A tanker fills up at an LNG Canada facility in Kitimat, B.C., on Nov. 13.ETHAN CAIRNS/The Canadian Press
Conversations with the federal and British Columbia governments have “raised the likelihood” of the LNG Canada export terminal expansion in Kitimat, B.C., says Wael Sawan, Shell PLC’s SHEL-N chief executive, with a decision on the project expected in the coming months.
Mr. Sawan’s comments come on the heels of Shell’s announcement Monday that it is buying Calgary-based ARC Resources Ltd. – the largest pure-play producer in the Montney basin, which straddles Alberta and northeast British Columbia. The US$16.4-billion deal will significantly boost Shell’s holdings in the region, which is a crucial supplier of natural gas to LNG Canada.
Shell holds a 40-per-cent share in the terminal, whose liquefied natural gas can reach Asian markets faster than most other North American suppliers. While there has been no final investment decision made on the second phase of the terminal, it is on the list of five projects that Prime Minister Mark Carney has said will be reviewed for fast-track approval under Ottawa’s Building Canada Act.
Mr. Sawan said Shell has been “growing in confidence in the posture” that the Canadian and B.C. governments have been taking when it comes to enabling LNG Canada Phase 2, which would double capacity to 28 million tonnes a year from 14 million.
“There has been a significant leap forward in terms of their conviction around LNG projects, and that has, of course, raised the likelihood of a potential opportunity moving forward,” he said on a Tuesday morning call with analysts.
Shell buying Calgary-based ARC Resources in $16.4-billion deal as it mulls LNG Canada expansion
The ARC portfolio being acquired by Shell includes natural gas, condensate, natural gas liquids and crude oil assets across 1.5 million net acres. The deal will add roughly two billion barrels of proved and probable oil reserves to Shell’s books in the same region as its existing Groundbirch and Gold Creek projects.
“I’ve been chomping at the bit on this particular company for a couple of years now,” Mr. Sawan said Tuesday, adding that Shell was only going to make a move once it was sure it could unlock the value of ARC’s assets.
While those assets are an important part of Canada’s liquefied natural gas chain, he said, ARC is “first and foremost, in my mind, a liquids-rich player.”
Liquids production comprises roughly 70 per cent of ARC’s revenues, he said, but the natural gas presents a unique upside in that it can be monetized through either the U.S. market or LNG Canada – particularly if the terminal is expanded to boost access to higher-priced Asian markets. Plus Shell can use product from the new assets to its Scotford refining and chemicals complex near Edmonton and its Quest and Polaris carbon capture developments.
Still, analysts see LNG Canada Phase 2 as the driving force behind the purchase.
Canada’s second chance in the global LNG race
Robert Catellier, with CIBC Capital Markets, said the ARC deal makes LNG Canada Phase 2 “increasingly as a matter of when, not if.”
“Shell’s acquisition of ARC secures one of the largest Montney gas portfolios, and the global supermajor appears to effectively be acquiring supply as feedstock for its global LNG value chain,” he wrote in a Tuesday research note.
TD Cowen equity research analyst Aaron Bilkoski also said in a research note that LNG Canada is the driving economic logic behind the acquisition. A final investment decision and timeline on the expansion will be “critical to the deal’s ultimate evaluation,” he added.
With the world continuing to demand more energy for electricity, transport and industry, LNG is “one of the most versatile, flexible opportunities to be able to fulfill that demand and at the lower carbon footprint than many of the alternatives,” Mr. Sawan said.
Canadian stocks are particularly attractive because of their price and the shorter shipping distance to Asian markets that want to diversify their supplies and are willing to pay a premium to do so, he added.