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Shipping to become ‘major new sector’ for LNG: Shell


by Angela Macdonald-Smith: 2 November 2016

Demand for LNG as a ship fuel has emerged as a much needed new source of growth in the oversupplied market, with oil giant Royal Dutch Shell giving a bullish assessment of the impact of tighter international rules on maritime emissions.

Shell’s head of integrated gas Maarten Wetselaar told investors in London that between shipping and trucking, the transport sector had become “a major new sector” for the LNG market.

The shipping market and the heavy trucking market together represent about 750 million tonnes of potential LNG demand, about three times the current global LNG supply, Mr Wetselaar said. He signalled that last week’s announcement of new rules on emissions from shipping had made Shell more positive on demand from the sector, noting it was an area where the competition was oil rather than cheap coal.

“These sectors have good affordability,” he said. “The alternative is oil, and that’s a price link that we like competing with in the gas side.”

By 2025, 35 million-60 million tonnes of LNG a year could be going into transport, rising potentially past 100 million tonnes by 2030, Mr Wetselaar said. Woodside Petroleum has also identified transportation as a new market and has invested in LNG fuelling infrastructure at Dampier in Western Australia.

Shell’s $US52 billion takeover of BG Group meant the oil major overtook home-grown Woodside Petroleum as Australia’s biggest LNG producer, with capacity in Queensland as well as at the North West Shelf venture in Western Australia. It is also a 25 per cent partner in Chevron’s monster Gorgon LNG project ramping up production, while its Prelude floating project is expected to start up in late 2017 or 2018.

The LNG market is wallowing in a glut, thanks to the several new plants starting up in Australia, with about 12 million tonnes of additional supplies so far this year, chief financial officer Simon Henry said.

But Shell is seeing “healthy growth” in demand, with the Middle East particularly strong, and India and China each increasing imports by about 4 million tonnes so far in 2016, Mr Henry said.

Driving demand as a shipping fuel was last week’s ruling by the International Maritime Organisation that strict new caps on sulphur in fuel oil would come into effect worldwide on January 1, 2020. The cap, which is falling from 3.5 per cent to 0.5 per cent, is expected to force some shipowners to switch to gas given the costs of alternatives such as installing “scrubbers” to clean up emissions.

In total, LNG demand could increase to 420-450 million tonnes a year by 2025, up from about 250 million now, Shell said.

Mr Wetselaar described progress on the Prelude project as “solid”, with the major construction work on the vessel at the shipyard in Korea having been completed.

“We’re into starting commissioning, handing over to operations and working things up,” he said, reiterating Shell’s expectation that Prelude would contribute “substantial cash flow” starting in 2018.

Mr Henry meanwhile flagged significant activity is under way behind the scenes on divestments as Shell targets $US30 billion of asset sales. He said Shell has 16 separate asset sale transactions of more than $US500 million in progress, of which only six are in the public domain, including the New Zealand business.

Shell reclassified its remaining $3 billion stake in Woodside Petroleum as an “asset for sale” earlier this year, apparently signalling a firmer intention to complete its exit from the share register sooner rather than later.

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