Free Gas! Alberta Market Looks Forward to Shell Export Project

(Bloomberg) -- An export terminal on Canada’s west coast may eventually rescue one of the cheapest markets for natural gas in North America -- so cheap that sometimes the fuel price falls below zero.

Royal Dutch Shell Plc and its four partners have agreed to invest in the $31 billion LNG Canada project, according to a statement from Shell on Tuesday. The decision to build the export terminal provides a much-needed outlet for gas in a region battered by competition from U.S. drillers, which has created bottlenecks so severe that prices can occasionally go negative.

Abundant shale supply from Texas to Pennsylvania has sharply reduced U.S. gas imports from Canada. While the years-long construction time for the Shell project means there won’t be an immediate impact on Canadian prices, the market will likely see a boost in the early to mid-2020s as fuel is piped to the coast and sent overseas on tankers as liquefied natural gas, according to Dulles Wang, an analyst at Wood Mackenzie Ltd.

“Having access to the booming international market is definitely a positive message for the Western Canadian producers,” he said. But “the impact of this decision may not translate into changes for at least the next five years.”

Even as LNG Canada advances, AECO gas -- Alberta’s pricing hub -- will still depend heavily on how much supply the U.S. soaks up via pipeline from its northern neighbor.

“We’re still dealing with an oversupply issue in Western Canada at AECO, and we still see lots of competition from the U.S.,” Wang said.

Shares of Canadian gas producers including Painted Pony Energy Ltd. and Birchcliff Energy Ltd. jumped last week after PetroChina Co. and Korea Gas Corp., two of Shell’s partners in LNG Canada, approved their share of the investment.

Drillers should get some relief this winter, when spot prices at AECO are expected to soar as Arctic temperatures threaten to hinder output at a time when storage levels are already at seasonal lows, Bank of America Merrill Lynch said in a note to clients last week.

AECO prices started to pick up at the end of September, ending Friday at $1.68 (C$2.15) per million British thermal units, the highest since late March.

And though any impact from the LNG Canada project won’t be felt for several years, prices could climb to a level that would trigger new production if Shell and its partners decide to move forward with an expansion of the export terminal, said Jordan McNiven, an analyst at Tudor Pickering Holt & Co. in Calgary.

The terminal moving ahead proves that “Canada, even with its regulatory challenges, can get a project of this magnitude done,” McNiven said. “And hopefully this is a blueprint for potentially others to follow.”

To contact the reporters on this story: Rachel Adams-Heard in Houston at radamsheard@bloomberg.net;Ryan Collins in Houston at rcollins74@bloomberg.net

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net, Christine Buurma, Joe Carroll

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