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Shell’s $31 Billion Gamble On Canadian LNG

Callum Turcan: October 17, 2018

Summary

  • Going over Royal Dutch Shell’s LNG Canada endeavor.
  • The pros and the cons.
  • Why this is ultimately a good idea.

Royal Dutch Shell plc (NYSE:RDS.A) (NYSE:RDS.B) is making another big bet on liquefied natural gas, this time in Canada. On October 1, 2018, Royal Dutch Shell plc and its partners announced a positive investment decision on the ~US$31 billion (~40 billion Canadian dollars) Canada LNG venture. The goal is to bring an LNG export facility online in Kitimat, British Columbia, to take advantage of both its existing infrastructure (deep-water ports, roads, electricity grids) and its easy access to Asian markets. While I am a shareholder of Royal Dutch Shell, that doesn’t mean I want to be a cheerleader for every decision the company makes. Here is what I view as a very reasonable assessment of LNG Canada, highlighting both the pros and cons of this endeavor. Let’s dig in.

Overview

Through Shell Canada Energy, Royal Dutch Shell has a 40% stake in the LNG Canada venture and will be taking lead on the endeavor. Its partners include the subsidiaries of Petronas (Malaysia’s state-run energy firm), PetroChina Company Limited (NYSE:PTR), Mitsubishi Corporation, and Korea Gas Corporation. Note how each of those firms are based in major LNG importing nations in Asia.

Here is a key except from one the press releases Shell put out:

“Each joint venture participant will be responsible for providing its own natural gas supply and will individually offtake and market its own LNG. Shell’s Groundbirch asset in Northeast British Columbia can provide the majority of Shell’s equity share of natural gas or Shell will buy gas from the market, depending on which option provides the most value.”

What makes this portion significant is that each partner is responsible for marketing their own equity stake of LNG production. Shell needs to find an end buyer for 5.6 million metric tons of LNG per year, as that is its share of LNG Canada’s expected production. Two liquefaction trains, each with 7 million metric tons of LNG production capacity, will be created as part of the initial project. Good for a total LNG production capacity of 14 million metric tons per year. It is worth mentioning that often major energy projects don’t operate at full nameplate capacity due to changing market conditions, maintenance activity, and unplanned downtime (80-90% is often considered full capacity).

FULL ARTICLE

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