Global investors step up for Canadian infrastructure because it’s predictable

Back in June, the head of Korea Gas Corp. travelled to the port city of Incheon to make the case for a massive investment in another port: LNG Canada’s planned $33-billion terminal expansion in Kitimat, B.C.

Choi Yeon-hye, then the company’s chief executive, stood in front of a tanker from Canada as it fed natural gas into the main pipelines that fuel Seoul and praised the reliability of a “strategic energy asset we can control ourselves.”

Korea Gas, a 5-per-cent stakeholder, and its partners lived through 13 years of cost overruns and delays before the $18-billion LNG Canada facility began shipping. The experience didn’t stop Ms. Choi from making an upbeat pitch for her company to invest in a buildout that will double capacity.

Duplicating equipment and suppliers from the first phase of the project is expected to shorten the construction schedule and cut costs, said Ms. Choi, who retired in July.

Some of the largest asset managers in the world are buying into the argument that Korea Gas is making.

Blackstone, Canadian pension funds invest $3.1-billion for LNG Canada stake

On Monday, New York-based Blackstone Inc. teamed up with four major Canadian pension funds to purchase a minority stake in LNG Canada from Mitsubishi Corp. for US$3.1-billion. The investment means the asset managers are on the hook for the cost of expanding the terminal.

Mitsubishi owns a 15-per-cent stake in LNG Canada, and is selling half the holding to both raise money from a long-held project and offset part of the expansion costs.

State-controlled Korea Gas backs LNG Canada for strategic reasons. The utility wants to diversify away from Middle East producers such as Qatar, which historically supplied 15 per cent of South Korea’s natural gas.

Prime Minister Mark Carney gave the Major Projects Office responsibility for speeding up the LNG Canada expansion on economic grounds. The facility is part of a strategy to realize the country’s potential as an energy superpower.

Patriotism and geopolitics have nothing to do with the LNG Canada investment from Blackstone and some of the largest domestic funds: the Canada Pension Plan Investment Board, Ontario Municipal Employees Retirement System, Investment Management Corp. of Ontario and Public Sector Pension Investment Board.

The money managers are investing because they regard LNG Canada as a reliable, cash-spinning business, despite the risks that come with the facility’s aggressive growth plans. The Blackstone consortium view this infrastructure asset as a substitute for bonds and other fixed-income investments in credit portfolios they run for insurers and pensioners.

LNG Canada is a source of predictable double-digit returns in a world where returns on credit and equity investments are increasingly unpredictable.

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The largest shareholder in LNG Canada, Shell PLC, is also showing increased faith in the project’s prospects.

Earlier this year, London-based Shell signalled that the Canadian natural gas industry is central to its future growth by dropping US$16.4-billion to acquire Calgary-based ARC Resources Ltd.

Like Mitsubishi, Shell considered selling down its 40-per-cent stake in LNG Canada over the past year. The energy company hired an investment bank and ran an auction that lasted several months.

Shell recently shut down that process, according to sources familiar with the company’s strategy. The Globe and Mail is not identifying the sources because they are not authorized to speak for the company.

The spike in oil prices in the wake of the conflict in Iran is boosting Shell’s balance sheet and making it easier to pay for projects such as the Kitimat facility. Analysts estimate over the next 18 months, Shell will spend at least US$10-billion buying back its own stock.

Less than two months after asset managers, including Blackstone, spent a day listening to Mr. Carney pitch opportunities at the Canada Investment Summit, the deals are coming.

Kitimat joins Manitoba’s Port of Churchill as a target for global capital. In October, Dubai-based port operator DP World Ltd. signed a memorandum of understanding with the port’s owner to expand the northern shipping corridor, potentially adding container terminals to a facility that only ships commodities such as grain and potash.

The mindset around Canada as a place where things don’t get done has shifted. If the likes of Korea Gas, Shell, Blackstone and domestic pension plans now view large domestic infrastructure projects as low risk, Mr. Carney is on his way to achieving what was initially seen a stretch goal of attracting $500-billion in new investment to Canada over the next five years.