Light at the end of the tunnel for Canadian LNG and heavy crude

Last week Malaysia’s state run Petronas ended its $27 billion bid to build a liquefied natural gas facility on the west coast of Canada. The fate of a similar LNG project in British Colombia from Royal Dutch Shell is still up in the air.

To be specific, LNG Canada would be the project owner. LNG Canada is a joint venture that began in 2012 and involves: Royal Dutch Shell, PetroChina Company Limited, Korea Gas Corporation, and Mitsubishi Corporation.

The joint venture was created to build a LNG facility near Kitimat, British Columbia, which is roughly 100 miles from Alaska’s southern tip. Royal Dutch Shell holds a 40% working interest.

The project has been delayed thus far, and Royal Dutch Shell’s chief executive officer, Ben Van Beurden announced during a conference call that LNG Canada’s fate might not be decided until early 2019.

Van Beurden added, “We need to get the timing properly right – we think we can. If we look at an investment decision in the next 18 months or so, this is going to be a project that could start producing right at the moment when the spot market, the short-term market is getting very tight again.”

Right now, the market is flooded with LNG, so many export terminals are on hold around the world. Asia is getting cheap gas from the United States and Australia, and the number one exporter of LNG, Qatar, has promised to increase their production over the next few years.

LNG Canada hasn’t been shelved yet, but Van Bearden wants to wait for a, “break-even price that is very resilient – this needs to be a project that can survive also under downcycles.” He also added, “If you have the best possible project on the cost of supply curve for new projects, then you are a little less obsessed with the timing because you will be able to get it into the market.”

This news comes as Canada’s struggling energy sector also sees light at the end of the tunnel in their oil market. The Organization of the Petroleum Exporting Countries and several non-OPEC countries in Latin America have cut production, leaving a market place for the Canadian oil sands’ heavy crude.

Refiners in China and here along the Gulf Coast are struggling to find heavy crude to make up for the dearth of Middle Eastern oil. This is pushing the price of Western Canadian Select to roughly $5 a barrel below U.S. crude. In 2015, the lowest differential between WCS and U.S. crude at the U.S. storage hub in Cushing, Oklahoma was $4.10 per barrel.

The Canadian crude still suffers from high shipping costs in many cases due to lack of pipelines to the west coast and pipeline constraints to the U.S. But according to the RBC analyst Michael Tran, “So many tankers out there are looking for work it would not be surprising for somebody to get a sweetheart deal.”

Article written by HEI contributor Raymond Arrasmith.

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