UPDATE 3-Shell seeks sale of Canadian Mackenzie gas assets

Fri Jul 15, 2011 5:49pm EDT

* Seeks bidders for stake in C$16.2 bln Arctic project

* Says sale part of portfolio management

* Imperial Oil still committed to project (Adds details and comments)

By Scott Haggett and Jeffrey Jones

CALGARY, Alberta, July 15 (Reuters) - Royal Dutch Shell Plc (RDSa.L) has put its stake in the C$16.2 billion ($16.8 billion) Mackenzie gas project up for sale, the first crack in the partnership set up to develop vast reserves in Canada's Arctic and build a pipeline to take the gas south.

Shell is seeking bidders for its 950 billion cubic foot Niglintgak natural gas field in the Mackenzie River Delta, as well as its 11.4 percent stake in the planned pipeline.

The move adds yet more uncertainty to a project that many observers believe suffers from shaky economics. Now several years behind its initial schedule, the Mackenzie project is under pressure because of high construction costs and questionable returns due to weak gas markets as the industry develops cheaper shale gas reserves across North America.

Still, Shell said the planned sale was part of its routine portfolio management and that it continues to have faith in the viability of the pipeline.

"Shell still believes the project is important for Canada," said Stephen Doolan, a spokesman for the company.

Imperial Oil Ltd (IMO.TO), the lead partner in the five-member consortium that has backed the project for more than a decade, still plans to go ahead with the line, its chief executive said on Friday.

"We're still committed to try to make this project go forward," Bruce March told Reuters. "We're just pleased that (Shell) is getting started with the marketing effort."

He declined to say if Shell had first offered its stake to project's remaining partners.

Shell said it would market the interest to a wide group of potential buyers, but any purchaser would need deep pockets. Developing the Niglintgak field, the smallest of the three fields the pipeline would serve, would cost C$800 million according to regulatory filings.

A buyer would also need to pay Shell's share of the C$7.05 billion pipeline.

Though the construction of the line was approved by regulators earlier this year, the project has been stalled as the backers seek a deal with the federal government that would see Ottawa pay for roads, airstrips and other permanent infrastructure in the sparsely populated Northwest Territories, in order to reduce the project's financial risk.

Although he did not comment on the progress of the fiscal negotiations for the Mackenzie project, Joe Oliver, Canada's natural resources minister, said he believed the project is still viable, despite Shell's exit.

"My understanding is that their investment is relatively small for the size of the company that they are. It was explained to me by their president that it wasn't a strategic investment so I don't draw any broader conclusions from that," Oliver told reports following a speech in Calgary.

The planned pipeline is only a small part of Shell's Canadian operations. The company also has the country's third-largest oil sands project and is expanding its western natural gas production, as well as examining the feasibility of building a liquefied natural-gas facility on the West Coast.

The sale "might be a signal that they don't want to have to manage too many projects," said Michael Dunn, an analyst with FirstEnergy Capital.

The planned pipeline would carry up to 1.2 billion cubic feet of gas daily nearly 1,200 km (750 miles) south from the Mackenzie Delta on the Beaufort Sea to Alberta's pipeline network. The current start-up estimate is 2018.

Other partners in the pipeline project, include ConocoPhillips (COP.N), Exxon Mobil Corp (XOM.N) and the Mackenzie Valley Aboriginal Pipeline LP.

($1=$0.95 Canadian) (Editing by Peter Galloway and Rob Wilson)

FILED UNDER: