Shell to Sell Arctic Gas Stake, Focus on Shale (RDS-A, COP, XOM)

Less than five years ago, natural gas was selling for as much as $13/thousand cubic feet. It sells for about a third of that today, and some of the high-dollar projects that grew out of the former high prices are now withering away from lack of interest.  The latest is Canada’s Mackenzie Gas Project, a joint $17-billion tie-up among Canadian branches of Royal Dutch Shell plc (NYSE: RDS-A), ConocoPhillips Corp. (NYSE: COP), Exxon Mobil Corp. (NYSE: XOM), Exxon-controlled Imperial Oil, and a Canadian aboriginal group.

The project included production in the Mackenzie River Delta on Canada’s Arctic coast and a 1,200-kilometer long pipeline along the Mackenzie River Valley to a connection point on the border between the Northwest Territories and Alberta. Up to 1.2 billion cubic feet/day would have been pumped through the pipeline.

But that was then. Now, the enormous, and much easier to extract, shale gas plays in the US have driven the cost of natural gas to below $5/thousand cubic feet, making the construction of the Mackenzie Project simply uneconomic. Add to that the blizzard of lawsuits from environmental and aboriginal groups, and expectations evaporated that this project would be up and running any time soon.

Shell’s stake in the project is about 11%, but it is highly improbable that the company will be able to sell its stake for its value in 2007. The Canadian government approved the project last year following a six-year review process. Exxon-controlled Imperial Oil holds about 34% of and leads the project. A determination on whether or not to proceed is not scheduled until the end of 2013.

This project will be put cancelled or put on hold before then. The US supply of shale gas could last for twenty years or more. Until that’s exhausted — or nearly so — drilling for gas in the frozen North will not happen.

Paul Ausick