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Book LNG now or risk shortages later, says Shell

With Asian and European buyers prepared to pay high prices for LNG under long-term contracts, building a receiving terminal is no guarantee of receiving supplies in the future, says Linda Cook, Shell's executive director for gas and power

Liquefied natural gas (LNG) buyers that fail to lock in supplies under long-term contracts risk ending up with nothing, says Linda Cook, Shell's executive director for gas and power.

LNG buyers in Asia and Europe are starting to "mop up" – under long-term contract – volumes that had previously been considered flexible, says Cook. For example, Shell has recently struck deals with China and Dubai for off-take from the under-construction Qatargas 4 train – volumes that had originally been earmarked for North America and Europe.

"Countries or customers that are unwilling to secure supplies under long-term contract are running the risk that the gas won't be there when they need it. Those that think all they need to do is build an LNG-import terminal and the LNG will come are making a risky assumption."

Cook expects the LNG business to continue to grow robustly – at around 8% a year "over the next several years", despite fears that the low number of final investment decisions (FIDs) being taken on LNG projects could mean supply failing to keep pace with demand; since Qatargas 4 was approved in April 2007, just four LNG projects around the world have been given the green light.

Separately, the company is studying new prospects for gas-to-liquids (GTL) investments. Australia and Russia are on the list, but Shell would be likely to target an expansion of Qatar's 140,000 barrels a day Pearl GTL plant before embarking on new ventures, says Cook.

Meanwhile, Shell continues to target Russia for expansion, despite its forced sale in 2007 of a controlling stake in its flagship LNG project on Sakhalin Island to state-owned Gazprom. "If a company wants to be big in international gas, you can't put a moratorium on doing deals in Russia," says Cook. "We hope that Sakhalin will expand in the future. In addition, we have aspirations for other projects: we recently signed a protocol with Gazprom, which will involve looking at options to develop fields in the Yamal area. That will hopefully open up a second big front for us in the country."n

Q What's your view of how the liquefied natural gas (LNG) industry will develop?

A LNG is very important to the world and to Shell. We see LNG demand and supply growth [total world supply amounted to 163m tonnes in 2007, according to Cedigaz] of around 8% a year over the next several years. That could be a bit of a bumpy ride because these projects are big and in some years more projects will start up than in others, but LNG will become increasingly important in the global natural gas sector.

Last year, LNG accounted for about 8% of Shell profits after tax [$31.9bn]. In the future, we expect that to rise, because our outlook for LNG sales in Shell is higher than the average growth rate in the company. Our aim is to maintain market share in LNG – to reflect, at least, the growth rates we see across the sector.

Q Where will demand growth come from?

A There will continue to be growth from traditional importers, such as Japan and South Korea, and some European countries. In addition, we are seeing increasing demand from countries such as India and China. Over the past several months, China, in particular, has demonstrated a real commitment to securing new LNG supplies for the long term.

Other countries are talking about building their first LNG import terminals – including Singapore and Pakistan. Dubai has just sanctioned construction of its first import terminal, Mexico is importing LNG for the first time and Brazil is securing its first LNG imports.

Put that together and we have a generally robust demand outlook for LNG, founded on a more diverse customer base.

Q But relatively few final investment decisions have been taken in recent years. Is there a danger of the LNG industry suffering a credibility crisis, with supply failing to keep up with demand?

A I don't think so. If you talk to traditional LNG customers, who have been in the business for decades, they would say they're pleased with the overall reliability of the LNG suppliers to deliver the energy they need.

Why is that? They secure the LNG they need for their demand under long-term contract, so they have a generally secure supply. Countries or customers that are unwilling to secure long-term gas supplies under contract are running the risk that the gas won't be there when they need it. Those that think all they need to do is build an LNG-import terminal and the LNG will come are making a risky assumption.

Asian customers and buyers in Europe are starting to mop up, under long-term contract, a lot of the volumes that were thought to be flexible in the market in the coming years. Providing their demand continues to grow, there may be less and less for the markets that were just expecting the LNG to come without securing it.

The US could be an example of that. You see lots of LNG import terminals today remaining relatively empty in the US because volumes are going to either higher-priced markets or they've been secured under long-term contracts by other markets.

Q What sort of prices are being paid now by Asian buyers?

A The price you can secure today under contract reflects the fundamentals of the market – strengthening demand and rising costs. They are prices we're generally happy with and that give us a fair return for the risks we take with the billions of dollars generally required to make these projects a reality.

Q What is the status of the various LNG projects that you have in development?

A We have five LNG trains under construction. The first to start up will likely be the fifth train [4.3m tonnes a year (t/y)] at Australia's North West Shelf project, later this year. The [9.6m t/y] two-train Sakhalin-2 project will follow. It's too early to say when it will reach peak production – it's a complex oil and gas project in a fairly unique location and not just LNG – but the outlook is that construction will be complete around the end of this year.

The [7.8m t/y] Qatargas 4 train continues in line with our expectations when we took the investment decision two and half years ago [for first cargo around the end of the decade]. We also have an interest in the planned [4.8m t/y] Woodside Pluto project in Australia.

Initially, the outlook was that these volumes would be distributed between North America and Europe, but the marketing of that project is reflecting the changes we see in the global LNG sector. In the past two months, we have made two marketing announcements for Qatargas 4: 3m t/y will go to China's CNPC and some volumes will go to Dubai.

Q Shell was interested in taking a share of Santos' Gladstone LNG development in Australia, but lost out to Petronas. How can you compete with national oil companies (NOCs) in the future?

A It's an evolving relationship between NOCs and international oil companies (IOCs) and it's been that way for some time. Just as we do with competitors such as ExxonMobil or Chevron, there are times we compete with NOCs.

Q It must be hard to compete when they don't share the same investment criteria.

A We all bring something different to the table. Shell's value proposition is, in most cases, founded on the strength of our technology or what we can bring commercially. When oil's above $100 a barrel lots of companies have money. We try to put forward a strong value proposition founded on technology. Our involvement in Pearl GTL is not because we were able to bring a bunch of money to the Qataris. It was because we had sound technology and a commercial value proposition. It's the same thing in Libya: we were able to negotiate access founded on our experience in LNG.

Q The money's also important. What oil price assumption are you making for investment purposes?

A We don't disclose that, but I will say that when we look at all our projects around the world – whether they are acquisitions, downstream projects, upstream projects or competitive bids – we look at prices over a relatively wide range and the effect on individual projects and on the overall Shell portfolio.

Q What's the situation at the Pearl GTL plant and what are the prospects for that project and the GTL business in general?

A We have 30,000 people on site and progress is generally good. Conditions are very challenging, but we're pleased with progress so far. The project's about 40% complete and more or less on the schedule we set out when we took the investment decision two years ago [for first production around the end of the decade].

Where might we go next? The best opportunity will most likely be expansion of the existing project. Qatar has additional gas resources to underpin that should they decide that that's what they'd like to do. But there are other countries that we continue to consider for GTL – going down the list of countries with lots of natural gas for export, you think of Russia, Australia and others. We're investing a lot in research and development to lower the cost of future generations of GTL plants, which we hope will open up more countries as GTL investment sites.

Q How quickly will sales from Pearl GTL pay back the investment?

A I can't give specifics, but for Pearl GTL the returns are very competitive with the other opportunities we have for investments at Shell. The marketing outlook is very strong as well – it's about using gas to provide clean liquid transport fuels and the demand for those is higher than it's ever been.

Q What other projects are you contemplating in Qatar?

A We hope to have additional projects with the Qataris in the future. Once they decide to lift the moratorium [on further North Field development], we hope to be part of that – in terms of LNG, GTL or regional pipeline projects. We continue to have discussions with them, but there's nothing specific at this point.

Q Russia has a poor reputation for contract sanctity. What's your feeling about the investment climate and what projects would you like to become involved in?

A If you want to be big in international gas, you can't put a moratorium on doing deals in Russia. We hope Sakhalin LNG will expand in the future. We also have aspirations for other projects. We recently signed a protocol with Gazprom that will involve looking at options to develop fields in the Yamal area. That will hopefully open a second big front for us in the country [Petroleum Economist understands Shell is among the firms Gazprom plans to involve in the Yamal LNG projet, which would tap the North and South Tambey fields].

Q How has Shell been affected by cost inflation in the last 12 months?

A Inflation rates vary, depending on the year in question and the type of equipment or service that you're talking about, but Cambridge Energy Research Associates and others publish indices that indicate inflation of the order of 20% a year over the past two to three years.

On average, we see inflation at about 10% a year, but that varies depending on which part of the company you look at. But it is an issue: there is more uncertainty when it comes to estimating project costs than previously. The schedule for projects and lead times for delivery of equipment are longer than they used to be. When I meet chief executives of the big engineering, procurement and construction contractors, I stress to them how important it is that they increase capacity to serve our sector and help narrow the risk and uncertainty.

Q What progress is Shell making with its exploration programme in Libya?

A Our first exploration well is drilling right now, although we are some months away from having any results. Part of our agreement was to rejuvenate the existing [2.3m t/y, Marsa el-Brega] LNG plant – most of the engineering has been competed and the project is proceeding according to plan.

We have a site allocated for a new LNG plant at Ras Lanuf and we're doing some early site preparations, but it all hinges on the success of the exploration programme.

Q What is Shell's view about the economics of and environmental obstacles to oil-sands developments?

A There is no doubt that the oil-sands sector has been affected by cost inflation; it's in a remote area and it's hard to get people to the construction site. We face higher taxes and tighter environmental regulations – it's a triple whammy. But expansion is under way and we're pleased with its general progress and we will continue to work on expansions in the future. The oil sands is an important part of the Shell portfolio and world energy supply.


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