Shell Sees Bleak LNG Outlook

This could be the year that sees liquefaction plants being shut in as supply fails to find demand at a price that makes sense for the producers. Presenting its fourth and gloomiest annual outlook, senior executives at Anglo-Dutch major Shell said that new supply added 40mn metric tons (mt) to the market, a record amount; this year another 20mn mt are due to arrive and next year, another 10mn mt/yr.

So far the demand has been there, but at ever-lower prices, and executive vice president for Shell Energy Steve Hill said that there was the potential for shut-ins this year. He also said LNG exporters may try to find domestic buyers for their gas instead, naming Malaysia, Egypt and Australia. 

A mild winter globally, lower gas demand for power in Japan and Korea and a very high storage inventory in Europe explain the very low prices: on occasion the spot price for northeast Asian LNG has gone to $3/mn Btu. In that light, Shell's decision to take Prelude, the floating LNG production vessel offshore Australia, out of action for maintenance has come at a good time.

But the low prices also help create demand, especially in countries with declining production and plenty of onshore pipeline infrastructure, such as Europe, where gas use was up 13% and coal down 16% in power generation. India has also been buying spot cargoes in the last weeks and months thanks to the low prices, they said.

But other factors are also limiting demand, most notably the coronavirus outbreak in China: of this year's 20mn mt of new capacity, China would have taken between 4mn mt and 6mn mt, said Maarten Wetselaar, the major's head of integrated gas and new energies. This is now likely to be lower, but he did not comment on the extent. As a large LNG supplier, he said, Shell was working closely with its customers to reschedule cargoes that cannot be taken now and finding customers elsewhere that can. But it will be transitory, he said. The analysis in the outlook was carried out before the coronavirus outbreak.

The oversupply of LNG had been forecast for some years; Shell expects demand to pick up and rebalance the market in the middle of the decade, depending on the timing of major projects such as the Qatari North Field expansion. Among the encouraging signs for suppliers has been the major shift from coal to gas in European power, where gas partners renewables; and looking further ahead, there is the growth of LNG in transport. And for many industrial applications too molecules are needed.

Wetselaar said that if the energy transition were to be stable, governments needed give "very significant support" to carbon capture and storage until it became commercially viable, just as they had done for solar panels. Hydrogen and biofuels are still a long way off and the best solution in the meantime is gas.

And south and southeast Asia have plenty of scope to use more LNG, as pipeline deliveries to many countries are impractical and the demand for cleaner air ousts woodburning. The flexibility of LNG, demonstrated by the ability to route US LNG away from China to other markets when Washington imposed sanctions, and to displace Algerian and Russian pipeline gas in Europe, point to an encouraging future, the executives said. Shell is the world's largest trader of freely deliverable LNG.

Shell's report may be downloaded here.