Shell’s floating LNG facility – they’re going to need a bigger boat

Oh no, not more natural gas. Just when gas traders thought America had all the gas reserves it could handle, Royal Dutch Shell announces a landmark project that could “unlock dozens of strained gas fields that are too remote to be developed”, according to the Wall Street Journal.

The project is to build the world’s first floating liquefied natural gas (LNG) facility – a giant vessel that could process offshore gas reserves in situ. Shell could send the vessel to tap reserves far offshore, where the economics wouldn’t justify the construction of a pipeline to the coast. As Australia’s energy minister Martin Ferguson was quick to point out, floating storage would allow Shell to develop the 140 trillion cubic feet of stranded gas worth $890bn that currently sit off the Australian coast.

Shell have stressed that the project is still at the engineering and design phase. But estimates of global natural gas reserves are rising fast. Breakthroughs in seismic imaging are allowing gas groups to unlock huge new reserves. And with the development of the vast shale gas resources in North America, it suddenly feels like all our energy woes are over.

Not so fast. As we pointed out in last week’s cover story (if you’re not already a subscriber to MoneyWeek magazine, subscribe to MoneyWeek magazine), natural gas prices are not about to take off anytime soon. And with every port in the world turning away tankers of LNG at the moment, Shell will be in no hurry to order a fleet of vessels that cost $5bn each. There is already a huge amount of gas building up in storage.

Still, the drive to unlock unconventional oil and gas reserves does look an attractive story. We recently tipped seismic group Petroleum Geo-Services (NYSE: PGSVY). It doesn’t suffer from the same over-capacity issues as other seismic groups and looks a cheap recovery on gas and oil exploration.

And while gas groups have soared in misplaced expectation of a surge in gas prices, coal-bed methane group Green Dragon Gas (Aim: GDG) still looks interesting. Last month, Green Dragon announced it was planning a move to a major market listing in either Hong Kong or London. And having signed a joint venture with ConocoPhillips in August, it has the resources to develop its huge licence areas in China.