What this announcement from Shell means for investors.

Patrick O'Rourke, CFA 403-539-8615

LNG Canada is a Go!
As has been widely speculated in the markets and the media over the past several months (and with a notable increase in volume over recent weeks), Shell (RDSB-L; Not Rated) and its partners officially provided a positive FID for the LNG Canada project. The project will initially consist of two trains producing 14 mmtpa, or 1.84 bcf/d, with Shell noting first gas by mid-next decade (2025). The project is effectively a “bring your own gas” project, with each of the joint venture partners responsible for supplying their proportion of feedstock.

Phase One Input Gas is Likely Mostly Covered Off Already
Our analysis of current production relative to the 1.84 bcf/d of production required to fill
the 14 mmtpa project, indicates that it is likely mostly covered by the LNG Canada partners current production and assets already. Evaluating on a partner-by-partner basis would indicate a need for between 590 mmcf/d (at today’s output) and 370 mmcf/d (assuming Shell fills its allotted capacity by first shipment) of incremental supply required from current production.

However, when aggregating the current production for all the partners, there is only a need for an incremental 90 mmcf/d from current production. Further, during the investor call Shell indicated a gas cost of USD 2.00/mcf at its Groundbirch play, where it noted it was in principal fully covered for its required gas but would be inclined to purchase AECO gas at prices below its supply cost. We believe that investor hopes for an immediate sanctioning of all four trains, along with Shell's supply needs statements, were the principal reasons for the dramatic sell off in perceived LNG levered producers today.

We Believe that AECO Gas Will De-bottleneck Prior to LNG
Regardless of the demands from LNG Canada, we are reiterating our thesis that there is a line of sight to AECO de-bottlenecking and to prices reflective of transportation normalized gas-on-gas competition in downstream demand markets by 2022.

The Upside for Canadian Gas is in Economies of Scale in LNG
With the announcement and subsequent investor call, Shell laid out a clear and compelling case for the competitiveness of Canadian West Coast LNG projects. Given the economies of scale that will be captured by subsequent projects (we estimate the cost of an expansion of the Coastal Gas Link from 2.1 to 5 bcf/d to cost ~$3bn relative to the $6.2bn for the initial 2.1 bcf/d—whether for a second phase of LNG Canada or for another competing project) we now believe that it is highly likely that another project is sanctioned which more broadly benefits Canadian upstream producers.

Oil Services, Camps and Modular Construction are the Most Obvious Near-Term Winners
While the benefits to upstream Canadian gas producers are less immediately obvious, given our analysis that the initial phase is largely already supplied with gas (and our perhaps non-consensus view that Canadian gas physically de-bottlenecks prior to first gas at LNG Canada), the benefits for those companies that will participate in the construction as well as those that provide drilling and completion services to the joint ventures partners is obvious.