When Shell plc (NYSE:SHEL) announced a $22 billion play for ARC Resources (TSX:ARX) last month, it was widely hailed as the clincher for a Phase 2 expansion to LNG Canada.
And while Shell CEO Wael Sawan confirmed the acquisition of the Montney-focused natural gas producer would indeed provide “upside” to the LNG side of its business, the real prize in the acquisition isn’t natural gas, but natural gas liquid—i.e. condensate.
“Don’t look at this as the acquisition of a Canadian domestic E&P (exploration and production) player that has a predominantly gas portfolio,” Sawan told analysts in an investor presentation.
“Actually, look at it as a liquid-rich addition to Shell with an upside of LNG that we are uniquely positioned to be able to unlock.”
For Shell, ARC Resources is an asset that squints in two directions—west and B.C.’s LNG export sector, and east to Alberta’s oilsands.
It’s the liquids side of the business that’s most valuable. Volumetrically, condensate is three to five times more valuable than natural gas. It accounts for just 40 per cent of ARC’s production in B.C. and Alberta, but 70 per cent of total production value.
“It is the liquids that really drives the gas production,” said Ian Archer, North American gas markets expert for S&P Global.
Unlike the refinery-ready light crude produced elsewhere, oil produced in Alberta is a hybrid: a blend of heavy bitumen and ultra-light oil (condensate).
Alberta Premier Danielle Smith wants to see Alberta’s oil production double, from about 4 million barrels per day to 8 million barrels per day—an ambition that will require new pipelines and a lot of condensate.
“There’s a pretty long running room for condensate producers, because not only are you selling into a growing market, but they can ultimately displace imports,” Archer said.
A decade ago, Shell divested some of its natural gas assets in B.C. Now it is building its holdings back up again.
The acquisition will bring Shell up from the 11th largest natural gas producer in Canada to third largest, Archer noted.
ARC Resources is focused entirely in the Montney formation, with six operating areas—two in Alberta and four in B.C.
The acquisition, which is expected to close in the second half of this year, will provide Shell with US$1.5 billion annually in added new cash flow, Sawan said.
It will also provide Shell with the natural gas it will need to fill its share of a Phase 2 expansion of LNG Canada, which would double LNG Canada’s production capacity of 14 million tonnes per annum (MTPA).
“One of the questions we were often puzzled by was: where was Shell going to come up with the gas to meet their commitments to LNG Canada?” Archer said. “This acquisition answers that question.”
At 40 per cent, Shell is the largest shareholder in the five-member LNG Canada joint venture partnership.
In an April investor presentation, Sawan was asked about speculation that Shell was planning to divest some of its holdings in LNG Canada. Sawan put the rumour to rest.
“We are very comfortable with 40 per cent equity interest in LNG Canada,” he said.
Up until February, when an energy crisis was triggered by the Iran war and closure of the Strait of Hormuz, there was some question about the timing of new large LNG projects like LNG Canada Phase 2.
While the demand for LNG is expected to remain strong in Asia and Europe, new LNG production coming online is expected to create a medium-term glut that could affect the timing of a final investment decision (FID).
But the crisis in the Middle East is now putting a new risk premium on reliable LNG supplies, particularly in Asia.
An FID decision on Phase 2 is not expected until the end of this year.
Earlier this month, the B.C. and federal governments announced an “enhanced cooperation agreement” aimed at advancing FID on LNG Canada Phase 2.
“While our FID still remains subject to our joint venture participants satisfying many additional requirements, today’s cooperation announcement keeps us all on that positive path,” said LNG Canada CEO Chris Cooper.
https://www.biv.com/news/resources-agriculture/shells-22b-arc-deal-fuels-bcs-lng-ambitions-12348778