What Royal Dutch Shell plc Is Doing With Cheap Natural Gas

More and more companies are seeking to capitalize on North America's abundant and cheap supply of natural gas, including, most recently, Royal Dutch Shell (NYSE: RDS-A  ) .

The Hague-based oil giant recently announced that it has inked an agreement with Caterpillar (NYSE: CAT  ) to test new engines running on liquefied natural gas (LNG) at its oil sands mining operations in northern Alberta, a move that is expected to slash fuel costs and reduce emissions.

As part of the agreement, Caterpillar and Shell will team up to develop a fully integrated mining truck that will be fueled primarily by LNG, but will also use some diesel. The design will be tested at Shell's oil sands projects near Fort McMurray starting in 2016. Shell also plans to retrofit its existing trucks with the new engines and develop refueling infrastructure at its oil sands operations.

Shell's Athabasca oil sands project
Oil sands mining is a huge source of carbon dioxide emissions, emitting as much as 18% more carbon dioxide than the average crude oil production operation in the U.S. By using the new dual-fuel technology, Shell hopes to substantially reduce both fuel costs and greenhouse gas emissions, further boosting the profitability of its oil sands projects, which have been one of the company's biggest cash generators.

The company's Albian Sands project consists of two mines -- the Muskeg River Mine and the Jackpine Mine -- that are operated as part of the Athabasca Oil Sands Project (AOSP). Shell serves as the operator and majority shareholder of AOSP, with Chevron (NYSE: CVX  ) and Marathon Oil (NYSE: MRO  ) each holding 20% stakes. The project involves excavating bitumen-rich sand from the two mines, which is then separated, diluted, and shipped to the company's Scotford Upgrader, where it is converted into synthetic crude oil.

Growing use of gas-powered trucks
A host of other companies have also embraced natural gas-powered engines. For instance, Waste Management (NYSE: WM  ) , one of the leading providers of waste management services in North America, has already converted a sizable portion of its vehicles to run on natural gas and boasts a fleet of 2,000 trucks that run on compressed natural gas, or CNG.

Similarly, Halliburton (NYSE: HAL  ) , a leading oilfield services firm, recently announced that it would add nearly 100 new CNG-powered light duty trucks to transport equipment and workers at its various operating locations. The company estimates that the new trucks will reduce emissions by as much as 90% while burning CNG, saving the company roughly $5,100 per truck in annual fuel costs.

Meanwhile, Apache (NYSE: APA  ) began using gas-burning engines to power its fracking operations in Oklahoma's Granite wash, earning it the distinction of being the first exploration and production company to power a full hydraulic fracturing operation with natural gas. The company expects the switch to significantly lower emissions, while reducing its fuel costs by approximately 60%.

Cabot Oil & Gas (NYSE: COG  ) followed Apache's lead, announcing in May that it was using natural gas produced from its operations in the Marcellus shale in Pennsylvania to power its fracking operations in the field. The company expects these new engines, which can run on either natural gas or diesel, to help reduce costs, air emissions, and truck traffic by reducing the amount of diesel used by as much as 70%.

What's next for Shell?
As these examples highlight, more and more companies are warming up to the idea of using North America's abundant and cheap supply of natural gas to slash costs and lower emissions. For Shell, reducing costs at the Athabasca oil sands project is especially important since oil sands mining operations tend to have some of the highest break-even costs around. Though the company has come under pressure from shareholders regarding its massive capital spending program, I think its decision to invest throughout the cycle should ultimately pay off.

Not only will Shell generate a ton of cash flow from the start up of more than a dozen new high-margin projects, including Mars-B and Cardamom in the Gulf of Mexico, over the next year, but its recent long-lived projects, including the Athabasca oil sands project, Pearl GTL, and Qatargas 4, could generate a combined annual $5 billion of operating cash flow over the next few years, giving the company more room to return cash to shareholders.

OPEC has a target on its back 
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