A global powerhouse in liquefied natural gas has emerged in a blockbuster merger that is expected to reshape British Columbia's LNG industry.
Royal Dutch Shell PLC's £47.7-billion ($88-billion) deal to buy BG Group PLC creates a liquefied natural gas giant, and will allow the combined company to choose which energy projects to keep or jettison within B.C.'s fledgling LNG sector. The merger will bolster the Shell-led LNG Canada project in Kitimat while hampering BG's chances near Prince Rupert, as pressure mounts for players to either drop out or consolidate to cut costs.
There are 19 LNG proposals in B.C., though only three or four projects at most have a realistic chance to survive amid fierce global competition and a looming glut of LNG supplies. "We're going to see some consolidation amongst the LNG projects. There really isn't room for all of them," BMO Nesbitt Burns Inc. energy analyst Randy Ollenberger said in an interview.
Premier Christy Clark describes the LNG industry as a once-in-a-generation opportunity to improve the province's finances and create tens of thousands of jobs. She campaigned hard in touting LNG's prospects during B.C.'s general election in May, 2013. Her B.C. Liberal government boasts that the LNG sector could transform the provincial economy.
Ms. Clark is sticking with her prediction that companies will be operating three LNG terminals in B.C. by 2020.
"Partnerships change and continue to change in the global energy industry. It's a healthy aspect of the business," a B.C. Natural Gas Development Ministry spokeswoman said Wednesday.
The new Shell-BG partnership changes the game.
In northwestern B.C., the Shell-led LNG Canada joint venture in Kitimat gains momentum. That proposal is further advanced than BG's Prince Rupert LNG project slated for Ridley Island, industry experts say.
LNG Canada estimates that it will cost up to $40-billion to develop a massive LNG export terminal in Kitimat. Royal Dutch Shell, through Shell Canada Energy, owns 50 per cent of the project, with partners from China, Japan and South Korea.
"Shell would be at an advantage over BG in B.C.," Mr. Ollenberger said. "BG has a low-probability project."
Shell has natural gas reserves in northeastern B.C. that would be transported by pipeline to Kitimat for export, and LNG Canada has Asian customers lined up to take delivery of natural gas in liquid form, including orders placed by Shell's partners.
"LNG Canada has a number of milestones ahead of us before we make a final investment decision on our project in Kitimat – most importantly, that the project is economically viable. We can confirm that LNG Canada continues to move forward through this phase of the project," LNG Canada chief executive officer Andy Calitz said in a statement.
BG is still looking to obtain natural gas supplies for its planned Ridley Island export terminal and also hasn't secured any Asian customers. Madeline Whitaker, who left her position as BG Canada president in February to return to BG's head office in Britain, won't be replaced. Last October, BG delayed its final investment decision for Prince Rupert LNG until 2017 instead of aiming for the original target of 2016.
Moody's Investors Service Inc. said Tuesday that it doesn't make economic sense to invest billions on each of the dozens of LNG proposals in Canada and the United States, especially during an era of low oil prices and with Asian buyers slowing down their orders for new LNG supplies.
If BG's Ridley Island site is divested, the Pacific NorthWest LNG joint venture near Prince Rupert will stand to benefit.
Pacific NorthWest LNG, led by Malaysia's state-owned Petronas, has been studying ways to avoid damaging salmon habitat in Flora Bank by proposing a costly suspension bridge from its planned terminal on Lelu Island to a deep berth location in Chatham Sound.
Pacific NorthWest LNG officials weren't available for comment. But industry observers say BG's Ridley Island site would be an option for Pacific NorthWest LNG to relocate the berths for LNG tankers, if the suspension bridge proves to be too complex and expensive to construct.
On Feb. 23, the Canadian Environmental Assessment Agency asked the Petronas-led group to provide more information about the project's potential impact on salmon habitat near the proposed LNG terminal site on Lelu Island. The agency has halted the regulatory clock at Day 240 of the one-year review process, meaning a federal environmental ruling on Pacific NorthWest LNG could stretch into August or even September.
The Shell-BG combination forecasts the new entity's LNG capacity will rise sharply by 2018.
"This is a springboard to reshape the combined portfolios," Royal Dutch Shell chairman Jorma Ollila said.
"In LNG, we apply our expertise across the supply chain, from gas production to liquefaction to shipping and marketing, in which we are an industry leader," BG Group chairman Andrew Gould added.
FACTS AND FIGURES
LNG Canada and Prince Rupert LNG are two projects among the 19 proposals to build export terminals in British Columbia. Here is a snapshot of the two B.C. projects to be controlled by the combined company to arise from the Shell-BG Group deal.
Location: Kitimat, B.C.
Cost: Up to $40-billion.
Owners: Royal Dutch Shell PLC, through Shell Canada Energy, owns 50 per cent of the joint venture. PetroChina Co. Ltd. holds a 20-per-cent stake while the other Asian partners are Japan's Mitsubishi Corp. and South Korea's Korea Gas Corp., which each have a 15-per-cent interest.
Proposed pipeline: TransCanada's Coastal GasLink.
Prince Rupert LNG
Location: Ridley Island, near Prince Rupert, B.C.
Cost: At least $16-billion.
Owner: BG Group PLC.
Proposed pipeline: Spectra Energy Corp.'s Westcoast Connector.