Shell mulls fate of much-delayed $40-billion LNG Canada project

Brent Jang | The Globe and Mail | December 29 2017

Shell Canada Ltd. says market conditions will dictate when it will make a final investment decision on a $40-billion joint venture to export liquefied natural gas from British Columbia.

Calgary-based Shell, a unit of Royal Dutch Shell PLC, is playing down expectations that it will set 2018 as the make-or-break year for the project in Kitimat on B.C.'s North Coast.

"The LNG Canada project team is working to have materials ready in 2018 for a final investment decision (FID)," Shell spokeswoman Tara Lemay said in a statement. "However, the timing of FID is up to the joint venture participants to make, based on global energy markets and the competitiveness and affordability of the project."

Industry analysts have been forecasting that Shell and its three partners will announce their long-awaited decision in 2018 on whether to forge ahead.

But Shell won't be rushed in 2018 into potentially giving the green light for the complicated megaproject. Shell's cautious statement about timing underscores the rigorous process that LNG Canada faces in lining up a prime contractor and trying to persuade Ottawa to exempt the proposed Kitimat terminal from anti-dumping duties levied against imported steel modules.

Only a handful of B.C. LNG projects remain active, down sharply from more than 20 proposals in 2014. LNG prices in Asia have staged a relatively modest recovery from their lows in 2016, but remain volatile and far from record highs set in early 2014.

In 2017, cancellations included Shell's Prince Rupert LNG plans on Ridley Island, the Petronas-led Pacific NorthWest LNG joint venture on Lelu Island, the Aurora LNG consortium led by China National Offshore Oil Corp. on Digby Island and Steelhead LNG's Malahat proposal on Vancouver Island.

Shell, which manages LNG through Shell Canada Energy, operates at arm's length from LNG Canada. Shell Energy holds 50 per cent of LNG Canada. South Korea's Kogas and Japan's Mitsubishi Corp. each have a 15-per-cent stake, while PetroChina Co. Ltd. owns a 20-per-cent interest in the consortium.

In July, 2016, LNG Canada announced a delay in making its final investment decision. Slashing costs significantly will figure prominently in whether the Kitimat proposal is deemed attractive enough to approve.

"The decision is always going to be for the joint venture partners. We have a goal to be FID-ready by 2018. But the ultimate decision – are they going to take FID in 2018? – is going to be a Shell decision, a PetroChina, Kogas and Mitsubishi decision," LNG Canada director of external relations Susannah Pierce said in an interview.

"They need to look at their other projects around the world and decide that this is the best project for their investment. We're competing for investment dollars. We need to look the best out of any other options they might have."

A major hurdle for LNG Canada is the federal imposition of anti-dumping duties of up to 45.8 per cent on imports of fabricated industrial steel components (FISC), primarily targeting China and South Korea.

LNG Canada has applied in the Federal Court of Appeal for a judicial review of the Canadian International Trade Tribunal's decision in 2017 to deny the Shell-led group's request to be exempted from the new federal tariffs.

LNG Canada, which is hoping to import massive modules from China and assemble them in Kitimat, is also seeking tariff relief by applying for a "remission order" from the federal Finance Department.

Ms. Pierce said Canada is at risk of missing out on exporting LNG in tank ships to Asia, with the danger that U.S. energy terminals will take delivery of Canadian natural gas piped south and then chill the gas into liquid form for shipping overseas: "This is a Canadian opportunity. Why would we export Canadian natural gas to the United States to export overseas to Asian markets?"

A $1.6-billion proposal, Woodfibre LNG, also faces anti-dumping duties that would ruin its plans to export LNG from its industrial site near Squamish, located 65 kilometres north of Vancouver.

Industry analysts expect Woodfibre to award its contract for engineering, procurement and construction to KBR Inc. in mid-2018, but the prospect of duties has created uncertainty for importing steel modules that are required to assemble the terminal. "Each time a new cost, such as an LNG tax or higher power rates or FISC is added, commensurate savings need to be found," Byng Giraud, Woodfibre's country manager, said.

As with LNG Canada, Woodfibre has filed a duty remission application with the federal Finance Department.

No LNG project is under construction in British Columbia, although FortisBC Energy Inc. and True North Energy Corp. recently started shipping the fuel in containers from the Vancouver region to China in a small-scale pilot project.

B.C.'s Energy Ministry said the province's NDP government recognizes that the federal anti-dumping duties would raise capital costs.

"Staff with the Ministry of Energy, Mines and Petroleum Resources will continue to engage with the federal government and stakeholders on the scope of federal duties," the ministry said in a statement, noting that the B.C. government is undertaking a review of the province's fledgling LNG sector. "We are engaging with industry, First Nations and the federal government for feedback."

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