Royal Dutch Shell CFO Simon HenryLuke MacGregor/Reuters
Royal Dutch Shell PLC is optimistic about plans to build a liquefied natural gas export terminal in Kitimat, B.C., but its executives are worried that there aren't enough skilled workers to support the simultaneous construction of several such plants.
The Kitimat project "is very much on the front burner," Shell's chief financial officer, Simon Henry, said in a telephone interview from company's headquarters in The Hague on Thursday.
His comments come as Canadian gas exports to the United States hit a 20-year low, as a result of rising U.S. production of shale gas. The declining sales to the U.S. market – and the plummeting price of Western Canadian gas, which is now trading at levels not seen since the 1990s – underscores the importance for Canadian producers to open new export routes to Asia.
Royal Dutch Shell is the world's largest producer and shipper of LNG, and is also pursuing projects in Australia and Indonesia to supply Asian markets with gas. It is partnering with Chinese, Japanese and South Korean companies on one of several facilities planned for British Columbia's northerly coast that would export production from the vast shale-gas fields in the province's northeast.
But it's far from alone: Six separate consortium groups are proposing to build LNG facilities in Kitimat or up the coast in Prince Rupert.
Shell is assessing the economics of the B.C. plant versus other global investment options. "We see it as being potentially quite competitive," Mr. Henry said.
"The gas itself is relatively low cost to produce, [but]we need to look at cost of a pipeline, and to avoid cost inflation as we've seen previously in parts of Canada, particularly Alberta, in terms of constructing the LNG plant."
The resource sector, and oil and gas companies in particular, have warned that they face a crippling shortage of skilled workers that could drive up costs and limit Canada's ability to take advantage of a looming capital investment boom.
The shortage is particularly acute in remote areas such as Kitimat, a town of 9,300 which is also the terminus for the proposed Northern Gateway oil pipeline that Enbridge Inc. hopes to build starting in 2014.
The companies working on West Coast LNG plans include heavyweights such as BG Group PLC; Progress Energy Corp., with partners Nexen Inc. and Malaysia's Petronas; and Kitimat LNG, which is led by Apache Corp. and includes Encana Corp. and EOG Resources Canada Inc.
A Shell-led LNG terminal in Kitimat could require as many as 4,000 construction workers, and rival Kitimat LNG would need a similar number. Companies may have to build their projects in stages, as they have in the oil sands, to ease the strain on the work force.
Mr. Henry noted that Alberta experienced some of the worst construction inflation in the world prior to the 2008 recession, when several oil-sands companies launched major expansions.
"We'd rather not see a repeat of those circumstances," he said. "What we don't want is two or three competing projects being built at the same time."
Mr. Henry said some consolidation would make sense, but may not be happen.
Kitimat LNG, which is working with several B.C. first nations, is the furthest along of the major proponents, with an export licence and a plan to build the Pacific Trail Pipeline from Prince George to Kitimat. A final investment decision on that project is expected later this year.
Canadian gas producers are desperate to diversify their export market beyond the United States, which is enjoying a boom in shale gas product that has driven North American prices to depressed levels.
U.S. gas imports, which come primarily from Canada, have hit their lowest levels since 1992 as a result of rising domestic production and a warm winter, the U.S. Energy Information Administration reported Thursday.
Since January, Canadian exports have averaged below 6 billion cubic feet per day, compared with nearly 8 billion in first 75 days of 2011.
In a recent report, CIBC World Markets analyst Andrew Potter said he expects there to be some 2.8 billion cubic feet per day of LNG exports from Canada's West Coast by 2020.
Mr. Henry said Canada has some clear advantages as a supplier to Asian gas markets, where prices are tied to crude prices and are now roughly $18 (U.S.) per thousand cubic feet compared with about $2.50 in North America.
In addition to low-cost supplies, he said, Asian customers appreciate Canada's stable political and economic environment, and its welcoming attitude toward investment by their energy companies, whether publicly traded or state-controlled.
Meanwhile, Shell is looking for other sources of new demand for growing North American gas supplies.
The company announced Thursday that it has selected a site in Pennsylvania for a proposed petrochemical complex that would use as feedstock the shale gas extracted from the state's Marcellus fields.