Cedigaz: Shell needs internal growth besides BG acquisition

With the $70 billion takeover of BG, the Anglo-Dutch major is about to become the unquestionable leader, thanks to the world’s largest and most diverse portfolio.

BG’s contracts will provide Shell with an unprecedented coverage of global markets, but the company has to keep developing LNG projects, as the medium- and long-term production of BG’s assets is uncertain, Cedigaz economist, Louis Jordan believes.

The biggest impact of the merger will affect the LNG upstream sector. With the purchase of BG’s assets, Shell is adding a 13.4 mmpta in nameplate equity capacity that is currently operating or under construction in Egypt, Australia, or Trinidad and Tobago, to its current 24.5 mtpa capacity.

This additional volume appears to be huge, but it is not as large as it seems. In Egypt, the 7.2-mmtpa Idku LNG plant is suffering from large supply disruptions and produced only 0.32 million tons in 2014. There is little chance that the plant will operate at full capacity again. In Trinidad and Tobago, where Shell already owns a 20 to 25% share in each of the four trains, production is expected to start declining from 2020, due to dwindling reserves. The main sources of growth are therefore expected to come from the 8.6-mmtpa Queensland Curtis LNG plant, which sent its first cargo in late December. With BG’s 60% share in Block 1, 3 and 4 in Tanzania, Shell is also getting a foothold in the emerging Eastern African LNG industry, even though Cedigaz does not expect exports to start before 2022.

Besides liquefaction capacity, Shell is acquiring BG’s very large contract portfolio. In 2015, BG will be buying LNG on a long-term basis from plants around the world for a total of 21.4 mmtpa, while Shell’s contracts currently stand at 13.1 mmtpa, with both companies having small regasification capacity namely, 2.9 mmtpa and 4.6 mmtpa respectively.

Cedigaz believes that the question is whether Shell’s move to achieve external growth will slow down its internal growth plans. The company has developed numerous proposals to increase its liquefaction capacity.

Cedigaz has identified three greenfield projects and three expansion projects that have a good chance of succeeding, as things now stand. These projects represent a total of 14 mmtpa and include Abadi FLNG (Indonesia), Browse FLNG (Australia) and LNG Canada. Additional production could also be contributed by new trains at the plants of NLNG (Nigeria) and Gorgon LNG (Australia) and by debottlenecking operations in Qatar. As for BG, only the Tanzania LNG project has a good chance of success, as the Canadian Prince Rupert LNG project was put on hold in the autumn of 2014. The most probable scenario is that Shell will drop the latter and focus on LNG Canada.

As Cedigaz said in its analysis, Shell’s acquisition of BG Group provides the company with immediate sources of growth but in order to maintain its position, Shell will have to work on developing LNG projects.

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Image: BG Group