Royal Dutch Shell Plc (RDSA) is expanding plans to make liquefied natural gas a fuel for ships and trucks as Europe's largest energy producer looks to profit from the cheapness of U.S. gas compared with oil.
Shell, where gas production overtook oil for the first time this year, will increase LNG-for-transport projects to more than 5 million tons a year over the next decade, said Shell Chief Financial Officer Simon Henry. That's equivalent to about 120,000 barrels of oil a day, or 4 percent of the company's global production in the third quarter.
Shell will offer about half the volume to the trucking industry in Canada and the U.S. and the rest to shipping in the Great Lakes, Gulf of Mexico and the Baltic Sea.
"This is a global opportunity," Chief Executive Officer Peter Voser said last month in New York. "The current gas equivalent price per kilometer is double-digit percentage lower than for diesel in the U.S."
Gas prices in the U.S. plunged to a decade low this year after companies ramped up output from shale deposits to make the nation the world's largest producer. Today, U.S. crude oil costs four times more than natural gas on a per barrel basis, allowing Shell to profit from LNG transport projects even after the costs of turning gas into a liquid.
"Because cost of the equipment, the engines and the liquefaction and distribution is rapidly coming down, we do see better opportunities than we've actually thought originally," Henry said. "The world is refining long, but diesel short by large because the world's refining complex is producing too much gasoline and not enough diesel," creating an opportunity for LNG to power vehicles.
Shell is working on the Green Corridor project with Flying J Inc. to supply 250,000 tons of LNG a year to trucks along the 900 mile (1,600 kilometer) highway from Alberta to the Pacific coast in Canada. It's also developing a plan to provide LNG fuel to the shipping industry with the help of its Norwegian distributor Gasnor and the Gate LNG terminal in Rotterdam, Voser said.
"What we are doing is developing multiple options that would be actually probably just a little bit more than the 5 million tons," Henry said on a conference call last month. "There are also opportunities for our own drilling rigs, our own mining trucks, our own demand is quite significant."
The Hague-based company is targeting European Union marine customers before new environmental regulations are introduced in 2015. It's already operating an LNG-propelled barge transporting petroleum products along the Rhine River, the first time such vessels have been used on inland waterways.
In EU shipping "we see LNG playing a leading role," Voser said.
Shell plans to start fuel production at its first small- scale gas liquefaction plant at Jumping Pound near the Canadian Green Corridor route's halfway point next year. In June, it agreed with TravelCenters of America LLC (TA) to sell LNG to heavy- duty trucks in the U.S.
"We've been surprised how quickly interest has accelerated," Henry said. "We are already looking at the Great Lakes Corridor and the Gulf coast for shipping and for trucking."
China has already developed capacity to offer 6 million tons of LNG a year for transportation, Henry said.
"This has been done under the radar by Chinese companies," he said. "They found the way of giving away free buses to customers" to create demand, which "can grow quite quickly because of the price arbitrage."
Shell expects the world's demand for LNG to rise five times to 500 million tons a year in 2025 from 2000. Producers will need to invest $50 billion a year in the new capacity over 15 years to meet demand for the fuel.
Gas "long-term demand growth remains firm, driven by Asia," Jefferies International Ltd. wrote in a Nov. 27 report. "In North America, projects to export low-cost gas to premium markets are now becoming a reality, which should add considerable value to the otherwise stranded resource that has been unlocked from the continent's shale."
Shell is also examining several projects in the U.S. part of its integrated marketing approach. It's reviewing plans to build a gas-to-chemicals plant in Pennsylvania to use ethane from Marcellus Shale and to export LNG from Freeport site on the U.S. Gulf of Mexico coast. In Canada, Shell is developing a project to export 12 million tons of LNG a year from Kitimat, British Columbia.
"We are probably two years at least away from a final investment decision on LNG export and chemicals," Voser said. "We've got some decisions to make on how much capital to allocate to these opportunities."