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Shell lauds unity of LNG partners on proposed British Columbia terminal

08.12.2013  | 

Shell's partners in the LNG Canada consortium, which plans a coastal plant and export terminal at Kitimat, British Columbia, are among the largest buyers of the fuel in Asia, so setting prices for long term supply contracts will not be an issue as they develop the venture over the next seven years.

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By JEFFREY JONES

CALGARY -- The new head of Royal Dutch Shell's Canadian natural gas business is touting the unity of its partnership with large natural gas buyers in a plan to build a multibillion dollar LNG project in British Columbia as an advantage over competing proposals.

That leaves possible increases in taxes and fees, as well as the costs of labor and materials, as the primary concerns ahead of a final decision.

Shell's partners in the LNG Canada consortium, which plans a coastal plant and export terminal at Kitimat, British Columbia, are among the largest buyers of the fuel in Asia, so setting prices for long-term supply contracts will not be an issue as they develop the venture over the next seven years, said Andy Calitz, a veteran of Shell's LNG business in Russia and Australia, where the European oil major has massive facilities.

"You can hear from me a quiet confidence that supply contract negotiations will not impede a final investment decision on the Kitimat project," Mr. Calitz said at Shell Canada's Calgary headquarters.

In fact, the players do not intend to trumpet any supply deals, which makes the venture different from Shell's previous projects, such as the huge Sakhalin-2 development in Russia and Gorgon in Western Australia, said Mr. Calitz, VP of LNG Canada.

That is not the case for all the players seeking to build up a new LNG industry in the region. At least one of the proposed projects, the Chevron backed Kitimat LNG, has experienced lengthy delays in reaching a final investment decision, with officials pointing to difficulty in finding buyers willing to sign lucrative contracts that link the price of the product to the price of oil.

Such oil indexed pricing is common overseas, and has helped draw the interest of United States and Canadian producers who have struggled with the much lower value of North American gas. However, some Asian buyers have said they are eager to buy supplies indexed to the United States gas prices.

Shell is one of several major players seeking to transform vast Western Canadian natural gas reserves into a lucrative transocean business. The company has teamed up with Korea Gas, Mitsubishi and PetroChina.

Korean Gas is one of the world's largest LNG buyers, Mitsubishi one of the top traders, and PetroChina its country's dominant energy company and largest natural gas producer, all of which add heft to the proposal and eliminates the need to hunt for LNG contracts, Mr. Calitz said. The partners plan to decide by 2015 whether to go ahead with the 1.7 Bcfd venture, with start up targeted for the end of the decade.

Australia, in particular, has seen massive cost overruns at LNG developments, something that will be a concern for Shell and its partners. However, Mr. Calitz said the group plans to construct large parts of the project away from the site and ship large prebuilt modules to Kitimat as a way to reduce the number of construction workers needed there.

Exports to higher priced markets would allow accelerated development of Canada's massive shale gas reserves, supporters say.

Mr. Calitz lauded moves by the federal and British Columbia governments to support the nascent industry, saying that they add credibility to the project proposals in Asian markets. Such support includes the National Energy Board's granting of gas export licenses.

The British Columbia government has been an enthusiastic promoter of the LNG industry, claiming that extraction of the fuel could help eliminate provincial debt. In June, the provincial government said another LNG project under development by Petronas could result in a total investment of nearly $19.45 billion.

But the industry is concerned about a prospective move by British Columbia to bring in new taxes and levies, which the government said in February could raise roughly $29.17 billion over 30 years in additional revenue.

In June, Tokyo Electric Power, warned that a new tax on gas exports could slow the development of the industry.

"We are supporting the British Columbia government as they work towards ensuring that the province is globally  competitive including from an LNG taxation perspective so that projects like LNG Canada can go ahead, Mr." Calitz said.

A competitive threat is also growing in the United States. Last week, Washington approved a third United States LNG project, a $2 billion facility on the Louisiana Gulf Coast. Mr. Calitz said he does not expect all Canadian and United States proposals to proceed, however, given high capital costs and the need for long termsupply arrangements. That will leave plenty of room for experienced developers, he said.

"We have already seen the LNG market doubling in size during the last decade and we expect the market to double again between now and 2020, he said."

Dow Jones Newswires



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