By Nathan Vanderklippe
North American natural gas may be cheap, but the world is ready to pay far higher prices to bring it across the Pacific.
So says Peter Voser, chief executive of Royal Dutch Shell (NYSE:RDS.A), an energy giant that, by its own math, delivers some 30% of global liquefied natural gas through facilities it owns shares in. North American gas is four to six times cheaper than gas on international markets, where it's priced off high oil prices. The huge price gap has led to a raft of proposals to build new facilities to load U.S. and Canadian gas onto ships for Asia and elsewhere. In Canada, a half-dozen, including one led by Shell, are being planned for the northern B.C. coast.
Investors, however, have grown increasingly concerned that buyers such as China will refuse to accept an oil-linked price and instead demand pricing on North American terms. If that happens, LNG exports suddenly become a much more tenuous proposition.
But Voser, who as a seller of gas has a vested interest in obtaining the highest price possible, says he doubts North American Henry Hub pricing will become dominant: "It is important for Canadian gas to have an alternative destination which is not Henry Hub-driven," he said. And in the Asia-Pacific market, "they're replacing industrial oil with gas imports, so this is different than just replacing gas with a cheaper gas. Hence I think there is a willingness to actually pay a certain premium for that," he said.
Shell is betting big on gas projects in North America, which it sees as more profitable than oil over the next decade. In part, that's because the company spent vast sums on the 100,000-barrel-a-day, $14.3-billion (U.S.) expansion of its Athabasca Oil Sands Project -- enough that it requires $75 a barrel, on a net present value basis, to break even.
But other parts of its oil sands operations are far more profitable. Shell's initial oil sands plant is running at cash costs in the $30s per barrel, Voser said. And, he disclosed, that initial 150,000 barrels a day has minted money. "That has paid out already after five or six years," he said.
Future expansion, in the form of a three-stage "debottlenecking" meant to add 80,000 to 90,000 barrels a day to the project, will need oil prices of "below $50" to break even, he said.