Shell has bet heavily on LNG over the past two decades and now has one of the world's largest LNG portfolios with assets in every segment of the value chain from gas production and liquefaction to retail sales. The company is confident its investments will pay off as natural gas applications continue to move beyond the power generation and industrial sectors into land-based and maritime transportation.
Speaking on a call with journalists ahead of LNG-17, one of the world's largest LNG trade conferences being held this week in Houston, Upstream International Director and former Executive Vice President of Shell's Qatar operations Andrew Brown said the company is strongly positioned in natural gas because hydrocarbons will still dominate the global fuel supply in 2050 - according the IEA's WEO - and that gas will likely experience the largest consumption growth of any fuel between now and then.
Gas demand is seen doubling in Asia and the Middle East, and between now and 2030, China's gas demand could grow 5 fold, with a doubling of LNG demand, Brown said. Shell's equity LNG sales volumes of 20.2 million tons were up 7% in 2012 compared with 2011, despite cratering demand in Europe.
In order to serve this growing Middle Eastern and Asian gas demand, Shell is operating and participating in some of the most ambitious LNG projects to date, most of which happen to be in Australia. The Anglo-Dutch supermajor has a 25% stake in the Chevron-operated Gorgon project and a smaller position in Chevron's Wheatstone LNG. But not to be outdone, Shell is building the world's first floating LNG liquefaction plant - Prelude - which "will be heaviest thing man has ever build that floats," Brown said.
In addition to these more traditional large-scale LNG ventures, Shell is also building a position in the North American LNG transport market where the fuel is increasingly being used for long-haul trucking, barge transport and other applications. Shell is currently supplying LNG for trucking in Canada and Brown said small-scale LNG seems to be cost effective and can be developed more quickly than the liquefaction megaprojects that have characterized the industry's recent past.
The European LNG Situation
LNG demand in Europe has declined along with gas demand generally, due in large part to economic weakness. At the same time, rapidly increasing natural gas production in the US has swelled supply causing prices to remain low, which encouraged utilities to choose gas over coal. With less coal burned for power generation in the US, ample supply has kept coal prices down making the fuel attractive to European utilities that have increased coal consumption in favor of more expensive natural gas. This excess capacity of comparatively cheap US coal has been making its way to European power plants.
"It's ironic because Europe has been promoting climate change initiatives, but they are now burning more coal," said Brown. He also explained that LNG prices in Europe have not come down because Asian demand has remained strong, so volumes not being consumed in Europe have been absorbed into the Asia Pacific market.
LNG for Transport
Transport use is growing fast, Brown said, and Shell recently bought Gasnor to help build its small-scale LNG business in Norway. "Gasnor is a market leader in Norway in small scale LNG (Liquefied Natural Gas), supplying LNG as a fuel to industrial and marine customers and operating an end to end supply chain, with three small scale production plants and distribution assets including two tanker ships, a fleet of trucks and a network of terminals," Shell said in a statement about the transaction.
"Shell's customer reach and Gasnor's LNG sales and marketing experience is a winning combination. There is real growth potential for small scale LNG in Europe, particularly in the marine sector, and Gasnor with Shell is well placed to capitalize on this," said Eilef Stange, Gasnor's Chief Executive Officer.
Australian LNG Project Cost Increases
On the same day as the briefing call with Shell, Woodside Energy - a company in which Shell holds a strategic investment - announced the cancellation of a $45 billion onshore LNG project in Australia because it was no longer economically feasible. Woodside will reportedly consider developing an offshore floating LNG project.
"Today's Woodside news is sad but reflective of high onshore construction costs...we have an alternative with FLNG that should be cheaper," said Brown. He added that Shell felt confident Gorgon would be completed on time despite cost increases, as would Shell-operated Prelude FLNG.