The punches keep coming for the Canadian gas and oil industry. The most recent uppercut came from Royal Dutch Shell Plc. on Thursday, because it postponed a choice on its US$40 billion liquefied natural gas export project in Kitimat, B.C. “likely” towards the end of the season.
Like most energy companies, Shell is reining in spending amid a severe oil and gas crash. The Hague-based oil and gas major is also distracted by a US$70-billion purchase of rival BG Group Plc. set to become performed by Feb. 15.
“Only probably the most competitive projects ‘re going ahead,” CEO Ben van Beurden told analysts on the conference call to announce fourth quarter results, noting he expects “to get better value in the supply chain in this downturn.”
Shell posted a 44 per cent drop in earnings within the last quarter as oil prices plunged 45 per cent in 2015. The company, that is building LNG Canada around the West Coast with Korea Gas Corp., Mitsubishi Corp. and PetroChina Co. Ltd., had discussed a final financial commitment (FID) around the West Coast LNG project this year, but had not set a firm date.
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“We are going after an FID decision in 2016,” said Susannah Pierce, executive director at Vancouver-based LNG Canada, downplaying the postponement.
“Frankly, this news from Shell this morning was no surprise to us here on the ground given market conditions. It provides us time to help make the project competitive and de-risk it further.”
The staff of approximately 100 working on the work won’t be affected, while work continues apace, Pierce said.
The massive project, certainly one of 20 proposed for the West Coast, has secured key licences, including a permit to construct an LNG facility from BC Oil and Gas Commission as well as an environmental assessment certificate. The venture still must secure a Federal Fisheries Authorization certificate and native permits therefore it can begin site work, Pierce said.
The delay is the latest setback for an industry beset by low prices, cancelled projects, regulatory quagmires and cumbersome new policies announced through the federal and provincial governments.
The Shell postponement also dents B.C.’s government about kicking off an LNG boom, after it had invested political capital and incentives to LNG developers over the past few years.
“Shell’s still delivering towards a final financial commitment during the last quarter of 2016 and that hasn’t changed,” Rich Coleman said within an interview.
The delay hasn’t surprised analysts given the mixture of a supply glut in the LNG market and depressed prices.
“At the end of your day, it is the bankers which will decide whether they are prepared to place the money in to these projects,” said David Austin, an attorney with Clark Wilson LLP located in Vancouver. “At this point in time, there is enormous quantity of uncertainty in energy markets all over the world.”
LNG prices in Japan slid to US$8.5 per million British thermal units, from US$16 per mMbtu two years ago, World Bank data shows.
Shell’s pullback propels Malaysia’s Petronas Bhd. to pole position in the race to construct a major LNG project in Canada. But its project is stuck within an environmental review and faces opposition from First Nations. Petronas and its partners gave the project a conditional FID this past year granted it secures an eco certificate.
Last month Petronas said it would slash US$11.4 billion within the next 4 years and defer some projects, without disclosing more details.
While some smaller projects can always proceed, some analysts believe Canada might have missed the window of LNG build-out as competitors have leapfrogged the fledgling domestic industry.
“It’s fair to state (we’ve missed the window),” said Mary Hemmingsen, someone at KPMG, who still believes Canadian gas has a role to play in Asia. “We were originally targeting in Canada a 2017-2018 timeframe, and so the U.S. beat us to the punch. After which nobody anticipated the meltdown in price that has challenged the affordability of these large capital projects.”
yhussain@nationalpost.com
Twitter.com/YAD_FPEnergy
