Royal Dutch Shell PLC is giving up on the Mackenzie Delta, pulling out of the region 38 years after it first discovered a massive deposit of natural gas.
The energy giant on Friday acknowledged it is looking to sell off its delta holdings, including its position in the newly approved but long-delayed Mackenzie Valley natural gas pipeline.
"As part of [Shell's] regular global portfolio review, Shell has decided to focus its resources on other options," the company said in an eight-page divestiture brochure.
Shell's decision marks another major setback to the industry's vision of transporting the region's natural gas reserves to southern markets, a plan that has stalled amid shifting industry economics.
After being held up for years in legal and regulatory delays, the Mackenzie Valley pipeline's economics are now in doubt because of extensive discoveries and production of shale gas, trapped in previously inaccessible formations in already developed parts of North America. Abundant shale gas reserves have contributed to a broad supply glut of natural gas that has depressed the commodity's price. The reality of today's gas industry has many questioning whether the Mackenzie pipeline will ever get built.
"This is an economic tragedy," said Adam Waterous, head of oil and gas finance firm Scotia Waterous, which was not involved in Shell's decision. "We can't let this happen again with Gateway," the Enbridge Inc. $5.5-billion oil pipeline that aims to take Alberta oil to the west coast for shipment to Asian markets. That project is now under review and faces opposition from environmentalists and native communities.
The Mackenzie pipeline – an 1,100-kilometre connection between the delta and Alberta – was first proposed in the 1970s but never got off the ground. A second attempt was made in 2004 but extensive delays, legal and regulatory, hurt the project. The pipeline is burdened by exorbitant costs that are expected to total $16-billion.
In the interim, vast quantities of shale gas were discovered throughout North America. Shell, for example, paid $5-billion in 2008 to buy Duvernay Oil Corp., which had vast assets of shale gas in British Columbia that were already connected to pipeline systems.
Even though Shell no longer sees value in the region, it promotes the delta in its sales documents as "an exciting, basin-opening opportunity."
Canada's Aboriginal Pipeline Group, which has the opportunity to own as much as a third of the pipeline if it is built, said the proposed sale isn't necessarily bad news. "Some will think that and others will realize it's business at usual," Fred Carmichael, chairman of the group, said from Inuvik, NWT. "It doesn't fit their portfolio, so they're moving on for the time being. There'll be plenty of interest."
Imperial Oil, Exxon Mobil Corp. and ConocoPhillips are the other members of the consortium that invested in building the pipeline. Imperial leads the group, but the company said "it wouldn't be appropriate" to comment on other members' decisions. However, a source close to Imperial said Shell's decision came as a surprise and that it is unclear if senior management saw it coming.
Shell has set a deadline of Aug. 31 for any bids. Some of Calgary's most senior bankers were caught off guard by Shell's decision and noted that the assets will be tricky to sell. One possible buyer could be Korea Gas Corp., which has shown recent interest in the region because it hopes to export gas in liquid form. South Korea is the world's top importer of liquefied natural gas.
To attract bidders, Shell will open a "virtual data room" on Monday, followed by seismic work stations at its Calgary office a week later. The company has already promoted a data package "to a broad group of prospective purchasers" to stoke interest, company spokesman Stephen Doolan wrote in an e-mail on Friday afternoon.
While Mr. Doolan said Shell "believes the project is important for Canada," the company has calculated it can make more money on other assets. Mr. Doolan added that selling assets is a key part of Shell's "portfolio-based strategy" and that it looks at what it owns to figure out what combination will make its shareholders the most money.
The comments suggest that Shell sees a better return on its investment in B.C.'s sprawling Montney shale gas play, where Shell paid a hefty sum for Duvernay.
Gas in the delta was first uncovered by Exxon Mobil's Canadian arm, Imperial Oil, in 1971. The field, according to regulatory documents, contains 2.8 trillion cubic feet of recoverable gas. The initial production rate from the field, named Taglu, was 445 million cubic feet a day – a large figure. To put the number in perspective, Taglu's size would be one-eighth of all of Encana Corp.'s current production and Encana is North America's No. 2 gas producer. Shell's main delta field is about one-third the size of Taglu.