimism surrounding Canadian energy prospects in general.

It comes as the country remains deadlocked in a bitter debate over oil export pipelines. In September, a federal court overturned regulatory approvals for the Trans Mountain oil sands conduit after ruling that the federal government failed to consult indigenous groups.

This time, however, Shell has all its ducks in a row. Indeed, the Kitimat facility will be built on the ancestral lands of the Haisla First Nation-with its blessing-in a rare sign of solidarity with the energy industry.

Upstream producers were also relieved. In addition to providing Canada with much-needed export markets for its unconventional gas, the FID allows domestic producers to keep drilling in what has been a depressed North American natural gas market.

Down to fifth place

Canadian gas production has long superseded its domestic consumption, following deregulation in the 1980s. Prior to 2007, Canada was the single-largest supplier to the US market. According to Statistics Canada, an agency of the federal government, exports fell nearly 30% over the past decade as unconventional drilling took hold on both sides of the border.

As a consequence, Canada has slipped from being the world's second-largest gas exporter-after Russia-to fifth spot, even as its proven reserves have grown to a record 1,700 trillion cubic feet.

Whereas the US was once Canada's largest customer, it's now the country's largest competitor for international markets. Unlike the US, which has willingly provided spot-linked Henry Hub pricing, Canadian producers have been reluctant to supply gas on anything other than long-term oil-linked contracts. This is why the Kitimat partners, like Mitsubishi and Kogas, are major gas consumers in their own right.

Shell's FID allows it to become vertically integrated on both the production and consumption side, providing a measure of certainty against future price shocks. Despite being slow to the game, this may ultimately be what tips the hand in the Canadians' favour.

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