FINANCIAL TIMES: Shell cements its position with LNG deal: “Royal Dutch/Shell's signing of a $7bn (£3.65bn) liquefied natural gas deal with Qatar this week cements its position as global leader in liquefied natural gas - the boom area of energy investment - and will boost its flagging oil and gas reserves.”: “Despite Shell's conservative assumption on oil prices, worries remain that companies are taking big risks when investing billions in LNG plants, ships and pipelines.” (ShellNews.net) 1 March 05

By James Boxell

Published: March 1 2005

Royal Dutch/Shell's signing of a $7bn (£3.65bn) liquefied natural gas deal with Qatar this week cements its position as global leader in liquefied natural gas - the boom area of energy investment - and will boost its flagging oil and gas reserves.

But while the Anglo-Dutch oil group and industry peers pile tens of billions of dollars into huge LNG projects round the world, based on the liquefaction of gas to transport it from areas impossible to reach by pipeline, questions remain about profitability.

Ann Pickard, director of global LNG at Shell, uses a conservative oil price assumption of $20 per barrel when choosing long-term investments, though oil prices have been higher than $50 recently. Gas price movements are linked to the change in crude oil prices, so an LNG project's viability would be determined using the same criteria.

Shell refuses to disclose the returns on capital it expects from projects but Wood Mackenzie, industry consultants, estimates ExxonMobil, the world's biggest listed oil group, should make returns of more than 18 per cent from its LNG project in Qatar. Shell would expect similar.

But Frank Harris, vice-president of global LNG at Wood Mackenzie, says returns are restricted on projects in countries, such as Qatar, which already know the locations of their vast gas fields. He says: "Qatar Petroleum has the volumes. Shell really just offers the market."

Despite Shell's conservative assumption on oil prices, worries remain that companies are taking big risks when investing billions in LNG plants, ships and pipelines.

An industry analyst says: "The strength of prices in the two largest gas markets, North America and Europe, has stimulated a rush to build new liquefaction capacity, much of which is not underpinned by long-term take-or-pay contracts, and is therefore being built on a speculative basis."

Oversupply could see gas prices crashing, which could make multi-billion dollar projects uneconomic.

But Ms Pickard expected a shortage of LNG supplies, with gas overtaking oil as the biggest energy source by 2025. She dismisses fears that environmental concerns will lead to a shortage of plants able to turn the liquid back into gas in the US, pointing to potential for new terminals in the Gulf of Mexico. "I see this big sink in North America, which will take as much LNG as we can throw at it," she says. "A year ago ...I was concerned whether there would be sufficient re-gas terminals in the US."

Shell will own 30 per cent of the Qatargas-4 project, with Qatar Petroleum holding the rest. It will invest 30 per cent of the $6bn to $7bn expected cost of the project. Shell - which has cut its proved reserves by almost a third in the past year - can book 30 per cent of the expected 2bn barrels of oil equivalent from the project. 

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