Faced with a new energy landscape, Shell and others bet big on natural gas
Royal Dutch Shell’s truck filling station at Rotterdam’s Waalhaven harbor in the Netherlands isn’t your typical fueling spot. Alongside the diesel pumps are fuel tanks with a special nozzle used to pump liquefied natural gas—an experiment that Shell is hoping can help it stay ahead of shifting trends in energy consumption.
Shell’s LNG fueling stations in Waalhaven and elsewhere are just one piece in a grand strategy to build new markets for the company’s growing natural-gas businessand get a jump on the competition.
Shell is the most active of the international oil companies in LNG for transportation fuel. But all the big oil companies are focusing more on natural gas, jockeying for market position in the expectation that gas will be the world’s fastest-growing fossil fuel over the next two decades, thanks in part to tougher environmental standards around the globe that give gas an advantage over other fossil fuels.
Natural gas now accounts for about half of the production of most of the world’s biggest oil companies and is expected to dominate new output in the coming years. France’s TotalSA plans to boost its LNG production capacity by 50% by 2020. Britain’s BP PLC expects roughly 60% of its production will be gas by the end of the decade, up from 44% in the first half of this year. And Italy’s Eni SpA estimates around 70% of the resources that it’s likely to be able to recover from new projects it’s planning to develop over the next four years will be gas.
Shell’s exposure is biggest of all. Its roughly $50 billion acquisition of BG Group earlier this year has put gas at the heart of the company’s business, and consolidated Shell’s position as the largest independent producer and marketer of liquefied natural gas, a supercooled form of the fuel that can be shipped globally just like oil.
These are massive bets on natural gas at a challenging time in the market, despite the rosy growth projections. Natural-gas prices remain closely linked to oil prices, which have dropped precipitously in the past two years. And the LNG market is already suffering from a glut, with a wave of new supply yet to hit. According to Bank of America Merrill Lynch, startup LNG projects in Australia and the U.S. are expected to add 135 million tons a year to production capacity by 2020—a 50% increase in global supply. Meanwhile, demand in traditional markets like Japan and South Korea is flat or declining, mostly because of economic weakness.
Those pressures are encouraging Shell and its peers to re-examine their business models.
Rather than focusing on simply producing natural gas to sell to long-term customers, as they have for years, big oil companies are increasingly looking to develop new markets for gas through investments in import terminals and other infrastructure needed to distribute the fuel more widely. The broader approach is similar to the long-term strategy of these companies’ oil divisions, which explore for crude, pump it to the surface, refine it into fuel and then sell it to consumers at gas stations.
“They have to get more imaginative to create demand,” says Neil Beveridge, a senior analyst at Bernstein Research, of the oil companies’ new approach. “In an oversupplied world, the winners are the ones with a market position already,” he says, so the energy giants are scrambling to establish positions in natural gas.
France’s Total is in talks with Ivory Coast, Morocco and Indonesia, among others, to develop infrastructure to import LNG, helped by new technologies that make it much cheaper for developing countries to enter the market. In certain instances, the company is even considering investing in power plants to unlock new regions of demand.
“There is now a massive amount of innovation commercial innovation, changes in the business model, as well as technical innovation,” says Laurent Vivier, president of Total’s gas division. “There’s an incredible window of opportunity at the moment.”
Shell has become a vocal advocate lobbying governments on the environmental benefits of natural gas, which is a lower-carbon fossil fuel than coal or crude oil. Shell worked closely with the Jordanian government as it developed plans to build new LNG importing facilities. When Jordan’s import terminal opened for business in 2015, Shell became a major supplier. In August, the company signed a deal to supply LNG to Gibraltar that included the construction of import infrastructure.
Shell’s interest in Jordan reflects the role of developing countries in the growth of demand for natural gas as they seek low-cost fuel. This year Jordan, Pakistan and Egypt were the biggest drivers of LNG demand. Wood Mackenzie, a U.K.-based consulting firm, forecasts that over the next decade, new LNG importers will likely account for 40 million tons of additional annual demand, expanding the global market by 16%.
There’s almost been a mind-set shift,” says Frank Harris, Wood Mackenzie’s head of global LNG consulting, as the potential of the developing markets catches the oil companies’ attention. “There’s probably a whole raft of emerging markets that three years ago the big players would have said they could leave to others.”
While it seeks to expand into new natural-gas markets geographically, Shell also has been ambitious in trying to build a presence in the nascent market for LNG as transportation fuel. It now operates LNG truck fueling stations in the U.S. and the Netherlands. But in a sign of the challenges facing the LNG transport market, the company decided to shut down two fueling stations in Canada this year, largely because of weaker-than-expected demand. Shell said it still sees significant opportunity in the technology.
It’s also targeting the shipping market, hoping new regulation of fuel emissions will encourage more shippers to switch to LNG to power their fleets. The International Maritime Organization has plans to significantly tighten emissions standards by the end of the decade.
Shell is working on plans for LNG refueling barges in Rotterdam and truck-to-ship refueling in Singapore by 2018, and earlier this year it signed a deal with Carnival Corp. to provide LNG at certain ports to two of the cruise line’s ships. Shell expects to have close to global coverage for LNG fuel supply to the shipping industry by the end of the decade.
Efforts like these by Shell and other companies are chipping away at one of the biggest obstacles to the growth of the market for LNG transportation fuel the rarity of refueling facilities at ports or on the road.
“It will take more time,” says Maarten Wetselaar, head of Shell’s gas and new energies divisions, but the potential markets are a “big prize.”