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Shell pulls out after 38 years

Shell pulls out of Mackenzie pipeline


david ebner

Globe and Mail Update

Published Friday, Jul. 15, 2011 4:57PM EDT

Last updated Friday, Jul. 15, 2011 5:02PM EDT

Royal Dutch Shell PLC (RDS.A-N71.900.590.83%), 38 years after it made a massive discovery of natural gas in the Mackenzie Delta, is giving up on the region, saying the firm has other priorities.

Shell is marketing its delta holdings, including its position on the now-approved but long-delayed Mackenzie Valley natural gas pipeline.

Bids are due Aug. 31 but it is unclear who will make a move for assets, given that the building of the pipeline is widely seen as unlikely. A buyer with a long-term eye could be a possibility, such as Korea Gas Corp., which has shown recent interest in the region, with the idea to export gas from the area in liquid form. South Korea is the world’s top importer of liquid gas.

The Mackenzie pipeline – a 1,100-kilometre connection between the delta and Alberta – was first proposed in the 1970s and then rejected. A second attempt was made in 2004 but extensive delays, legal and regulatory, hurt the project. In the interim, vast quantities of shale gas were discovered throughout North America. Shell, in just one example, paid an aggressive $5-billion in 2008 to buy Duvernay Oil Corp., which had vast assets of shale gas in British Columbia – already connected to pipeline systems.

Even though Shell doesn’t see value in the region, it promotes the delta in its sales documents as “an exciting, basin-opening opportunity.”

“As part of [Shell’s] regular global portfolio review, Shell has decided to focus its resources on other options,” the company said in an eight-page divestiture brochure.

The Aboriginal Pipeline Group, which has the opportunity to own as much as a third of the pipeline if it is built and significant gas flows south, said the proposed sale isn’t necessarily bad news.

“Some will think that and others will realize it’s business at usual,” Fred Carmichael, chairman of the group, said from Inuvik. “It doesn’t fit their portfolio, so they’re moving on for the time being. There’ll be plenty of interest.”

Shell opens its “virtual data room” on Monday and opens seismic work stations at its Calgary office a week later. Shell has already promoted a data package “to a broad group of prospective purchasers” to stoke interest, said company spokesman Stephen Doolan on Friday afternoon.

While Mr. Doolan said Shell “believes the project is important for Canada,” the company has calculated it can make more money on other assets. He said selling assets is a key part of Shell’s “portfolio-based strategy” and that it looks at what it owns to figure out what combination will make its shareholders the most money.

The company’s reasoning suggests its profit potential in B.C.’s sprawling Montney shale gas play, where Shell paid dearly for Duvernay to get a large position, is a better investment than the delta.

The problem with the proposed $16-billion Mackenzie pipeline is cost. The construction figure hasn’t been updated for years and few believe it makes sense to build it, given ample current and future supplies already connected to the continent’s pipeline network – even though the size of the fields in the delta are huge. Meanwhile, the price of gas has long been mired at depressed levels because of surging supply in the United States from shale plays.

Gas in the delta was first uncovered by Exxon Mobil’s Canadian arm, Imperial Oil, when the Taglu G-33 well found its hoped-for target in 1971. The field, according to regulatory documents, contains 2.8 trillion cubic feet of recoverable gas. The initial production rate from the field was 445 million cubic feet a day – an absolutely massive figure. To put the number in perspective, Taglu’s size would be one-eighth of all of Encana Corp.’s current production and Encana is North America’s No. 2 gas producer.

Shell’s Niglintgak field is considerably smaller. The well Niglintgak H-30 started drilling in October, 1972, with the ground frozen, and finished in April, 1973, at a depth of 2,382 metres. In Shell’s sales document, the field contains an estimated 840 billion cubic feet of gas that could be recoverable – about a third of Imperial’s Taglu.

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