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Betting on Gas, Shell Floats Plan on High Seas

By STANLEY REED: 12 November 2012

A version of this special report appeared in print on November 13, 2012, in The International Herald Tribune.

THE HAGUE — At a shipyard on a South Korean island called Geoje, an army of welders and metal cutters are beginning to assemble what is by many measures the largest ship ever made.

It will span 488 meters, or about 1,600 feet — about one-third longer than some U.S. aircraft carriers. The vessel, the first of its type, will spend much of its time in one place, over a natural-gas field called Prelude, about 200 kilometers, or 120 miles, off the coast of Australia. The gargantuan craft’s majority owner is Shell. Minority partners include Korea Gas.

Perhaps more than any of its rivals, Shell has bet its future on natural gas. That is where the giant ship fits in. It will house what is usually a huge, land-based apparatus for chilling natural gas down to minus 162 degrees Celsius (minus 260 Fahrenheit) to liquefy it so it can be transported by a another specialized ship.

Shell has equity stakes amounting to about 30 percent of the world’s liquefied natural gas volume, according to the company. Gas used to be sold via fixed contracts, but fast-growing L.N.G. is making it into a commodity like oil that can be shipped just about anywhere. Prelude should help the company further expand that franchise.

Since the 1990s, Shell and other companies have had the idea of putting L.N.G. factories on ships so as to reach remote locations and avoid putting them on land, where environmental concerns can be an impediment. In those years, Shell considered floating L.N.G. for a field called Kudu, off Namibia in West Africa, and another called Nwa/Doro, off Nigeria. Neither of those projects came to fruition.

When Shell discovered a big but not huge gas field in an area called the Browse Basin off northwestern Australia in 2007, it thought it finally had the right place.

The Prelude field and one nearby called Concerto are big but not monsters. Each contains about three trillion cubic feet, or 170 billion cubic meters, of gas reserves — about what Britain consumes in a year.

That figure is below the rule-of-thumb of five or six trillion cubic feet that has been thought to be the minimum to warrant constructing an onshore processing plant. Prelude’s distance from shore also argued for putting the L.N.G. processing on a ship rather than on land.

“The size and remote location makes an ideal development for floating L.N.G.,” says Marjan van Loon, a Shell vice president for liquefied natural gas.

When the hull and another huge piece of equipment called the turret, being built in Dubai, are finished, they will be towed by tug to the gas field and fixed there by huge anchor cables. Prelude is expected to start producing by 2017 and could be beaten to market by other entries like one by Petronas, the Malaysian oil company.

The vessel, which will be able to house as many as 400 people, is expected to remain on site for 25 years. Then, after refurbishment, it could be recycled for use at another field.

When oil companies and others first started thinking about building floating liquefied natural gas facilities, the idea was to build low-cost, relatively nimble machines. The thought was that they could be built and financed by third parties and rented out to oil companies.

The creation that Shell is finally bringing into the world is not exactly stripped down. It is more comparable to a land-based plant with all the bells and whistles crammed onto the decks of a ship.

“They are effectively taking an onshore plant and putting it on a barge,” says Katan Hirachand, a banker at Société Générale in London who helps finance oil and gas projects. “It is different to other F.L.N.G. projects since others are more field-specific.”

Prelude is not coming cheap. Shell has not disclosed exact costs, but says the capital expenditure is in the range of $3 billion to $3.5 billion per million tons a year of capacity. By that measure, the cost of the Prelude vessel, with L.N.G. capacity of 3.6 million tons a year, would easily exceed $10 billion.

Still, Iain Pyle of Bernstein Research in London figures that Shell could make $1 billion a year in net profit. Prelude will produce a lot of gas — more than enough to supply the needs of Hong Kong, for instance, Shell says.

Assuming Prelude works, it should provide Shell with a persuasive talking point when it approaches governments.

“Having the first major floating L.N.G. facility is hugely important,” to Shell, says Stuart Joyner, an analyst at Investec in London. “It is their unique selling point.”

Above all, Shell is an architect of huge and expensive oil and gas processing machines. In tiny Qatar, for instance, it is ramping up production of a facility called Pearl. Not a tiny jewel, Pearl is a sprawling $20 billion network of pipes and tanks designed to perform the alchemy of turning Qatar’s matchless natural gas resources into even more valuable diesel and jet fuel.

Shell argues that once it builds something like Pearl or Prelude it will be able to use the experience to build subsequent projects for less money. Shell hopes that there will be a Prelude clone.

In fact, Ms. Van Loon says Shell wants to build a new floating liquefied natural gas project each year “for the foreseeable decades.”

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