November 1, 2018 / 8:06 PM / 18 days ago

Shell Canada sees cost advantage in LNG Canada expansion

CALGARY, Alberta (Reuters) - An expansion of LNG Canada has a cost advantage over its rivals in the race to build more liquefied natural gas export capacity, but a go-ahead decision on phase two is likely still a few years away, Shell Canada’s president said on Thursday.

The first phase of the C$41 billion ($31.3 billion) Royal Dutch Shell (RDSa.AS)-led project was given the go-ahead last month, firing up a race among companies eager to be the next to tap into booming Asian demand for the gas that is supercooled into liquid form for export by tanker.

“What’s in our favor now is expansions are typically lower capital cost,” Michael Crothers, Shell Canada President, told the Reuters Global Commodities Summit. “I think that opens up an even more competitive opportunity for us and the partners.”

That expansion cost saving adds onto the project’s other advantages, including a relatively short shipping distance to key Asian markets and cheap feed gas.

The question of when the second phase, which would double output at the 14 million tonne per annum (mtpa) plant to 28 mtpa, will be approved remains unclear, Crothers said.

“I’m sure Shell leadership would like to see demonstrated performance before we start to consider this too closely. So that’s still probably a few years away,” he said.

He added an LNG Canada expansion would have to compete with global rivals, including options in the U.S., Africa and Middle East, and would depend on the market for the fuel - though all signs point to sustained Asian demand.

LNG demand has risen sharply in recent years, led by China, gobbling up an anticipated surplus and fanning fears of a shortage by mid-next decade. This has projects around the world scrambling to secure the long-term deals they need to finance multi-billion dollar builds.

LNG Canada is a joint venture between Shell, Malaysia’s Petronas [PETR.UL], PetroChina Co Ltd (601857.SS), Mitsubishi Corp (8058.T) and Korea Gas Corp (036460.KS).

One of the key benefits for Canada-based LNG projects is access to cheap gas, Crothers said, noting that Western Canadian gas prices are roughly $1 less than the U.S. Henry Hub benchmark NGc1 and are not expected to rise anytime soon.

Gas prices are so low that Shell has stopped drilling new wells at its massive Groundbirch field in northern British Columbia and will only resume in 2020 to ready for LNG Canada shipments.

Crothers also sees a first-mover advantage domestically on labor costs, noting that a construction slowdown in Alberta’s oil sands is allowing LNG Canada good access to skilled workers.

LIGHT OIL

Shell pulled back from the oil sands last year and has focused on the Duvernay and Montney shale formations, which produce mainly light oils and natural gas.

The market for that light oil, known as condensate, is booming as oil sand producers use it as a diluent to run their heavy crude through pipelines. The risk is that heavy oil producers could cut output in response to low prices.

“If oil sands plays decline or people shut in production ... then the demand for local condensate could drop and that will impact the price,” said Crothers.

For now, Shell’s Alberta light tight oil assets remain one of the top areas of unconventional spending for the company, but Crothers noted that an unfavorable tax situation is hurting its competiveness globally.

“The performance of wells continues to look very encouraging, costs continue to come down,” he said. “It would be helpful if there was a better competitive story Canada when it comes to the fiscals.”

Crothers also said Shell Canada is open to acquisitions in key shale regions, but declined to comment on any specific opportunities.

Reporting by Julie Gordon And Rod Nickel; editing by Diane Craft and Marguerita Choy

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