Shell Makes a Promising Move

Seaborne natural gas.

Photographer: Tomohiro Ohsumi/Bloomberg

Royal Dutch Shell has put down a big bet on the future market for liquefied natural gas in bidding to purchase the U.K.-based BG Group for 47 billion pounds ($70 billion). Given the challenges facing the LNG industry, it's not obvious that Shell's gamble will pay off. But for the sake of the climate and world energy security, let's hope it does. 

Natural gas is a relatively clean-burning fuel, and to the extent it can be used instead of coal to generate electricity, carbon emissions can be minimized. Not all suppliers and markets can be linked by pipelines, however, so the gas market has never become truly liquid or global in the way that the oil market has. This is why LNG holds such promise. 

The trick is to liquefy large quantities of gas for shipping from the places where it is plentiful -- North America, the Middle East, Australia -- to places that need it -- Europe, Japan, India and China. If Shell's move to buy BG can trigger further LNG acquisitions by oil majors with pockets deep enough to develop them even through bad times, it becomes more realistic to envision a bigger, more efficient worldwide market, capable of setting a global price for gas -- one that's less open to political manipulation by suppliers such as Russia. 

What's long been missing from this picture is commercial viability. The cost of liquefying, shipping and regasification is so high that, for decades, the technology was confined to government energy companies in countries such as Algeria and Qatar. Only relatively recently has soaring demand from emerging markets in Asia driven prices high enough to make the business viable. Those prices remain volatile; since last October, the Asian spot price for gas has fallen by half to a little over $7, leaving BG and other companies on the ropes. And with global economic growth seemingly stalled, demand may not soon snap back. 

Consolidation of the kind Shell and BG are planning marks a necessary transition for LNG, a still-immature industry with costs inflated by inefficiencies such as lack of expertise for constructing terminals. If the use of LNG expands, these costs should begin to fall, improving business prospects. 

Public policy can encourage this expansion. In the U.S., the Barack Obama administration has given a handful of companies permission to export LNG, and terminals are being built in Louisiana, Maryland and Texas. The Department of Energy should speed up the process of approving the many other applications in the pipeline. At the currently depressed LNG price, not all will get built immediately, but they will come along as the market allows. 

Getting to the nirvana of a large, efficient and commercially viable LNG market that delivers gas at competitive prices will, at best, take many years. But if China is to replace its coal-fired plants and Europe is to cut its dependence on Russian pipelines, the business needs to move forward.

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