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Defiant Shell remains bullish on LNG

Amid the gloom and doom of a supply glut and record low prices, the major, which controls more than one-fifth of the global LNG market, sees a bright future

Shell yesterday shrugged off concerns about the future of natural gas in a decarbonising world economy, forecasting that “as policy meets reality” global LNG trade will double to 700mn t/yr by 2040.

It believes that demand for gas will grow by 2pc/yr driven by growing populations, rising energy demand, increasing urbanisation and the need to cut carbon emissions and improve air quality—and that 40pc of this projected growth over the next two decades will be supplied as LNG.

Launching Shell’s annual LNG Outlook in London, Maarten Wetselaar, director of integrated gas and new energies, says the forecast—despite being bullish—holds significant upside. This is because it assumes that China and India will fail to meet their targets of raising the share of gas in their primary energy mixes to 15pc by 2030, or even by 2040.

“There is real tension between what is projected in the outlook and the government targets,” says Wetselaar. If China and India were to get even close to their targets, he adds, the gas industry would struggle to meet their demand.

Asian markets are expected to account for three-quarters of the growth in LNG demand over the period covered by the outlook and Wetselaar stressed that China and India are only part of that story.

“If you break down Asia, the main story is not China or India. It is the rest of Asia, the smaller countries that are becoming significant LNG consumers. That adds a lot of resilience to the LNG demand that we project for 2040.”

Ignorance risk

Wetselaar insists that LNG will play a growing role in the transition to a lower-carbon energy system. “Helped by policy support, strong availability and affordability, gas continues to penetrate further into the energy mix and we believe that trend will be there for decades to come,” he says.

“Too often in the simplistic discussion that is being had over the future of energy, people believe that solar and wind will solve the issue. But significant sectors of energy demand can not be electrified and will continue to need molecules to run. Even if you believe that in the very long term hydrogen and biofuels will do that job, in the next 25 years those value chains will not be of a material size, even if we work really hard on them.

“But we need continued advocacy from those who see that picture because otherwise it might drown in a sea of—what you might call—ignorance. If it does, that would be quite a risk to the energy transition.”

700mn t/yr - Shell’s predicted demand for LNG by 2040

LNG trade grew by 12.5pc last year, reaching 359mn t. A record 40mn t of new supply was absorbed, with Europe playing a crucial role as market of last resort. Its LNG imports soared by 74pc.

2019 was also an exceptional year for investment in new liquefaction capacity, with new projects totalling 71mn t/yr reaching FID. Nevertheless, Shell sees a need for more LNG liquefaction capacity from around 2025 even if Qatar goes ahead with its proposed major expansion, which Shell expects to be sanctioned this year.

Executive vice president Steve Hill says the record number of projects sanctioned last year made up for the paucity of FIDs in the preceding three years and that much will depend on how much more capacity is sanctioned this year. “It is what happens next that will determine whether we get into a scary situation or not,” he says.

Commenting on the current supply glut and the low level of LNG prices, Hill says: “Between today and the summer the market is going to continue to face challenges. We have a low price today, [due to] mild weather, high inventories and the uncertainty over Chinese demand [because of the Coronavirus outbreak], so the next two or three months will continue to be tough.

“We could tell you a very positive story starting from the summer onwards. But the purpose of this event is not to give you our best trades. We like to keep those to ourselves.”

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