Royal Dutch Shell (RDS.A) (RDS.B) and its Asian partners are expected to announce that they're officially moving forward with the long-delayed LNG Canada project this week, according to a report by Bloomberg. The 40-billion-Canadian-dollar ($31 billion) facility -- which would liquefy and export natural gas -- would be the largest infrastructure project in Canada's history. Furthermore, it would spur additional investment across the country's natural gas sector, including an associated pipeline and natural gas wells, which would be needed to support the project.
Shell is leading the development of the massive liquefied natural gas (LNG) export terminal along Canada's west coast. LNG Canada would initially export 13 million metric tons of LNG per year, primarily to customers in Asia. Meanwhile, a potential second phase could double its capacity in the future.
The project has been in the works for seven years but was put on hold when oil and LNG prices plunged during the recent energy market downturn. However, with those markets improving and demand for LNG growing at a brisk pace, Shell and its partners are moving forward with the project. PetroChina (NYSE: PTR), China's largest natural gas producer, recently approved investing $3.46 billion for its 15% share of the project, following a similar approval from Korea Gas Corp. for its 5% stake. Meanwhile, Shell (40%), Malaysia's Petronas (25%), and Japan's Mitsubishi Corp. (15%) appear set to announce their approvals this week, according to Bloomberg. That would enable them to start construction on the project next year, putting them on track to complete the first phase by 2023.
The domino effect
The approval of LNG Canada would trigger additional investments further upstream. One of the largest would be by TransCanada Corporation (TRP 0.37%), which would build the Coastal GasLink pipeline to supply natural gas to LNG Canada. The 415-mile pipeline would cost CA$4.8 billion ($3.7 billion). It's a needle-moving project for TransCanada and would give the company more fuel to extend its dividend growth outlook. The company expects to boost its payout at an 8% to 10% annual pace through 2021. TransCanada, as well as other midstream companies, will likely need to build additional infrastructure in Western Canada to support production growth.
That's because gas producers in Western Canada would have a new outlet for their production, which could help boost the price of natural gas in the country and spur additional investment in new wells. Driving that view is the fact that the first phase of LNG Canada would consume roughly 1.8 billion cubic feet per day (Bcf/d), which would account for about 10% of the current production out of Western Canada. Among the likely beneficiaries would be Canadian Natural Resources (CNQ 2.10%), Canada's largest gas producer at 1.5 Bcf/d. Higher natural gas prices thanks to LNG Canada could help boost Canadian Natural Resources' profitability since a CA$1 increase in the price of gas would fuel a CA$380 million ($296.5 million) uplift in its cash flow. Meanwhile, the company is sitting on a massive 11.6 trillion cubic feet equivalent resource base, which gives it significant growth potential. Other gas producers in Western Canada could also see a significant uplift in their production and profitability thanks to LNG Canada.
A game changer for Canada's natural gas industry
The apparent approval of LNG Canada is a significant milestone for Canada's energy sector. The project will not only move the needle for Shell, but it will trigger an important growth project from TransCanada and will likely spur additional investments in other natural gas-related infrastructure in Western Canada to support an anticipated increase in the region's production from producers like Canadian Natural Resources. Those investments have the potential to enrich investors across Canada's natural gas industry in the coming years, making it an intriguing region for them to search for opportunities.