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Shell will buy a portion of Repsol's LNG assets for $4.4 billion in cash and $2.3 billion in financial leases and assumed debt - more than double pre-sale estimates, according to Bernstein Research.
Tuesday's deal underscores the looming importance of LNG to natural gas companies and the global energy market.
"LNG overcomes the primary problem faced by natural gas users," explained Money Morning's Global Energy Strategist Dr. Kent Moors earlier this year. "Available supply is traditionally limited to where pipelines are running. LNG, on the other hand, cools gas to a liquid, allowing it to be transported by tankers almost anywhere by water, regasified at an import terminal, and then injected into the local pipeline network."
This opportunity means huge profits for companies - and investors - who get ahead in the LNG market.
Shell's Big LNG Win
Shell believes global consumption of LNG will double from now until 2025. Earlier this year, Shell's ECO Peter Voser said he expects gas to play a significant role over the next 40 years, with much greater growth rates than oil.
Voser said in November 2012 that Shell plans to invest $20 billion in natural gas products globally over the next few years.
One of the reasons Shell pursued this current deal was to get Repsol's stakes in a major LNG project in Trinidad and Tobago, in addition to a small project off coastal Peru. Shell previously had no presence in these emerging regions.
Operating in these regions gives Shell the ability to provide gas to Latin America, and use its Nigerian gas operations to service Asia. That'll save the company shipping costs and boost profit margins.
"This is a perfect complement to what we have. We get a West Atlantic position and an East Pacific position. These were blind spots," Maarten Wetselaar, Shell's executive vice president told The New York Times.
The deal comes with a fleet of specialized LNG carrier ships and will add 30% to Shell's LNG supplies, according to The New York Times.
Macquarie Securities estimated Shell will now have 6.6 million tons of LNG to trade, or about 20% of its total volume.
Why Natural Gas Companies are Chasing LNG
LNG is one of the fastest growing segments of the natural gas market.
Industry experts at an event in Dubai Feb. 25 said LNG demand will rise by 4.6% annually over the next 15 years.
One of the reasons for increased natural gas usage is growing interest in "cleaner" transportation. While the use of natural gas in the transportation sector is still in its infancy, it's maturing.
"We have been witnessing a rise in interest here for several years, but the move to using liquefied natural gas (LNG) and compressed natural gas (CNG) to replace gasoline and diesel has been gaining strength," Moors said in his 2013 natural gas market outlook.
China's rise to become the world's biggest car market will be another catalyst for natural gas demand. The Asian nation has set a goal of fueling more vehicles with cleaner-burning natural gas.
This increasing global demand for the fuel is good news for U.S. natural gas companies.
Significant shale gas reserves, and the development of techniques to extract it, have led to an abundance of U.S. natural gas supply. That has turned attention to exporting the gas in its liquefied state.
"Companies are retrofitting current import terminals to export LNG from the U.S., using shale gas excess volume as the feeder stock," said Moors. "Of course, that also provides an additional source of revenue for producers and processors... and added potential for investors."
Moors explored how investors can profit from natural gas companies and gave away one of his favorite LNG stock picks in his report, "Betting on the Coming Boom in Natural Gas."
And don't miss "Five U.S. Natural Gas Companies Set to Soar from an Export Boom."
Related Articles and News:
- Money Morning:
2013 Natural Gas Forecast: Six Bullish Reasons Why It's Time To Buy
- The New York Times:
Natural Gas Deal a Bonus For Shell and Repsol
- Natural Gas.org:
Natural Gas Demand
- The Wall Street Journal:
Repsol, Shell Reach LNG Deal