TransCanada Gets Shell Pipeline Gig - Analyst Blog

By Zacks | June 06, 2012 AAA

Anglo-Dutch energy giant Royal Dutch Shell Plc (RDS.A) and partners have selected Calgary-based TransCanada Corp. (TRP) to build an estimated C$4 billion ($3.8 billion) natural gas pipeline across northern British Columbia.   Per the agreement between the parties, TransCanada will design, build, own and operate the proposed 'Coastal GasLink' project that is intended to transport natural gas from the Montney Play in northeastern British Columbia to feed Shell Canada's recently announced massive liquefied natural gas (LNG) export terminal near Kitimat, British Columbia's northern coast. The Kitimat plant is owned by Shell (40% stake), together with other partners - Korea Gas Corp., Mitsubishi Corp. and PetroChina Co. Ltd. (PTR) - who own 20% each. 

The Montney formation is considered as one of North America's richest gas basins, expected to hold trillions of cubic feet of gas. However, the region is also one of the most distant from any large U.S. market, making it a top draw for LNG export.

Expected to run about 700-kilometer (462 miles), the Coastal GasLink pipeline is scheduled to have an initial transportation capacity of 1.7 billion cubic feet of natural gas per day. TransCanada - one of Canada's largest pipeline companies that prevailed over Enbridge Inc. (ENB) and Spectra Energy Corp. (SE) for the Shell contract. - expects the project to be in service by 2020. 

The Hague-based Shell officially launched the Kitimat export terminal in May. The project involves the design, construction and operation of a gas liquefaction unit as well as LNG facilities for storage, export and marine off-loading facilities and shipping purposes. The initial phase of the venture will have two LNG processing units or trains. Each unit will have an annual production capacity of six million tons of LNG, with the possibility of expansion in the future.

Apart from this venture, the Kitimat area also holds two planned liquefaction projects - Kitimat LNG that is controlled by Apache Corp (APA), Encana Corp (ECA) and EOG Resources (EOG); and BC LNG, monitored by a 13-member private cooperative.

Shell and its partners have decided to put up the Kitimat unit to facilitate a smooth supply of LNG to the Asian market to satiate the growing demand of the region. In particular, excess supply of natural gas has pulled down the North American gas prices to decade-lows, forcing many companies to look for alternative routes. Hence, the big energy firms are eyeing the lucrative Pacific Rim markets like Japan, South Korea and China that still offers a high price for LNG.

Both Shell and TransCanada currently retain a Zacks #3 Rank, translating into a short-term Hold rating.

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