Energy giant Royal Dutch Shell plc (LON: RDSA) has sold its 8% holding in the WA-based Wheatstone liquefied natural gas (LNG) project for US$1.135 billion, according to reports in the Fairfax media. It's the first of a muted series of domestic assets which are on Shell's sale block, including its remaining stake in Woodside Petroleum Limited (ASX: WPL), its petrol retailing operations and its Geelong-based refinery.
The muted asset sales are believed to be part of a streamlining of Shell's global operations, but have also called into question the economic viability of a number of domestic LNG projects.
Costs spike
The problem faced not just by Shell but by all major players in the LNG sector including Santos Limited (ASX: STO) and Origin Energy Limited (ASX: ORG) is the lead times involved from the time money was committed to their various projects. The ensuing resources boom has seen a substantial spike in costs, requiring in some cases billions of dollars more in expenditure to complete the development of LNG processing facilities.
Pricing concerns
A second concern for the domestic LNG industry is the unexpected boom of US shale gas. US shale gas is forecast to be a game-changer in the US by providing abundant and cheap energy and potentially turning the US into a net exporter. This potential shift in supply and demand dynamics makes forecasting the pricing of exported LNG from Australia very difficult, and creates uncertainty around the viability and returns of the various LNG projects.
Foolish takeaway
Despite asset sales, Shell is expected to continue to hold major stakes in three domestic LNG projects, namely Prelude, Gorgon and the North West Shelf. Given the longevity of many of the LNG projects and the world's future demand for energy, the prospects for the LNG projects currently under development in Australia would appear reasonable, however the viability of future projects may be more questionable.
Despite expectations that eventually the returns on these LNG projects will be reasonable, there could certainly be short-term gyrations. Any gyrations could provide investors and indeed the major players with an opportunity to buy assets at knocked-down prices.
