Energy Ink

Cost pressures loom as Shell eyes West Coast LNG

Potential for inflation is 'huge', analyst says

Guest Post

November 16, 2011

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There was a conspicuously empty chair at yesterday’s Canadian Unconventional Resources Conference held in Calgary. Victor Ojeda, general manager of Shell Canada’s British Columbia liquefied natural gas (LNG) project, was a no show. I inquired about his absence and was told by organizers that the company had initiated a media blackout, which precluded the executive from discussing his firm’s designs for Canada’s West Coast.

Blackouts are catnip for journalists – they typically precede announcements that are material to the market – so I was hardly surprised to see Nathan VanderKlippe report last night in the Globe and Mail that Shell is eyeing a liquefaction scheme at Kitimat that would eclipse a rival proposal put forward by Apache Canada.

Shell is still mum on its plans, acknowledging only that it has purchased an abandoned marine terminal in the coastal community and that it is “exploring the potential of an LNG project in British Columbia.” VanderKlippe quotes a Spectra Energy official (whose company operates a network of gas pipelines and gathering systems in B.C.) saying Shell is contemplating a project with capacity to process 1.8 billion cubic feet of natural gas per day. The Apache-led Kitimat venture, although smaller, has a leg up on Shell. It won a coveted export licence from Canada’s National Energy Board to ship 1.4 bcf/d of natural gas to overseas markets last month. Shell has yet to file a proposal with regulators.

Meanwhile, Cheniere Energy Partners LP on Monday signed a $3.9-billion engineering, construction and procurement contract with Bechtel Oil Gas and Chemicals Inc. to build two liquefaction trains at the Sabine Pass LNG terminal located in Cameron Parish, Louisiana, on the U.S. Gulf Coast. Cheniere has in hand a 20-year sales deal with Britain’s BG Group to supply 3.5 mtpa beginning as early as 2015. Construction of the liquefaction trains is expected to begin next year, pending final approvals from the U.S. Federal Energy Regulatory Commission.

The engineering deal, along with Shell’s blueprints, are a potentially worrying sign for Apache Canada, who is expected to issue a revised capital cost estimate for its $4.5-billion Kitimat scheme early next year. Firms that specialize in building liquefaction trains number fewer than a dozen internationally, making cost inflation a serious challenge as global interest in building the plants peaks. (Australia alone has committed 20 bcf/d of supply potential if projects currently underway or being planned go forward). “The potential for cost escalation is huge, particularly for the amount of liquefaction projects that are coming online, not just in Canada, but in the U.S.,” says Ken Fung, associate director of North American Gas with consultancy IHS CERA.

Indeed, Total SA said last week that costs to develop the firm’s Ichthys offshore gas project have skyrocketed to $30 billion from earlier estimates of $20 billion. In Canada, Apache will face pressure from a tight labor market squeezed by oil sands capital projects and, now, some $33 billion in federal shipbuilding contacts. “It’s got to be a concern for Canadian investors in liquefaction projects,” Fung said, speaking on the sidelines of the unconventional resource conference. “From an [engineering, procurement and construction] perspective and the amount of projects that are coming online, that market is fairly tight. The cost escalation from that standpoint could be huge.”

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