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Shell to Sell Partial Stake in LNG Canada Project to Petronas

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Royal Dutch Shell plc (RDS.A - Free Report) recently inked a deal to divest a portion of its stake in the liquefied natural gas (LNG) project in Canada to the Malaysian state-owned energy company Petronas. The financial details of the deal have been kept under wraps.

Notably, the LNG Canada project, located in Kitimat, British Columbia, is estimated to cost $31 billion. The project includes the construction of two LNG processing units and facilities for export, with a shipping capacity of around 26 million tons of LNG a year. The current partners in the project include Anglo-Dutch giant Shell, Chinese energy giant PetroChina Company Limited (PTR - Free Report) , diversified conglomerate Mitsubishi Corporation (MSBHY - Free Report) and South Korea's state-run Korea Gas Corporation (KOGAS).

Per the deal, Petronas will buy a total of 25% stake in the project, with Shell offloading its 10% interest, along with PetroChina and KOGAS jettisoning 5% and 10% stakes, respectively. Post the culmination of the agreement, Shell will own 40% stake and Petronas will become the second-largest partner in the project, with 25% interest. PetroChina and Mitsubishi will own 15% stake, each. The remaining 5% interest will be held by KOGAS. Subject to satisfactory closing conditions and international regulatory approvals, the deal is set for closure in the next couple of months.

Notably, outside Malaysia, Petronas has the largest number of investments in Canada, and the company is looking out for more strategic opportunities in the country to boost its production and growth.

Interestingly, the news of Petronas acquiring a stake in the Kitimat LNG project comes around a year after it scrapped its $36 billion Pacific Northwest LNG project near Port Edward, owing to its commercial infeasibility amid the challenging macroeconomic oil environment.

However, with LNG demand recovering and market conditions getting favorable, Petronas’ investment in LNG Canada is a prudent strategy and also a cheaper alternative to its own Pacific Northwest LNG project. In fact, with the cancellation of its Northwest LNG project, the company was left without an alternative plan to export gas produced by its subsidiary, Progress Energy. Acquiring a stake in the LNG Canada project will offer some respite to the problem.

The deal will help Petronas stimulate the chances of shipping Canadian gas overseas and further motivate it to develop natural gas resources in North Montney through its subsidiary. Notably, Progress Energy could contribute an additional 560 million cubic feet per day of production to the project, ensuring that LNG Canada meets its initial export target.

Notably, the demand for LNG has been witnessing robust growth of late, primarily as China and other Asian countries are making efforts to switch from coal to natural gas, which is touted to be the cheaper and cleaner burning fuel. In fact, LNG demand reached 293 million tons in 2017 — up 29 million tons from 2016 and significantly higher than 100 million traded in the year 2000. China itself saw a 50% year-over-year increase in its LNG imports in 2017. The momentum is expected to continue as the country’s imports in the first four months have grown around 60%.

Banking on the favorable development, a new wave of LNG-project sanctions and investment announcements has overwhelmed the energy industry of late. Very recently, TOTAL S.A. (TOT - Free Report) inked deal to buy 10% stake in Russia’s LNG 2 project in the Siberian Arctic. Cashing on the secular shift to cleaner burning fuel, Cheniere Energy, Inc. also greenlit its third liquefaction unit or Train 3 at its Corpus Christi export terminal in Texas, marking the first final investment decision on the new LNG project in the United States since 2015.

Hence, with the improving energy landscape, Shell is expected to take a final investment decision (FID) on the much-awaited LNG Canada project by the end of this year. The European oil giant had delayed the FID on the project twice, owing to the global supply glut and weak prices. Shell has been currently working its way to lower the costs of the project and take advantage of the tax breaks announced by the government of British Columbia.

The deal with Petronas takes Shell’s $30 billion divestment program another step forward, as the company nears its target. The divestment deals have provided the company a major uplift in its drive to decrease debt, following the acquisition of BG Group for $47 billion. With Shell already wrapping up divestment deals worth $26 billion and having announced further asset disposals of more than $3 billion, the Zacks Rank #3 (Hold) company remains focused to meet its target by 2018. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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