Canada is encountering pricing problems for crude exports into the U.S. The Western Canadian Select (WCS) benchmark trades at almost a $40 a barrel discount versus West Texas Intermediate (WTI) due to pipeline capacity constraints. However, this is not preventing the country from moving forward with plans to develop Canadian-sourced liquified natural gas (LNG).
Royal Dutch Shell ( RDS.A) was given a green light to invest in LNG Canada earlier this week. Shell has made a final investment decision on LNG Canada , a major LNG project in Kitimat, British Columbia in which Shell has a 40% working interest. LNG Canada's joint venture partners include PETRONAS (25%), PetroChina (15%), Mitsubishi (15%) and KOGAS (5%). Construction will start immediately. But this is not positive news for U.S. players like Cheniere Energy ( LNG) and Tellurian ( TELL) , who are trying to sell U.S. sourced natural gas from the Gulf Coast into Europe and Asian markets.
LNG Canada is in the right place given its direct access to the Pacific markets. This also comes at the right time as the Trump Administration is battling with China over trade wars, giving Canada a price advantage.
We are bullish on the global LNG market as demand is expected to double by 2035 with much of this growth coming from Asia where gas will displace coal. We think LNG Canada is well-positioned to meet growing customer demand at a time of LNG supply shortage and U.S.-China trade wars, given its significant integration advantages from production to trading.
LNG Canada is expected to deliver an internal rate of return of 13% to Shell. Cash flow is expected to be significant.
LNG Canada is a long-life asset that will initially export from two processing units (or "trains") totaling 14 million tonnes per annum (mtpa), with the potential to expand to four trains in the future. To give investors some perspective, Cheniere's Sabine Pass liquefaction project has an aggregate nominal production capacity of approximately 27 mtpa, or double the size of LNG Canada. Cheniere's Corpus Christi liquefaction facility is under construction in South Texas and is expected to be approximately 13.5 mtpa of LNG.
What makes the LNG Canada project unique is that each partner will provide its own natural gas supply and will individually market its own LNG. TransCanada will build, own and operate the Coastal GasLink pipeline that will connect upstream gas supply to the LNG Canada plant.
Canada seems to have an advantage over the U.S. in the global LNG race given its access to abundant, low-cost natural gas from British Columbia's vast resources, and the relatively short shipping distance to North Asia, which is about 50% shorter than from the U.S. Gulf of Mexico and avoids the Panama Canal.
