The proposed merger of Royal Dutch Shell and BG Group sets the stage for a drastic, long-predicted weeding out of Canada’s overcrowded LNG field.
Assuming that anti-trust authorities don’t attempt to block the deal, the combined company will make it easier to eliminate one and possibly two of British Columbia’s 19 LNG ventures.
Shell Chief Executive Officer Ben van Beurden dropped a clear hint during a conference call when he said that incorporating the BG portfolio will “bring important new LNG optionality to Shell.”
“In Canada, for instance, both companies have plans on the drawing board for LNG exports ... from British Columbia. There is clearly some scope for review there, as you can imagine.”
Shell’s investor presentation documents bolstered that view by identifying BG’s Prince Rupert plan as overlapping with its own LNG strategy in British Columbia.
Decision already stalled
The United Kingdom-based BG had already stalled an investment decision on its Prince Rupert LNG Exports until at least 2017 after gaining regulatory approval to export from 14 million to 21.6 million metric tons a year, citing the need for more time to examine the economics while it searched for gas supplies and LNG buyers.
That plan may already have been on the skids according to Noel Tomnay, the head of Wood Mackenzie’s LNG research, who said that over the last six months all of the senior employees at the Canadian operation have left, including the head, Madeline Whitaker, who took a position elsewhere in the company in March and has not been replaced.
BG declined to comment on any developments in its LNG plans six months after announcing its final investment decision would be delayed beyond its original 2016 target.
Although doubt accumulates around its British Columbia scheme, BG is a big LNG player as an original investor in Trinidad’s Atlantic LNG project founded with Amoco; as owner of the Lake Charles LNG terminal in the U.S. Gulf; and as a stakeholder on the United Kingdom’s Dragon LNG terminal.
Shell at more advanced stage
Shell’s LNG Canada project (with partners from China, Japan and South Korea holding a combined 50 percent stake) is at a more advanced stage, targeting shipments of 12 million to 24 million metric tons a year, but it, too, has backed away from earlier plans to come on stream in 2020.
However, Tomnay said that closure of the Shell/BG deal this year would likely mean the C$40 billion venture will be built.
He said the project has “got buyers in the partnership, it’s developing a pipeline, it’s well ahead with engineering ... so the Shell project is well advanced.”
TransCanada has the lead role in building a pipeline from northeastern British Columbia to the liquefaction and tanker terminal.
Karl Johannson, president of TransCanada’s natural gas pipelines business, told the Financial Post that his company has seen no signs of Shell “putting down the tools on the project. As a matter of fact, Shell has come out publicly and said North American LNG projects are some of its priorities globally. We are still pretty confident that we are attached to a winner.”
Looming LNG glut
Others are less positive. Overshadowing the global outlook is a looming glut of LNG, with Moody’s Investors Service warning on April 7 that the “vast majority” of North American projects face cancellation because of the collapse of oil prices that LNG proponents had once eagerly tried to use in negotiating LNG deliveries to Asia.
Whatever emerges, the combined portfolios of Shell and BG would represent about 16 percent of the “global LNG market, further propelling Shell’s position as a leader in this sector,” said RBC Capital Markets analyst Biraj Borkhataria in a research note.
Shell now delivers 34 million metric tons per year of LNG to customers, led by its Nigerian LNG operation, which was first designed to squeeze more cash out of gas flared from its oil field in the Niger Delta and has since turned into a highly profitable enterprise.
Randy Ollenberger, a BMO oil and gas equity analyst, said his company has long anticipated consolidation among Canada’s LNG players even without the Shell-BG transaction.
Otherwise he said the deal would have only “minimal impact” on other Canadian operations, which include Shell’s focus on the oil sands and unconventional gas/liquids, none of which overlap with BG’s assets.
“Shell may dispose of some non-core unconventional assets, but again they would likely have pursued that anyway,” he told the Globe and Mail.
