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Is This The Biggest LNG Deal Of The Decade?

By Tim Daiss – Oct 03, 2018, 2:00 PM CDT

After years of indecision, governmental red tape, aboriginal resistance, environmental push-back and other problems, it appears that Canada may finally be on the path to having its first major liquefied natural gas (LNG) export project.

On Tuesday, the Royal Dutch Shell-led C$40 bn (US$32 bn) LNG Canada project announced that its project partners had reached a final investment decision (FID). It’s the first major LNG project to receive a FID in several years after numerous projects worldwide were either canceled or postponed during the plunge in global oil and gas prices from 2014 to 2017. The project was approved by all its stakeholders – Shell, Malaysian state-owned oil major Petronas, PetroChina, Korea Gas Corp (KOGAS) and Japan’s Mitsubishi Corp.

Though global oil prices and LNG prices ticked up amid the so-called OPEC+ group of producers’ efforts to put a floor under oil prices and restore OECD oil inventory levels to five-year averages, companies were still reticent to approve LNG projects due to the ongoing supply overhang of the fuel that initially was projected to last until around the mid part of the next decade.

Now, however amid increased natural gas usage from China that is already changing global gas markets, that historic supply glut could be trimmed by several years. LNG is also becoming more commoditized with a rapidly developing secondary markets, spot markets, and a plethora of trading houses and buyers that are now trading the super-cooled fuel.

Though it’s a stretch to think that LNG could, at least in the foreseeable future, trade like crude oil and iron ore, the world’s top two traded energy commodities, the days of restrictive long-term contracts required to fund massive CAPEX LNG projects have seen their heyday come and go.

Massive project

LNG Canada will be a massive project with an initial output of some 14 million tonnes per annum (mtpa) from two production trains, with an option to add two more trains for a total of 28 mtpa. The project will be so large that at full capacity it will boost global LNG supply by a whopping 10 percent.

LNG Canada’s decision to go forward also comes as Shell’s forward-thinking CEO Ben van Beurden takes a long view on gas. As far back as 2016 during the doldrums for global LNG producers, van Beurden went long on gas by spearheading the company’s $70 bn acquisition of UK-based gas giant BG Group to both increase production and ramp up market share. With LNG Canada slated to come online by mid-next decade, Shell will continue to solidify itself as the world’s top LNG producer.

“As the market grows, our LNG business needs to grow,” Shell Chief Financial Officer Jessica Uhl said in a call with reporters after the FID disclosure. “Demand has exceeded expectations. We believe that that pattern will continue going into 2020s.”

LNG Canada will also come on-stream around the same time as a number of U.S.-based LNG projects as part of the second wave of U.S. LNG production. This second wave could allow the U.S. to compete against both Qatar and Australia for the spot as top global LNG producer in terms of liquefaction capacity. However, Qatar’s recent announcement to increase yet more production from its North Field, from 77 mtpa to 110 mtpa, by 2023 or so might be hard act to follow.

Notwithstanding, LNG Canada has a significant advantage over any U.S. based LNG project based either on the east or Gulf coast. Since the project will be built on Canada’s west cost in British Columbia it can significantly reduce the time it takes to transport gas to key Asian markets compared to U.S. based projects.

LNG Canada said that LNG from its project will reach Asia in about half the time it takes from the U.S. Gulf Coast. Other reports claim that LNG Canada will be able to send cargoes from Kitimat, British Columbia, to Tokyo in about eight days versus 20 days from the U.S. Gulf.

Saul Kavonic, director for Asia Pacific markets and head of energy research at Credit Suisse in Australia said that “LNG Canada’s FID would signal the appetite to invest in LNG is back.”

By Tim Daiss for Oilprice.com

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