Shell and Mitsubishi Explore Sale of Stakes in LNG Canada Project

Oil giants Shell and Mitsubishi Corp are currently evaluating options to sell their stakes in the C$40 billion (approximately $28.8 billion) LNG Canada project. According to three sources familiar with the situation, this strategic move coincides with discussions among project owners regarding a potential expansion of the liquefied natural gas facility.

Shell, which holds the largest share at 40 percent, has enlisted the services of investment bankers at Rothschild & Co to gauge interest from prospective buyers. Two sources indicated that the company might consider divesting as much as three-quarters of its stake, translating to a 30 percent interest in the project. Shell is also open to various options concerning its exposure to the operational Phase 1 and the proposed Phase 2, each presenting different risks.

One source estimated that any potential buyer for Shell’s stake could expect to invest around $15 billion, factoring in the equity stake, existing debt, and capital requirements for the anticipated Phase 2 expansion.

Mitsubishi’s Strategic Considerations

Mitsubishi, which possesses a 15 percent stake in LNG Canada, has begun discussions with RBC Capital Markets regarding its own options. As with Shell, sources warned that these deliberations are in their early stages, and any sale initiatives may not commence until later this year. The specifics of how much of its stake Mitsubishi might put on the market remain unclear.

Both Shell and Mitsubishi have chosen not to comment publicly on these developments. Reports suggest that sales involving either company are not guaranteed, as all sources spoke on the condition of anonymity due to the confidential nature of the discussions. LNG Canada has referred all inquiries back to Shell and Mitsubishi.

In a recent transaction, investment firm EIG and Saudi Aramco successfully acquired a fifth of the Petronas venture, which holds a 25 percent interest in LNG Canada. Alongside Shell and Mitsubishi, other stakeholders include PetroChina with a 15 percent stake and Korea Gas Corporation, which owns 5 percent.

Market Dynamics and Operational Challenges

LNG Canada represents the first major liquefied natural gas facility in North America with direct access to the Pacific Coast. The project, located in Kitimat, British Columbia, benefits from a supply cost advantage, as Canadian natural gas prices typically trade at a discount to the U.S. Henry Hub benchmark.

Despite its advantages, existing and prospective owners will need to navigate industry concerns regarding a global oversupply of liquefied natural gas as new production capacities come online. In December 2022, Energy Transfer announced it would suspend development of its Lake Charles LNG export facility in Louisiana, reflecting broader market uncertainties.

LNG Canada commenced production in June 2023, but has faced operational difficulties. Reports indicate that its second processing unit, known as Train 2, encountered issues shortly after its startup, leading to downtime in December. Once fully operational, Phase 1 is expected to have the capacity to export 14 million metric tons of LNG per year.

Shell has informed potential bidders that it intends to maintain a gas contract with the terminal for a duration of 30 years. This strategic approach aligns with a common practice among developers of large infrastructure projects, who often reduce their stakes post-operations to realise profits and reinvest capital into new ventures.

As the world’s largest LNG trader, Shell has set ambitious targets, aiming for a 4 percent to 5 percent annual increase in LNG sales over the next five years, coupled with a 1 percent yearly growth in production. The company, along with its partners, is working towards a final investment decision for Phase 2 of the LNG Canada project, which could double its capacity.

With the landscape of the LNG market evolving rapidly, the future of Shell and Mitsubishi’s stakes in LNG Canada remains to be seen.