Shell gets serious about natural gas

Recent ambition should fuel this energy company for years to come.

By InvestorPlace Dec 13, 2011 11:27AM
Kevin Phillips/Digital Vision/age fotostockBy Aaron Levitt


It's no secret that the world is witnessing a natural gas boom. New advances in drilling technology have allowed E&P firms the capability to access gas trapped within various shale rock formations across the world. Billions of dollars worth of new investment have flown into the sector, and the newly found abundant supplies have the International Energy Agency calling this the "golden age of gas."


Overall, the group estimates that global consumption of natural gas will rise by more than 50% during the next 25 years. To that end, most of the major integrated energy firms have been expanding into shale and natural gas assets at record paces. One such major energy firm, Royal Dutch Shell (RDS.A, RDS.B), could rise to the top of the pyramid after some recent strategic investments.


A multitude of assets

Shell recently has been taking a long view on the growth of natural gas and has invested heavily (more than $30 billion) on new projects within the sector. Under CEO Peter Voser, natural gas has become a priority, and the fuel type will overtake crude oil as Shell's chief source of production next year.


Shell continues to lead the world in liquefied natural gas growth. Analysts estimate that global production capacities of LNG will more than double by the end of the decade, and LNG imports are seen as growing an incredible 8.2% per year over that time. Shell — which already has LNG projects throughout Malaysia, Brunei and East Russia — owns a 25% stake in Australia's massive Gorgon gas project. Analysts estimate the Gorgon field could hold as much as 50,000 billion cubic feet of gas. Several Japanese utilities already have agreed to purchase fuel from the project. and India signed a 20-year, $25 billion deal for a share of the exports.


In addition, Shell has begun construction on the first-of-its-kind floating LNG plant. The center of the Prelude Project will be a huge offshore liquefaction plant that will chill natural gas from the deepwater Prelude and Concerto fields off of Australia's coasts. The project is located perfectly to help meet the growing natural gas demands in Asia.


In North America, Shell currently controls 40 trillion cubic feet of natural gas reserves, or about 12% of the continent's total reserves. This abundance has prompted the firm to explore export options, as well as build a new ethylene plant in Appalachia. The "cracker" would process gas from Shell's own Marcellus shale holdings for making plastics.


Big news in China

Perhaps Shell's most significant natural gas story could be its recent find in China. Partnering with PetroChina (PTR), the oil major drilled two promising wells and hit shale gas. Currently, China has no commercial production of shale gas. However, the Energy Information Administration estimates China could hold nearly 1,275 trillion cubic feet of technically recoverable shale gas resources.


This find could be extremely disruptive to other LNG or natural gas players. One of the major driving theses behind the growth of U.S. shale gas has been exporting excess gas to China. Plans such as Chesapeake (CHK) and Cheniere Energy's (LNG) to build the first exporting LNG liquefaction plant in the U.S. or Exxon Mobil's (XOM) shale ambitions could become moot if China is able to produce its own natural gas assets.


Bet on the Koninklijke

Shell's dominance in natural gas and LNG could reward portfolios for decades. These ambitious projects ultimately will fuel the company's cash flow and strengthen its dividend. Shell currently has one of the largest dividend payouts of the majors at 4.7% and can be had for a dirt cheap P/E of 7. The company's strategic placement of its natural gas/LNG assets near Asia, as well as its new finds in China, should give it an edge against some of the other major integrated energy firms.


For investors looking for a single way to play the global growth of natural gas, Royal Dutch Shell offers a compelling investment.


As of this writing, Aaron Levitt did not hold a position in any of the aforementioned stocks.


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