Shell Moves Forward With Major LNG Project

| About: Royal Dutch (RDS.A)

Royal Dutch Shell (NYSE:RDS.A) announced on Tuesday that it plans to move forward on the construction of a 1.2 billion cubic feet per day liquefied natural gas (NYSEMKT:LNG) facility in Kitimat, British Columbia. Shell will be partnering with Korea Gas Corp., Mitsubishi Corp., and PetroChina (NYSE:PTR) in the development of the facility. The project is planned to be staged, with capacity doubling to 2.4 billion cubic feet per day of export capability over time.

The facility is the third, yet largest, LNG project proposed at Kitimat. Kitimat LNG, a partnership comprising Apache Corporation (NYSE:APA), EnCana (NYSE:ECA) and EOG Resources (NYSE:EOG), is the furthest project along in development, with an approved export capacity of 1.4 billion cubic feet per day. BC LNG, another proposed facility, is a partnership between LNG Partners and a local First Nation group, with an export approval of 230 million cubic feet. Other Canadian energy firms are also eyeing future LNG projects, including Talisman Energy (NYSE:TLM), Nexen (NXY) and Imperial Oil (NYSEMKT:IMO).

Shell's proposed investment in Kitimat reflects the growing price disparity between natural gas prices in Canada and the United States, and those being experience in Asia and Europe. Japan's import price at the end of April for LNG was $16/MMBtu, while Tuesday's AECO-C price (the reference rate for Alberta natural gas production) was $2.00/MMBtu.

With such a differential, margins are highly attractive for firms with the resources to undertake such a project. Getting the abundant shale gas resources of North America into the hands of eager consumers in Asia is promising to be a huge opportunity, especially with the consumption of natural gas in Asia expected to climb by up to 80 million tones per year.

Engineering and design of the terminal will begin in the Netherlands in 2013, with construction underway in 2015 and complete by the end of the decade. The estimated cost of the project was not disclosed by Shell, though more details will likely be available once the project is confirmed in late 2012.

Shell's partners in the project are not new to the LNG game. PetroChina is already partnered with Shell on the Arrow LNG project in Australia, and Mitsubishi is invested in nine terminals around the world. Korea Gas is currently the world's largest LNG importer.

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