Shell Backs Natural Gas with Large-scale Investment

- November 21st, 2012

Royal Dutch Shell is aggressively expanding its gas operations as demand for the commodity continues to rise across regions such as Asia and Europe.

Shell Backs Natural Gas with Large-scale Investment

Energy giant Royal Dutch Shell (NYSE:RDS.A,LSE:RDSA) once again has investors questioning whether natural gas should be receiving more attention with the confirmation that it will spend more than $20 billion on gas projects through to 2015.

While the North American gas sector has fallen victim to plunging prices and a glut in supply, Shell’s move is likely to have a significant effect, especially on the junior market.

Shell, along with a number of other influential market players, has aggressively expanded gas operations of late as demand for the commodity continues to rise across Asia and Europe.

Gas earnings more than trebled in five years

At a recent meeting with investors, the company’s CEO, Peter Voser, said, “[s]trong growth in gas markets, especially integrated gas, is a major opportunity for Shell and our shareholders. Our integrated gas earnings have more than trebled in the last five years, reaching $9 billion over the last year, driven by liquefied natural gas (“LNG”) and gas-to-liquids (“GTL”), and we see growth opportunities to invest over $20 billion here for 2012-15.”

A company statement from Shell notes the company forecasts global primary energy demand will double to 400 million barrels of oil equivalent per day (Mboe/d) in the first half of the 21st century, up from 270 Mboe/d in 2011. It adds that natural gas has an important role to play in energy provision and that it expects that global natural gas demand will increase by 60 percent from 2010 to 2030, accounting for 25 percent of all global primary energy.

The company’s bullish forecast rests on the fact that LNG demand has doubled to 200 million tonnes per annum (mtpa) since 2000. Shell expects LNG demand to double again to 400 mtpa by 2020 and potentially reach 500 mtpa by 2025.

Shell has already announced $6 billion in acquisitions so far this year and has forecast that cash flow from its operations will rise 50 percent through 2015, driven by new projects in areas including Qatar and Canada.

Good news for North American market

The company’s aggressive stance towards gas-sector expansion is good news for North American producers. Since prices have taken a hit, many analysts are of the opinion that high-yielding projects could become potential takeover targets once LNG export facilities are up and running.

“Shell is continuing to generate substantial cash flows,” Stuart Joyner, an analyst at Investec Securities, told Bloomberg. “We expect Shell to pursue a more active acquisitions strategy.”

Of of the majors, Shell has been by far the most bullish in relation to its plans to expand its gas portfolio. The company is currently the world’s largest LNG supplier and has been examining plans to add more than 20 million tons of annual capacity in areas including Australia, Indonesia and North America. It is also interested in gas-focused exploration programs in acreage positions, including China, South Africa and the Ukraine, which it believes host large-scale resource potential.

Only the beginning

Natural gas investors will no doubt be pleased with the attitude shown by a major of this magnitude, and will also likely feel that a $20-billion investment pledge is only the beginning.

“The US is on the path to becoming energy self-sufficient,” Voser said in an interview with The Telegraph. “It has the tight shale-gas revolution, it has tight oil and it also has a lot of untapped oil resources in the Gulf of Mexico and in Alaska, which really can deliver sufficient gas and oil for their own consumption.”

With recent trends confirming that energy majors are becoming increasingly enticed by Canadian natural gas acquisitions, North American projects that boast decent reserves and sound infrastructure are likely to become takeover targets for majors seeking an increase in natural gas production.

Natural gas firms able to tap into the proposed Pacific Trail Pipelines project, which is set to transport natural gas from Northeast British Columbia to the coast at Kitimat for export overseas, are also likely be on prospective buyers’ acquisition radar.

Earlier this year, Shell publicly announced plans for a 12-million-tonne-a-year LNG plant on the BC coast. Many view the move as confirmation that a race to develop a North American LNG industry capable of rivalling traditional natural gas giants, such as Australia and Qatar, is well underway.

Shell looking to US for future projects

In a conference call with reporters earlier this month, Shell’s chief financial officer, Simon Henry, confirmed that the company will be looking to the US as a location for its next GTL project.

“It’s absolutely right that North America holds probably the best potential for the next development. We’re looking at potential sites on the U.S. Gulf coast where there is existing infrastructure and available gas supply,” he said in The Wall Street Journal.

These are exciting times for those invested in the sector, and even more exciting for those looking to enter it. While prices for the commodity have plunged across North America, demand and prices in regions such as Asia and Europe remain high.

While many bears might be questioning whether global demand is adequate to jumpstart the North American gas sector, large-scale investments by companies such as Shell will do wonders to quash any doubts within the market. There is clearly an imbalance in relation to western and eastern gas market fundamentals, and once issues relating to the inability to effectively export large volumes of gas from North America are resolved, junior company valuations are likely to surge.


Securities Disclosure: I, Adam Currie, hold no direct investment interest in any company mentioned in this article.

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