A Natural Gas Company Floating in Profits
by David Fessler, Investment U‘s Energy and Infrastructure Expert
Friday, May 27, 2011: Issue #1522
Australia, like America, is awash in natural gas. But Australia’s gas isn’t conveniently located under terra firma, near existing pipelines. We have that luxury and advantage.
Most of the gas down under is in giant underwater deposits, located more than 100 miles from Australia’s shores. Developing some of its largest fields, far from any landmass, has been a problem without a solution… until now. This is an interesting opportunity for investors looking to capitalize on innovation in natural gas production outside of the United States.
LNG production is headed for the high seas. Last Friday, Royal Dutch Shell plc (NYSE: RDS-A) announced plans for the world’s first floating liquefied natural gas (FLNG) manufacturing ship.
However, calling the Prelude FLNG project a ship really doesn’t do it justice. It’ll be the world’s largest floating man-made object, weighing approximately 600,000 tons. To put it in perspective, that’s six times the size of the world’s largest aircraft carrier.
After researching the concept for 15 years, it took Shell engineers more than 1.6 million man-hours to design it. The Prelude will be constructed from 260,000 tons of steel by Samsung at its Geoje Shipyard in South Korea.
Construction is expected to take four years, with initial service beginning in 2016. And how much will this behemoth cost? Shell estimates somewhere between $10.8 billion and $12.6 billion. You can see a conceptual video of the Prelude here.
Shell made the announcement from Perth, Australia for a reason. Prelude will initially be located 125 miles off the coast of northwestern Australia. Once anchored, it will remain in place for 25 years. That’s the estimated life of the Prelude field in the Browse Basin.
The Prelude field was first discovered by Shell back in 2007. It’s estimated to contain three trillion cubic feet of natural gas.
Annual production will be about 5.3 million tons of liquids. This will be comprised of 3.6 million tons of LNG, 1.3 million tons of condensate and 0.4 million tons of liquefied petroleum gas.
Once production is complete at the Prelude field, Shell plans to move it to other fields where the company has an interest.
FLNG is a Natural Gas Game-Changer
According to Ann Pickard, President of Shell Australia, FLNG will upset the natural gas production cart:
“This will be a game-changer for the energy industry. We will be deploying this revolutionary technology first in Australian waters, where it will add another dimension to Australia's already vibrant gas industry.
“Beyond [Prelude], our ambition is to develop more FLNG projects globally. Our design can accommodate a range of gas fields. Our strategic partnership with Samsung should enable us to apply it progressively faster for future projects.
“We see opportunities around the world to work on other FLNG projects with governments, energy companies and customers.”
Australia is one of Shell’s key growth areas. It expects the investment in Australia could top $30 billion in just the next five years.
Its major projects include the Prelude field and the Gorgon natural gas field. Gorgon and the adjacent Jansz-lo gas fields are estimated to contain as much as 40 trillion cubic feet of natural gas. Both could remain viable sources for as long as 60 years.
Full Steam Ahead for FLNG
Why is FLNG so revolutionary? Simple. Many offshore wells that contain oil also contain large amounts of natural gas. In the past, a small portion of the gas has run the turbines that supply power to the oil rig.
Oil pumped up from below can simply be loaded into tankers. But there’s been no economical way to liquefy the gas and ship it to shore. So the bulk of it has simply been burned at the top of giant flare-off towers.
The Shell announcement that it’s building the Prelude marks a huge vote of confidence for what is now a fledgling industry. That won’t be the case for long, however. That’s why Shell’s FLNG project represents the beginning of what will become standardized practice in a decade or so.
Demand for LNG globally was 220 million tons in 2010. That’s expected to triple in the next 20 years. The introduction of the FLNG concept has spawned a flurry of interest in LNG. Argentina, Brazil, Kuwait and Dubai are recent members of the LNG buyers’ club.
Thailand and Singapore will shortly open their first LNG receiving terminals, and Indonesia, Malaysia, Pakistan, Sri Lanka and the Philippines all have others in the works.
Projections are that most if not all Asian countries could soon be importing LNG. A similar picture is emerging in South America, Europe and the Middle East.
The growth in global LNG receiving terminal capacity is skyrocketing. It was about 350 million tons in 2005. That grew to 600 million tons last year, and it could reach nearly one billion tons by 2015.
In a situation gas producers love, demand is running ahead of supply, and no one sees that picture changing anytime soon.
Shell has plans for more FLNG units on the drawing boards, including its Greater Sunrise projects in East Timor, and others in South America, Cyprus, East Africa and Indonesia.
In short, FLNG will change the way gas is transported and priced, and make it available to many countries that have no resources of their own. Royal Dutch Shell is leading the charge, and investors should target the natural gas revolution as a reliable long-term investment.