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Shell Way Ahead of the Crowd

NEW YORK (TheStreet) -- From Exxon Mobil's  (XOM) venture into the semi-autonomous region of Iraq to Chevron's  (CVX) ambitious Gorgon liquified natural gas project in Australia, the leading global oil and gas companies are known for taking big risks by betting on projects that are far too challenging for mid-cap energy companies.

One such company -- European oil giant Royal Dutch Shell  (RDS.A) -- is leading the industry in the development of floating liquefied natural gas, or FLNG, technology.

Earlier this month, Shell moved one step closer to its FLNG ambitions when it moved the enormous 1,600-foot hull of its FLNG vessel, called Prelude, out of the dry dock. Through this facility, which came with a price tag of around $11.7 billion, Shell will be able to tap into offshore projects that are otherwise too costly to develop.

Shell plans to use this massive vessel to tap into the growing demand for LNG from Asia. Shell's FLNG vessel is nearing completion while its competitors are still in the early stages of development. In terms of FLNG, Shell is way ahead of the crowd.

Natural gas, unlike coal, is the cleaner alternative for power generation. To ship this gas, companies must chill the gas to hundreds of degrees below zero. This process turns the gas into liquid (called LNG) as its volume shrinks by 600 times, which makes it easier to ship the fuel to far-off places. Traditionally, this is done on land through conventional LNG plants.

Through its FLNG project, however, Shell aims to take both production and processing operations to deep sea.

A FLNG vessel can be a cost-effective alternative to traditional onshore liquefaction methods because of its considerably lower development costs and minimal environmental impact. In many cases, a FLNG vessel is the only feasible solution to monetize relatively smaller gas fields in deeper parts of the ocean.

Shell's enormous Prelude FLNG vessel is a marvel of modern engineering. The vessel is going to be the largest floating structure on water; its deck will be bigger than four soccer fields laid end to end.

The vessel is so big that if the Empire State building were laid next to it, the building would be 476 feet shorter than the vessel. Naturally, a vessel this big also comes with unmatched storage capacity. The vessel can store as much liquid as 175 Olympic-sized swimming pools. When these tanks are filled, then Prelude will weigh nearly six times as much as the biggest aircraft carrier.

Despite its gigantic size, the Prelude FLNG vessel is just one-quarter the size of an equivalent plant on land.

The Prelude vessel will be deployed about 125 miles off the coast of northwestern Australia at the Prelude gas field. The vessel has been designed to withstand all sorts of weather conditions, including some of the most powerful tropical cyclones. Once deployed, it will remain there for the next 20 to 25 years.

The Prelude vessel can produce 5.3 million tons of liquids each year; that is more than enough to fulfill Hong Kong's natural gas requirements for a year.

Through this Prelude FLNG project, Shell aims to tap into the growing demand of LNG from the energy-hungry nations of Asia. Since 2000, the demand of natural gas has increased at an average pace of 2.7% per year, while the demand of LNG has risen by 7.6% per year as natural gas imports by Asian countries are mainly LNG.

Moreover, in the coming years through 2035, International Energy Agency believes that the growth in the demand for LNG will continue to outpace the growth in demand for oil and natural gas.

Historically, almost 50% of the demand has come from Japan, South Korea and Taiwan, and the three nations will likely continue to drive a big portion of demand in the coming years.

More new demand, however, will come from China and India because of the pro-gas policies of their governments.

There are now no FLNG facilities that could use the relatively smaller deep-sea natural gas reserves to tap into this growing demand, and no other oil major besides Shell that is in the late stages of development.

Exxon Mobil and BHP Billiton  (BHP) have formed a joint venture for a FLNG project off western Australia's coast, but the two are still in the early stages of development as they have just recently received the government's environmental approval. A final investment decision will be made in 2014 or 2015, and so it will take several years before their vessel is deployed.

On the other hand, Shell's Prelude FLNG vessel will start operating by 2017. Clearly, Shell has the first mover's advantage.

Furthermore, Shell is not stopping here. The company's executives have revealed in an interview that they have an even bigger vessel on their project pipeline, which could be even more cost effective than Prelude.

With the massive cost blowouts being experienced in other land-based LNG projects, particularly Chevron's Gorgon LNG project which has recently reported yet another increase in costs, a cost-effective FLNG alternative is now looking more and more attractive.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Stock quotes in this article: XOM, CVX, RDS.A, BHP 

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