Friday, December 6, 2013

Shell Abruptly Drops Louisiana GTL Plant

Royal Dutch Shell abruptly announced yesterday that it is ceasing plans to develop a $20 billion gas-to-liquids plant in Ascension Parish, Louisiana.  The move comes as something of a surprise given that the company made a splashy announcement that it had selected the Ascension site a couple of months ago.

Early reports suggest that Shell didn't feel the project was economically feasible because of the relationship between the price of natural gas and oil, which must be fairly significant (~16x) to justify the high cost of the GTL process.  Perhaps Shell sees the writing on the wall with the prospect of additional oil supply in the world market.  Oil production is up in the U.S., and with tensions thawing in Iran, the Persian Gulf might be a bigger player in the world market.  With consumption declining, or at least plateauing, the prospects for ever-higher oil prices are limited at this point.

Another thought:  perhaps this is part of a larger strategic effort by Shell to pull back from situations where it was a late comer and is playing catch-up rather than being a leader in the field.

Remember a couple of recent Shell capitulations:  first, the decision not to build its proposed ethylene plant in Pennsylvania to take advantage of gas coming from the Marcellus Shale, and second, its decision to sell its assets in the Eagle Ford Shale.  (Let's not even talk about drilling in the Arctic.)  In both cases, Shell realized that it was out of position, to borrow a basketball metaphor.  In Pennsylvania it was easier to pipe gas to the Gulf Coast to existing infrastructure than it was to build it new in the Northeast.  In west Texas, Shell arrived late to the game and lacked prime assets.  Additionally, as we have seen in the Haynesville Shale, Shell is not a leader in shale gas E&P.

With the Louisiana GTL plant, Shell was importing technology that works great in Qatar (but under an entirely different set of economic conditions) to try to take advantage of Haynesville Shale gas.  But the GTL process is very expensive, and economic risk when you look at the spread between oil and gas prices is too volatile to justify an investment of tens of billions of dollars.

Don't cry for Shell, though.  Expect the company to keep pulling back to nurse its wounds for a year or two before coming back strong on a few new big projects, either internationally or in the Gulf of Mexico, where its expertise and financial muscle are not commodity items.

1 comment:

Anonymous said...

Robert--excellent analysis of the situation. Sounds like Shell is getting a little gun shy.