Royal Dutch Shell PLC is doubling-down on its natural gas bet, despite a depressed North American market that has seen many producers shut in production.
The international oil company is the world's premier gas company, producing and shipping more of the cleaner-burning fuel, in more markets, than any of its global competitors.
It is leading the charge on the twin challenges of natural gas – the difficulty in transporting it and the glut in North America – by pursuing liquefied natural gas exports to premium markets, and by investing in technology that processes raw gas into far more valuable liquid or chemical products or pioneers it use as a transportation fuel.
The company's bet on natural gas comes as the fuel's prices linger at 14-year lows in Canada and the United States, driven by unseasonably warm weather and a surge in supplies that continues as companies like Shell and Encana Corp. eke out profits from liquids like propane and butane that are associated with the gas production.
Shell, which expects North American natural gas prices to recover slowly, will this year produce more gas than crude on an oil-equivalent basis for the first time. And it expects gas to continue to grow as a proportion of its production in the coming years.
In an interview from Shells headquarters in The Hague, chief financial officer Simon Henry said the long-term focus on gas does not come at the expense of profitability, though clearly the return on investment in North America is currently weak.
"Returns are typically as good [as for oil projects]but of course, it depends what you price your gas at," Mr. Henry said.
Gas prices have sunk below $2.50 (U.S.) per thousand cubic feet (mcf) in North America. But only 15 per cent of Shell's gas production is in North America, though it holds a vast resource base.
Europe and Asia aren't experiencing a gas glut, and customers tend to purchase under long-term contracts tied to crude prices. In Europe, gas is selling for $11 (U.S.) per mcf in Europe and for $18 in Asia, where Shell is a rapidly growing provider of LNG.
The company has also partnered with state-owned PetroChina Co. Ltd. in LNG export facilities in Australia and British Columbia, and to develop promising shale gas fields in China itself.
Mr. Henry serves as Shell's chief strategist with particular responsibility for Asia-Pacific.
He says the company's emphasis on natural gas is both evolutionary – Shell was an early leader in the technology – and strategic as fewer oil-rich countries allow international companies access to resources and gas gains appeal as a cleaner-burning fuel.
Indeed, Shell expects to spend 60 per cent of its capital budget in just three countries – the U.S., Australia and Canada.
Mr. Henry stresses that Shell has not turned its back on crude oil business, where profits have been juiced by a runup in prices to $127 (U.S.) per barrel for internationally traded crudes.
But the company is allocating up to 60 per cent of its $32-billion (U.S.) in capital expenditures this year to its global gas operations. And it is aggressively exploring ways to enhance the value of a fuel that can still be regarded as unwelcome to find and uneconomic to produce by companies aiming for oil.
In the interview from The Hague, Mr. Henry spoke of Shell's efforts to find premium markets for the gas it produces around the world:
Coping with a North American glut.
"Low gas prices might be an opportunity as much as a threat for a company like Shell that has the technology and market capability to turn gas production into liquids markets – such as gas-to-liquids or gas-to-chemicals – or exporting LNG to Asian markets," he said.
The company is well down that road internationally, with a quarter of its $28-billion profit last year coming from its gas-to-liquids operations in Qatar and global LNG business.
Shell is pursuing plans to build an LNG plant in Kitimat, B.C., to ship natural gas produced from northeastern B.C. shale deposits to Asian markets.
Mr. Henry said that project is "on the front burner" but the cost of pipeline and construction of the liquefaction plant still have to be assessed against other projects in the company's queue.
In the United States, Shell is pursuing a several strategies to take advantage of low-cost gas, while expecting prices to gradually recover. It is one of several companies considering plans to liquefy gas and ship it to Europe or Asia, but Mr. Henry sees looming political risk to ambitious export proposals.
"For how long will that remain politically acceptable?" he asked rhetorically. "Transporting cheap energy to economic competitors is a good way to be accused of 'exporting American jobs.' " We think it will be a difficult political question at some point in the U.S."
In Canada, Shell sees no such qualms.
Rather than relying on exports, Shell is pursuing strategies to add value to its North American gas resources: using the gas as low-cost feedstock for chemicals, and for producing liquids like diesel fuel and expanding its use as a transportation fuel.
Last week, it announced it had secured land in Pennsylvania for a chemical plant that would process gas from the Marcellus shale fields, part of a rejuvenation of the North American chemicals business that is a spinoff from the shale gas boom.
It is also exploring the potential for a gas-to-liquids plant on the American Gulf Coast, essentially replicating the $19-billion (U.S.) facility it recently commissioned in Qatar that produces synthetic diesel and a slate of valuable liquids from the gas feedstock.
Shell is also working with Vancouver-based Westport Innovations Inc. to establish a corridor for natural-gas-powered trucks from the B.C. coast to Calgary to Fort McMurray.
Fuelling China's gas hunger
China produces and consumes relatively little gas currently, but is expected to be a growing customer for LNG and a significant producer in its own right.
Beijing has set a goal of increasing gas's share of primary energy demand to 10 per cent by 2020 from just 4 per cent now.
As a result, Shell sees China as driving 50 per cent of the world's growth in natural gas demand for the next 15 years – and that only represents growing commercial, industrial and residential use. If the country makes an effort to switch from coal or nuclear to gas in its power sector, the growth rate will only increase.
"Their own production will not fill that gap by 2020, it's just logistically impossible," Mr. Henry said.
Shell is working with PetroChina to develop the country's own shale gas potential, which is seen as enormous. But it is in the early stages of exploration. Last year, Shell drilled 15 wells in China and will increase that to 20 wells in 2012.
As the country's production grows, he expects a commensurate increase in Beijing's appetite to encourage the use of gas in residential, industrial and power sectors.
And the Chinese – like other Asia consumers – are looking to Canada as a secure, politically stable supplier that, importantly for them, also welcomes foreign investment from Asian companies.
"We can help Canada develop its resources and new markets in a way that is good for the country, as well as good for us and for customers in Asia," he said. "All of the customers in Asia see the huge potential for trade with Canada and we would love to be part of realizing that potential."