Royal Business for Royal Dutch

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Can Canada lose an opportunity that will guarantee a high amount of revenue for the country, along with new jobs that will boost the economy? It’s a win-win situation that no country can afford to lose. And Canada hasn’t, as proven by the license that Canada has awarded to Shell (NYSE: RDS-A) (NYSE: RDS-B) and its partners to export LNG from a facility planned on Canada’s West Coast.

Grasping the Opportunity:

The advances in technologies like horizontal drilling and hydraulic fracturing led to a supply glut of natural gas from shale fields. At a point when North American countries were thinking about importing a cleaner form of energy like natural gas, these new techniques completely turned the scenario upside down. Now in an effort to make an effective use of the oversupply of gas, North American companies are exporting gas to other countries where demand is high.

And the latest company to join the league of LNG exporters is the Shell-led consortium LNG Canada. The group has been awarded a license for 25 years with an annual export of 24 million tonnes of gas. The export terminal will be built on the West Coast at British Columbia and will provide Shell the competency to serve the markets of Japan and China, countries with high demand for cleaner energy like natural gas. LNG Canada has chosen TransCanada to build a 700 kilometer pipeline connecting their gas fields to the LNG terminal at Kitimat.

A lot more companies have applied for the license to export natural gas to Asian and European countries, and Shell is not the first one to get a license. Kitimat LNG, a group led by Apache, Chevron (NYSE: CVX), and BC Douglas Channel are two other projects that have already received a license to export LNG from British Columbia. The Kitimat LNG project got a boost when Chevron acquired interest in the project, as it adds to the credibility of the group. With a big player like Chevron holding a 50% interest in the project, buyers will feel more comfortable to enter into supply contracts for long terms with the group. This will guarantee that the group has supply contracts for years to come and earn a premium on the price by supplying to the LNG hungry Asian countries.

And the list doesn’t end here.  Many oil and natural gas companies have also applied to US for exporting LNG.

Situation Elsewhere:

Cheniere (NYSEMKT: LNG) was the first company after almost five decades to get a license in the US to export LNG to non-FTA countries like Japan and China. Cheniere is converting its LNG import facility at Sabine Pass, which became infeasible to operate after the supply glut of natural gas, into an export facility. Recently Pangea received the license to export LNG to the countries covered by the FTA with the US, and is building an LNG export facility at Corpus Christi Bay, working with its partner Statoil.

Though most of the companies are looking forward to exporting LNG to Asian countries to take advantage of the high price differential, the ones located on the West Coast have an added advantage to those lying on the East Coast.

The Pacific Edge:

The export terminals lying on the Pacific Ocean, like that of LNG Canada and Kitimat LNG, enjoy the added advantage of geographical proximity to Asian markets. This ensures lower shipping costs, as well as a greater profit margin for the operators. This adds to the premium price, around four times the price of natural gas in North America, that the companies will be able to take advantage of in the Asian markets of Japan and China.

Foolish conclusion:

If you are an oil and natural gas company, then you will always try to look to access markets from which you can derive the highest profit. Given the fact that Asian countries are the hot spots to sell natural gas, Shell is moving in the right direction and looks to boost its bottom line in the coming years once the LNG export facility becomes operational. Right now, it will be very hard for an investor to take his eyes off this stock.


sattybose has no position in any stocks mentioned. The Motley Fool recommends Chevron and Statoil (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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