More than any of its rivals, Royal Dutch Shell is betting its future on the business of bringing natural gas from remote locations like Qatar to energy-hungry destinations like China and Japan. Shell has already invested about $ 40 billion in LNG production plants, storage terminals and related systems, and plans to continue pumping money into that business. Many experts say Shell may eventually show big benefits from its natural gas emphasis.
Shell provided the technology for the world’s first commercial liquefied natural gas (LNG) plant at Arzew, Algeria, in 1964, and is today the world’s largest LNG shipping operator, managing and operating 50 of the world’s 370 LNG carriers. Shell’s managed fleets are based in Australia, Qatar, Nigeria and Brunei. Shell makes sure that the ships managed are safely decommissioned and hold a Lloyd’s Register Green Passports, a document that contains an inventory of all the materials onboard a ship that require careful handling or special awareness. At the end of the ship’s life, it helps the ship-recycling yard to formulate a safe and environmentally friendly way of decommissioning the vessel.
Demand for LNG is expected to grow in the mid-term. Shell has access to the important LNG markets of Asia-Pacific, Europe and North America. Its mix of Shell-owned facilities and lease arrangements in regasification facilities around the world enables Shell to remain close to its markets. In 2005, Shell was one of the first international oil companies to deliver LNG to India. In 2006, Shell delivered the first LNG to Mexico, and was involved in the first delivery of LNG to China through the North West Shelf Venture. About 75 percent of Shell’s L.N.G. goes to Asia.
Shell has LNG supply projects – either in operation or under construction – in seven countries. Once at its destination, LNG is turned back into a gas by warming so that it can be piped to customers. Shell has major interests in two regasification plants (Altamira, Mexico and Hazira, India), and long-term access to capacity in several others in Europe, the Middle East and North America.
Pluto, Australia: currently under construction, the Pluto LNG project has an expected production capacity of 4.3 million tonnes a year. Shell has an indirect interest in Pluto through its 24% shareholding in Woodside, an Australian publicly traded oil and gas exploration and production company.
North West Shelf Venture, Australia: Shell is one of the participants (and founding owners) in the North West Shel Venture. In 1985 construction started on the LNG plant near Karratha, Western Australia. In 1989 the NWS Venture exported the first cargo of Australian LNG to Japan. Since then four more liquefaction units have been completed, the latest in 2008.
Brunei LNG: The Brunei LNG (BLNG) plant, in Brunei Darussalam, started operations in 1972 and was the first LNG project to deliver 5,000 cargoes. This plant was the first LNG plant in the Western Pacific and was built to serve growing demand in the Asia-Pacific region. BLNG is undergoing a second rejuvenation to extend its life by a further 20 years from 2013.
Malaysia LNG: Shell first traded at local and regional ports in Malaysia in the early 1890s and is now a shareholder in Petronas-operated Malaysia LNG Dua and Malaysia LNG Tiga, in operation since 1995 and 2003 respectively. It produces LNG mostly for customers in north-east Asia, including Japan, Korea, Taiwan and China.
Nigeria LNG: Nigeria LNG is the fastest-growing LNG project in the world and one of the largest LNG suppliers in the Atlantic market. It has long-term supply agreements for deliveries to Europe and North America. Construction began in 1996, with its first two liquefaction units coming on-stream three years later. Since then, four more units have been added, the latest in 2007.
Qalat and Oman LNG: Qalat and Oman LNG have the lowest CO2 emissions of any LNG plant in a warm climate thanks to their efficient design. Qalat had the lowest completion cost per tonne of annual capacity.
Qatargas 4, Qatar: In 2006, construction started on Qatargas 4, in Qatar’s Ras Laffan Industrial City. LNG from this plant will go mainly to the North American market, and Asia and the Middle East. Shell is a partner in this project with Qatar Petroleum, one of the world’s largest producers of LNG.
Sakhalin 2, Russia: Sakhalin is a massive integrated oil and liquefied natural gas project. Russia’s first LNG liquefaction plant is well positioned to supply the LNG market in both the Asia-pacific region and the West Coast of North America.
Hazira, India: The Hazira regasification plant started operations in 2005. It produces LNG in the international market to match the commercial needs of customers in north and north-west India.
Altamira, Mexico: The Altamira regasification plant boosts Mexico’s long-term energy security. Shell delivered Mexico’s first LNG cargo in 2006 and Altamira was first to provide LNG as a new source of natural gas for Mexico.
Shell now has about 7 percent of the world LNG business, with ambitions to more than double that share through new projects and acquisitions. In 2012, LNG and related businesses earned Shell $9.4 billion of its $25.1 billion in profit.
« We are in the lead and we want to stay in the lead », Andrew Brown, Shell’s head of international exploration and production, said in a mid-April interview. Mr. Brown said Shell expected global demand for LNG to grow rapidly in the coming years, doubling by 2025 to about 500 million tons a year, the equivalent of about 4.5 billion barrels of oil, making it by far the fastest-growing fuel. The main reason for the anticipated growth is that natural gas is abundant. And because of the US shale gas boom, it has become relatively cheap – especially in North America, where prices lately have been in the range of $4 per million British thermal units, compared with highs of $13 as recently as 2005. The European spot price is around $10 per million B.T.U.’s, and the Asian price around $15 contract prices, often linked to oil, may be higher.
And because it burns much cleaner than either coal or oil, it will be very likely stay in favor because it use can help lower the greenhouse gas emissions that are blamed for causing global warming. The United States has wholeheartedly embraced gas. But Europe, mired in economic doldrums, has turned to coal, which is less expensive. This has driven down demand for gas in the region, which in recent decades had been one of the world’s biggest markets for natural gas via pipelines and LNG.
Over the longer run, being a big player in LNG is likely to help Shell outearn its peers, predicted Martijn Rats, an analyst at Morgan Stanley in London. The huge upfront investments of several billion dollars per gas liquefaction plant might seem prohibitive, Mr. Rats said, but those projects “generate large amounts of operating cash flow over two or three decades.” While LNG projects may not have as high potential returns as some oil fields, it is less risky to build giant gas installations because much of the output is sold in advance and the plants require relatively little capital expenditure once up and running. The steady cash from LNG, which at current prices produces profit margins of 10 percent to 15 percent, can be used to finance riskier activities. One risk for Shell is that an anticipated export surge from North America leads to a plunge in the much higher prices for gas in Europe and Asia.
So far the use of LNG in transportation is negligible; about 16 million cars and trucks are powered by gas, which is just 1.5 percent of the world’s road vehicles. Morgan Stanley calculates that the gas now used by these cars and trucks replaces about 1.2 million barrels per day of oil products. Under optimistic forecasts, that use in 10 years could rise to 5.6 million barrels a day, or around 7 percent of 2012 oil supplies.
Meanwhile, Shell is trying to lower the capital cost of LNG to make it feasible in even more remote offshore locations, by building liquefaction plants on what amount to enormous barges, bigger than aircraft carriers. The first such vessel destined for an offshore field in Western Australia is being built in a South Korean shipyard. Shell wants to come up with a standard design for these floating LNG plants and gradually introduce them around the world. A candidate for one of the vessels is a field called Abadi in Indonesia, where Shell has a 30 percent stake.
And where is the LNG-liquefaction building boom likely to be after Qatar and Australia? North America, Mr. Brown says.
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