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Shell quits Canadian Arctic gas pipeline project

Supermajor’s long-term vision just not long enough for a gas-pipeline project almost 50 years in the making

In a setback for Canada’s Arctic development, Shell Canada has backed out of an historic gas-pipeline project from the Mackenzie Delta.

Company officials confirmed it has put up for grabs all of its northern holdings, including a 10% stake in the C$16.2 billion ($16.5 billion) Mackenzie Valley gas pipeline to Alberta. If built, it would transport about 1.4 billion cubic feet a day (cf/d), 1,200 km from the Beaufort Sea to the Alberta border.

 

The timing was suspect, given that the project received long-awaited Canadian regulatory approvals after more than a quarter of a century of scrutiny. The most recent attempts to build the line began in 2005, when Imperial Oil, Shell and ConocoPhillips (then Gulf Canada) put an application before the National Energy Board.

Shell’s Arctic assets include six significant discovery licences; the minority interest in the pipeline; and a 100% interest in the undeveloped Niglintigak gasfield. Discovered in the 1970s, Niglintigak is estimated to contain about 840 billion cf of recoverable reserves. Additionally, the region is prospective for gas hydrates, which have been the subject of a joint Canadian, Japanese and American research study.

Shell says bids are due on 31 August, adding: “The Mackenzie Delta is an exciting, basin-opening opportunity that provides a gateway to the Beaufort Sea, and is important for economic development in the Canadian Arctic. But as part of its regular global-portfolio review, Shell has decided to focus its resources on other options.”

Exit a pioneer

Proceeds are likely to be modest; Shell’s stake in the pipeline is worth about C$1.5 billion and it’s less clear what the gas is worth in the absence of an outlet to southern markets. But the retreat is nonetheless symbolic given its role as a pioneer in Canada’s far north, and especially on the Mackenzie Delta, which was discovered by Sir Alexander Mackenzie in 1789 while he was searching for an overland route to the Pacific Ocean.

For almost half a century Shell championed its role at the frontiers, along with Gulf Canada and Imperial, making the initial discoveries that underpin the Mackenzie project. The northern pipeline has previously been compared with the national railroad in terms of its importance to Canada’s economy and northern communities are counting on it to provide elusive economic benefits.

Fundamental market shift

Shell’s withdrawal seems to pre-empt fundamental shifts in North American markets that will put the significant, but distant resources at an economic disadvantage. Where distant Arctic gas reserves were once seen as vital to offset dwindling conventional supplies, they’re effectively stranded without higher prices – under pressure in the wake of North America’s shale-gas revolution.

Earlier this month, Shell confirmed it is in talks with Asian players such as Mitsubishi to promote exports of its Canadian unconventional gas resources in the Montney Shale in the form of liquefied natural gas (LNG).

This paradigm shift in the market has occurred during a painfully long regulatory process for the Mackenzie proponents, led by Imperial. In the same period that gas prices plunged from $14/million British thermal units (Btu) to $4/million Btu, cost estimates for the pipeline doubled, then more than doubled again.

Never-ending saga

The seemingly never-ending saga began more than four decades ago when the first Berger commission rejected the proposal in 1974.

It was always assumed the gas could not just stay in the ground. But the emergence of big unconventional shale-gas deposits have created unprecedented new supplies in US Lower-48 basins that some analysts believe will make Arctic gas an uneconomic proposition. Imperial chief executive Bruce March maintains, however, that the gas will be needed and the company is pushing ahead with the project.

With approvals in hand, the Mackenzie developers group is negotiating with the federal government for special tax treatment and fiscal terms that would allow the consortium to move ahead, despite the present market conditions. When he was in Alberta last week, newly appointed federal energy minister Joe Oliver said the Conservative federal government staunchly supports the project, and prime minister Stephen Harper will travel to the far north next month to assert Canadian sovereignty over the Arctic.

Even if the Mackenzie pipeline fails to be economic, the federal government clearly sees it as a strategic asset in an increasingly competitive arena dominated by the US, Russia, Norway and Denmark.

Shell’s withdrawal is unlikely to derail the project. But oil companies are clearly not instruments of state policy and any decision to proceed will be based on purely monetary terms that, for now, don’t support the Mackenzie pipeline’s economics. An investment decision is unlikely before 2012 and even then gas wouldn’t start flowing until 2015 at the earliest.

It’s a long-term decision; but given that the project will be almost 50 years old by then, Shell’s own long-term vision just wasn’t long enough.

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