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Shell Acquisition of BG Group to Create Giant Operator of LNG Ships

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LONDON –  Royal Dutch Shell PLC’s (RDS.A) planned $70 billion acquisition of BG Group PLC would create a giant operator of liquefied-natural-gas vessels, offering owners that charter the ships more opportunities for lucrative, long-term contracts in an otherwise-depressed shipping industry.

“The merger offers owners more flexibility and better utilization of their fleets, which could mean long-term leases offering steady income,” said Ted Petropoulos, head of Athens-based Petrofin Research. “It’s also a defensive move to secure market share as more players come into the market.”

Shipping is still trying to emerge from the lengthy down cycle that began in 2008, when the economic collapse dealt a blow to world trade. But now, the fall in oil prices and a shift by governments and energy producers to cleaner fuels like LNG is spurring demand for vessels moving such petroleum products. Meanwhile, freight rates for dry-bulk carriers, moving commodities like coal and iron ore, hover at 30-year lows due to excessive tonnage in the water and falling demand from major importers like China and India.

At around $200 million apiece, LNG carriers cost at least three times as much as other types of vessels of similar size. But while the market for ships such as container vessels, tankers and dry-bulk carriers is marred by overcapacity reaching up to 25% above demand, leading to unsustainable freight rates, LNG carriers are usually linked to lucrative contracts that range from five years to more than 10, raking in substantial earnings for their owners.

Energy producers like Shell and BG lease rather than own most of the ships moving their products, avoiding the risk of being stuck with nonperforming assets when the market goes sour. The two partners own a combined 12 LNG carriers and charter about 60. The leases go to a handful of trusted owners, generating around $75,000 a day for a ship that carries 160,000 cubic meters of LNG. The break-even point for such a ship is $50,000 at most.

Two of the main beneficiaries include Greek-owned, New York-listed GasLog Ltd. and closely held Maran Gas Maritime Inc., also based in Athens. The two firms have been chartering their vessels to BG, Shell and other energy producers for nearly 15 years.

“There’s been a strong signal from Shell that they see their future in LNG,” GasLog Chief Executive Officer Paul Wogan told The Wall Street Journal. “The deal with BG shows their desire to grow the business and puts us in a good place to grow with them.”

A Shell spokesman had no comment on whether the marriage with BG would mean more chartering. Shell CEO Ben van Beurden said on Wednesday, “The addition of BG’s competitive natural-gas positions makes strategic sense, ahead of the long-term growth in demand we see for this cleaner-burning fuel.”

GasLog, whose shares closed up 4% Wednesday on news of the merger, charters 15 LNG carriers to BG and a further two to Shell, from a total fleet of 27 carriers. Mr. Wogan said the current global order book for LNG vessels is around 150 vessels but he expects another 150 to be ordered by 2020 as more gas will come on line from projects mainly in Australia and the U.S.

Exxon Mobil Corp. estimates that the global trade in liquefied natural gas will more than triple through 2040, to nearly 100 billion cubic feet a day–roughly 40% higher than current U.S. gas output. The company projects that countries throughout Asia and the Pacific will import half of the gas they consume by 2040, with LNG making up 80% of imports.

The U.S. will start exporting LNG cargoes at the beginning of next year, when the expanded Panama Canal will allow access to giant LNG carriers for the first time, facilitating U.S. shipments to Asia. Australia is ramping up its production and likely will become the world’s biggest LNG exporter by 2020, according to industry experts. Shell and BG are currently involved in five LNG projects in Australia and three in the U.S.

“One negative impact from the merger is that the merged Shell-BG group may concentrate on some projects and abandon others, which may constrain LNG shipping volumes,” said Arctic Securities analyst Erik Stavseth. “But in general it looks more promising for LNG carriers going forward compared with other shipping sectors, where long-term contracts are rare and owners operate at a loss.” The Shell spokesman declined to comment on the possibility of abandoning projects.

Other LNG vessel operators expected to benefit from LNG demand include Bermuda-based Teekay LNG Partners LP, Qatar Gas Transport Co., Japan’s Mitsui O.S.K. Lines and Russia’s state-run OAO Sovcomflot, whose vessels will move much of the gas when the Yamal LNG project in Siberia comes on line in 2017.

(By Costas Paris; Sarah Kent contributed to this article.)

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