Shell’s Promising Gasnor Win and Momentary Cove Loss
Shell’s recent market moves sent mixed signals this week. First, it announced the acquisition of Norway’s Gasnor which is a market leader in Europe’s small scale LNG, supplying LNG as a fuel to industrial and marine customers. Second, it withdrew from the battle against Thailand’s PTT in the takeover of Cove Energy which owns key gas assets in Mozambique.
Shell’s strategy is three-fold: 1) Bring to the next level small scale LNG in Europe and help creating a significant demand driver for gas in transportation; 2) Refocusing on the company’s key LNG export projects by securing long-term customers; 3) Developing LNG downstream in niche markets, notably South East Asia.
Shell’s acquisition of Gasnor will pave the way for the growth of Shell’s end-user LNG sales business and the creation of a larger market for gas in European transportation. As global natural gas supply expands thanks to development of unconventional resources, Shell along with other producers is looking for new sources of demand. Natural gas vehicles and shipping are becoming potentially significant outlets for natural gas, especially because of constraints on CO2 emissions and sulfur emissions and the high price of oil relative to gas. In Europe, natural gas as a bunker fuel is gaining traction due to new environmental regulations that will gradually reduce sulfur dioxide emissions in marine transportation and reduce emissions of air pollutants in designated areas.
Under EU directives that have set strict limits in so-called emission control areas (ECAs), the permitted sulfur content in bunker fuel is to be reduced from 1% to 0.1% by January 2015. So far, these ECAs cover only the North Sea, the English Channel, and the Baltic Sea, but important ports and trade routes are located in this part of the world. But control zones are expected to spread across the rest of Northwest Europe, the US, Canada, and perhaps some Mediterranean countries over the next decade, affecting all vessels from container ships to passenger ferries.
The fuel market will stimulate the development of small-scale LNG worldwide, and especially in Europe. Small-scale LNG is the coexistence of the traditional scheme of LNG export or LNG import with local LNG distribution operations using LNG tank trucks, small LNG ships and satellite regasification facilities to develop a domestic natural gas market. Increasingly, LNG regasification terminals will offer various services (regasification, re-export, bunkering and trucking) which will create new business opportunities for terminal’s operators. Norway is at the forefront of small scale LNG with Gasnor’s 3 small scale liquefaction plants, 2 tankers, a fleet of trucks and a network of terminals. The acquisition of Gasnor is a promising market move with important growth prospects for Shell.
By contrast, Shell’s withdrawal from Cove Energy’s bid raised a few eyebrows. While Shell is momentarily losing a sweet spot in Mozambique, one of the world’s largest booming gas scene expected to export about 20 million tons per year (mtpa) of LNG exports by 2020, it will enable the group to focus on marketing un-contracted volumes of its Australian projects currently under construction which will come online much earlier than any East African gas. Mozambique is a strategic location to export gas to India where Shell operates the Hazira regasification terminal. Shell already owns exploration projects in Tanzania and could have been a promoter of joint-development and cooperation between LNG schemes in Tanzania and Mozambique. However, as the East African play consolidates, Shell may get other opportunities to get a foot in the area.
In the meantime, in addition to its nine operating LNG projects which produce 21.5 mtpa of operational LNG capacity in seven countries, Shell participates in three new projects under construction. These three projects are in Australia (Gorgon LNG, Prelude LNG, and Wheatstone LNG ) which are all above 80% contracted. But sellers worldwide are competing to secure demand for the remaining un-contracted volumes of new LNG capacity coming online post-2015. Shell’s next wave of planned projects—notably in Canada— competes with its Australian volumes. It makes commercial sense to sell all Australian oil-linked volumes before contracting any hub-based LNG from Canada. Shell’s numerous projects in the drawing board include: Australia’s Greater Sunrise; Indonesia’s Abadi LNG (Masela), Australia’s Browse LNG; Arrow Energy LNG off Gladstone in Queensland's Curtis island; Nigeria’s Brass LNG, Canada’s Kitimat LNG, and Iraq’s Basra Gas project. However some projects are more likely to happen than others. Shell is pushing hard for its Canadian project and this is good news that the Canadian National Energy Board has just announced it will streamline its gas export license review process.
Another growth area for Shell is the downstream sector in emerging gas markets, notably in Asia with Thailand, the Philippines and India. South East Asia is becoming a major importer of natural gas, notably via LNG. The growing call for gas in South East Asia is a response to mushrooming domestic demand but also the slow demise of historical gas producers. There may have been a gentleman agreement between Shell and PTT in settling their battle to win over Cove Energy. Shell Thailand is pursuing opportunities in LNG business (trading, regasification or retail compressed natural gas) to meet the country’s growing demand for electricity generation and the transport sector. Thailand started to import LNG last summer and will expand its regasification capacity to 15 million tons by 2020. Shell is also planning a $1 billion regasification facility in the Philippines which is expected to come on stream around 2016. In India, Shell is considering a second regasification project on the East coast, in partnership with Reliance Power and Kakinada Sea Port (KSPL). India is seen by IOCs as a growing and robust gas market with true potential. However, the long-term growth of India's natural gas demand will depend on three key elements: sufficient investments in key gas infrastructure, potential increase in domestic gas output, and sustainability of the pricing regime.
Leslie Palti-Guzman is a natural gas analyst at Eurasia Group, a global political risk research and consulting firm headquartered in New York