Shell puts off decision on LNG megaproject in B.C. for another year as it grapples with plummeting oil prices and earnings

The punches keep coming for that Canadian oil and gas industry. The latest uppercut originated from Royal Dutch Shell Plc. on Thursday, because it postponed a choice on its US$40 billion liquefied gas export project in Kitimat, B.C. “likely” to the end of the year.

Like most energy companies, Shell is reining in spending amid a serious oil and gas crash. The Hague-based oil and gas major can also be distracted by a US$70-billion acquisition of rival BG Group Plc. set to become completed by Feb. 15.

“Only the most competitive projects ‘re going ahead,” CEO Ben van Beurden told analysts on the business call to announce fourth quarter results, noting that he expects “to get better value in the logistics within this downturn.”

Shell posted a 44 percent stop by earnings in the last quarter as oil prices plunged 45 percent in 2015. The company, which is building LNG Canada around the West Coast with Korea Gas Corp., Mitsubishi Corp. and PetroChina Co. Ltd., had talked about your final investment decision (FID) around the West Coast LNG project this year, but had not set a firm date.

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“We are working toward an FID decision in 2016,” said Susannah Pierce, executive director at Vancouver-based LNG Canada, downplaying the postponement.

“Frankly, the news from Shell today wasn’t any surprise to all of us here on the ground given current market conditions. It provides us the time to help make the project competitive and de-risk it further.”

The staff of about 100 working on the project won’t be affected, while work continues apace, Pierce said.

The massive project, one of 20 proposed for the West Coast, has secured key licences, including a permit to build an LNG facility from BC Gas and oil Commission and an environmental assessment certificate. The venture still needs to secure a Federal Fisheries Authorization certificate and native permits therefore it can start site work, Pierce said.

The delay is the latest setback for an industry beset by affordable prices, cancelled projects,  regulatory quagmires and cumbersome new policies announced by the federal and provincial governments.

The Shell postponement also dents B.C.’s government about starting off an LNG boom, after it had invested political capital and incentives to LNG developers over the past few years.

“Shell’s continuing to work towards a final investment decision during the last quarter of 2016 and that hasn’t changed,” Rich Coleman said within an interview.

The delay hasn’t surprised analysts because of the combination of a supply glut within the LNG market and depressed prices.



“At no more your day, it is the bankers that will decide whether or not they are prepared to place the money in to these projects,” said David Austin, a lawyer with Clark Wilson LLP located in Vancouver. “At this era, there is enormous quantity of uncertainty in energy markets around 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 build a major LNG project in Canada. But its project is stuck in an environmental review and faces opposition from First Nations. Petronas and it is partners gave the work a conditional FID last year granted it secures an environmental certificate.

Last month Petronas said it would slash US$11.4 billion within the next four years and defer some projects, without disclosing additional information.

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 say (we’ve missed the window),” said Mary Hemmingsen, a partner at KPMG, who still believes Canadian natural gas includes a role to play in Asia. “We were originally targeting in Canada a 2017-2018 timeframe, and then the U.S. beat us to the punch. After which nobody anticipated the meltdown in price that has challenged the affordability of those large capital projects.”

yhussain@nationalpost.com

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