The Tremendous Potential of LNG

Natural gas is expected to be the fastest-growing major fuel through 2030, fueled by growing energy demand in China, India and other developing economies, according to projections by ExxonMobil (NYSE: XOM  ) . Not only does gas produce substantially fewer emissions than oil or coal, but it's also significantly cheaper than oil on an energy-equivalent basis.

But there is one drawback to natural gas -- it's difficult to transport. However, by converting gas into liquefied natural gas, or LNG, this transportation barrier can be overcome. Let's take a closer look at the tremendous potential of LNG and some of the companies hoping to capitalize on it.

A primer on LNG
LNG is a clear, colorless liquid derived by cooling natural gas to -260ºF (-162ºC). By liquefying gas from its natural state into LNG, the volume of the gas is shrunk roughly 600 times, making it much easier to store and deliver via tanker to markets all over the world. Once LNG is shipped to where it is needed, it is converted back into gas at regasification facilities and then delivered to end-users such as households and businesses.

While natural gas liquefaction dates back more than a century, it is poised to grow rapidly in coming years, fueled by increasing global supply and demand. Already, the US Department of Energy has authorized four projects to export gas to countries that don't have a free-trade agreement with the U.S., including Cheniere Energy's (NYSE: LNG) Sabine Pass terminal in Louisiana, the first project to receive approval, and Dominion's (NYSE: D  ) Cove Point LNG terminal in Maryland, the most recent project to be given the green light.

By 2025, global LNG demand is expected to double to roughly 500 million tons a year, according to research by Shell (NYSE: RDS-A  ) . With such exciting prospects for growth, big oil is increasingly starting to pay attention to LNG. So far, Shell and ExxonMobil have emerged as two of the most dominant players.

Shell
Currently one of the largest global LNG producers, the Hague-based oil giant has already shelled out more than $40 billion on LNG-related facilities and services. It currently has 22 million tons per year of Shell-share liquefaction capacity across Australia, Brunei, Malaysia, Nigeria, Oman, Qatar and Russia, as well as three LNG projects currently under construction in Australia that should boost total liquefaction capacity by an additional 7 million tons per year.

In 2011, Shell became the first energy company to pursue a floating LNG facility, its Prelude Floating LNG project off Australia's northwest coast. By moving the production and processing portion out to sea, as opposed to on land like most LNG plants, the ambitious project is expected to bring major new energy resources within Shell's reach, including smaller, more remote fields that are harder to access through land-based LNG facilities. Once operational, Prelude will produce at least 5.3 million tons per annum (mtpa) of liquids, including 3.6 mtpa of LNG.

Exxon
Like Shell, Exxon has also built up a formidable gas portfolio over the past few years, and boasts liquefaction capacity of roughly 65 million tons per year. Earlier this year, it inked an agreement with Qatar Petroleum to install liquefaction equipment at an import facility in Sabine Pass, Texas, which will be able to ship as much as 15.6 million metric tons of gas per year.

The Houston-based energy giant is also targeting European markets through the new South Hook Terminal startup in Wales and the Adriatic LNG Terminal off Italy's shore, increasing its global LNG regasification capacity by about 2.8 billion cubic feet per day; it's targeting Asian markets through its Gorgon Jansz and PNG LNG projects.

The bottom line
As the global population grows over the next several years, LNG will play an increasingly important role in helping meet the world's energy needs. By 2020, LNG could meet 20% of global gas demand, according to Anders Ekvall, Shell's vice president of LNG Americas. That's why Shell and Exxon's leading positions in LNG should provide a major competitive advantage going forward.

Though LNG projects require massive up-front capital expenditures, they generate huge amounts of cash flow over extremely long periods of time, while requiring little additional capex once operational. They're also less risky than oil projects since much of their cash flow is locked in through long-term contracts. As such, Exxon and Shell's LNG projects should generate strong and reliable cash flows for decades to come -- cash that can then either be returned to shareholders or used to fund higher-margin oil drilling.

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