The fervor surrounding that shale gas revolution that’s unfolding in the US is easy to understand: It’s not every day that a country transitions from a growing importer of natural gas to one with an oversupply.

Moreover, the prolific output from the nation’s unconventional fields has depressed domestic natural gas prices to the point that producers have ramped up activity in liquids-rich plays such as the Eagle Ford Shale in south Texas. For many operators, the coproduction of higher-value crude oil, natural gas liquids (NGL) and condensate effectively subsidize any natural gas output.

At the same time, depressed prices and the long-term nature of these natural gas reserves have enabled policymakers to begin a conversation about expanding the role of natural gas in electricity generation and transportation–developments that could lower carbon emissions and improve the nation’s energy independence.

Not surprisingly, oil and gas producers worldwide are eager to apply the horizontal drilling and hydraulic fracturing techniques honed in US shale plays to similar reservoirs overseas.

On May 20, 2011, Royal Dutch Shell (NYSE: RDS.A) made its final investment decision on the world’s first floating liquefied natural gas (FLNG) vessel, a development that promises to open up a large number of stranded natural gas fields to development. Shell executives hailed the endeavor as revolutionary. Martin Brinded, executive director of Shell’s international upstream operations, recalled the first tanker allowed through the Suez Canal when he assessed the potential impact of the world’s first FLNG vessel:

Our decision to go ahead with this project is a true breakthrough.

Not since the launch of the Murex in 1892 has a Shell vessel had as much potential to change the nature of the industry. The Murex was the first tanker to be allowed through the Suez Canal, thereby transforming the global kerosene market. The Shell FLNG facility will be the first facility to produce and liquefy gas at sea, and I hope will prove to be a major turning point for the global LNG market.

Shell pioneered the concept of an FLNG facility over 10 years ago while seeking ways to exploit a still-undeveloped field offshore Namibia. The idea itself is relatively simple: A mobile, offshore liquefaction facility.

Liquefied natural gas (LNG) is far from a recent innovation; the energy industry has relied on this technology for over 50 years. By cooling natural gas to minus 260 degrees Fahrenheit at a liquefaction facility, it condenses into a liquid that’s roughly 1/600th its original size. In this form, large amounts of natural gas can be safely transported overseas in specially designed ships. Re-gasification terminals warm the LNG to return it to its gaseous state before pipelines transmit the product to end users.

Shifting these capabilities to a mobile, offshore FLNG unit would eliminate the need for expensive subsea pipelines and supporting coastal infrastructure, enabling the producer to exploit stranded natural gas reserves located in remote areas. Any natural gas production is liquefied and transferred to an LNG carrier for delivery to its end market.

Advertised as the longest floating structure in the world, Shell’s first FLNG facility will span more than four soccer fields, weigh more than six times as much as the world’s largest aircraft carrier and tower seventeen stories above the water.

The hulking vessel will operate in Shell’s 100 percent-owned Prelude field offshore Northwest Australia, which was discovered in 2007 and is estimated to contain about 3 trillion cubic feet of natural gas equivalent reserves. Management expects the vessel to extract about 3.6 million tons per annum (mtpa) of liquefied natural gas, 1.3 mtpa of condensate and 400,000 mtpa of liquefied petroleum gas.

Shell estimates that the FLNG vessel will cost $3 to $3.5 billion per mtpa of LNG capacity, which amounts to a total cost of $10.8 to $12.6 billion. It’s unclear whether these cost estimates includes liquids capacity.

Although delays and cost overruns are always a possibility–especially with untried projects of this magnitude–that the construction process will occur in the controlled environment of a shipyard should mitigate these concerns.

Locating the facility offshore Australia provides easy access to China and other Asian markets, a region that analysts expect will drive demand growth in the LNG market. Shell’s willingness to invest in this project alongside its direct stakes in several other major Australian LNG export projects–Browse, Gorgon, Sunrise and Wheatstone–suggest that management is confident in this growth story.

Although Shell was the first to announce a final investment decision on an FLNG facility, Brazilian national oil company Petrobras (NYSE: PBR) has reportedly solicited engineering, procurement and construction bids from three consortiums. With a due date of July, Petrobras could reach a final investment decision by year-end.

Although the boldness of Shell’s FLNG project is impressive, other stocks offer pure-play exposure to rising demand for LNG in both Continental Europe and Asian emerging markets. Focus on Portfolio holdings BG Group (LSE: BG/, OTC: BGRYY), Oil Search (ASX: OSH) and Teekay LNG Partners LP(NYSE: TGP).

Around the Portfolios

Growth Portfolio holding Knightsbridge Tankers (NSDQ: VLCCF) reported that average daily time charter equivalents for its four double-hull very large crude carriers (VLCC) and its four capesize dry-bulk carriers were $34,200 and $36,700, respectively. With only one of its vessels taking work from the spot market, these lease rates were roughly flat relative to year-ago levels.

The market rate for a VLCC on a standard trip between the Arabian Gulf and Japan in the first quarter of 2011 was $20,200 a day, up $4,600 a day from the fourth quarter but down from $29,700 a day from the first quarter of 2010. In its first-quarter earnings release, management noted that “market indications are approximately $10,000 a day in the second quarter of 2011.”

A spate of new crude and dry-bulk carriers have driven down tanker rates, but seven of the company’s eight tankers are booked under long-term time charters that insulate Knightsbridge from weak lease rates in the spot market.

The market should absorb new tanker supply over the next 12 months, putting Knightsbridge in a good position to put its two vessels coming off contract in the summer 2012 back to work. Moreover, the company’s solid balance sheet enables it to remain profitable when tanker rates are lower.

Nevertheless, the stock sold off in sympathy with shares of Frontline (NYSE: FRO), a company whose earnings depend heavily on lease rates in the spot market.

With long-term contracts providing insulation against a weak prices in the spot market, Knightsbridge Tankers is a buy up to 27.50 for its sustainable dividend.

City by the Bay

Elliott Gue is thrilled to be returning to San Francisco this year and invites you to join him at The MoneyShow, August 10-12, 2011, at the San Francisco Marriott Marquis Hotel. Be there as recommendations and advice are revealed for how to best position your portfolio for profit–in 2011 and beyond. As this new era of investing unfolds, smart investors know it’s imperative to stay informed and educated. The MoneyShow is your one-stop resource for the most comprehensive education, efficient research, and valuable advice. Don’t miss out…register FREE today and be sure to mention Priority code 022447!