LNG Oversupply Not Here Yet: Shell

The LNG market is not yet oversupplied and demand growth is proving robust, according to the LNG trading chief at Anglo-Dutch major Shell, the world's largest seller of the fuel. The executive vice-president of gas and energy marketing and trading, Steve Hill, formerly of BG, told journalists February 20 that there was evidence for this assertion, despite the claims made for the flood of LNG that was meant to have arrived last year. These include the failure of LNG to arrive in Europe – the market of last resort; and the high prices that LNG fetched at times of high demand last December. 

The drop in LNG deliveries to the UK and Belgium in 2016 was "good news" he said as it pointed to higher-paying customers elsewhere – despite the start-up of new plants in Australia and the US adding 17mn metric tons to output compared with 2015.

LNG might be selling at low prices compared with past levels, but these prices are not low enough to suggest value destruction, Shell says: instead, LNG trades at a steady 13%-15% discount to Brent crude and so they reflect low oil and other energy prices. "Every cargo that could be sold, was sold, and not into Europe," he said, and at a price reflective of the downturn in energy. "Clearly there was not a flood of LNG. Demand growth absorbed LNG." 

Analysis conducted for Shell by external consultants showed strong potential demand growth, from new areas such as transport – battery-powered planes remain a remote prospect while cruise ships and heavy-duty trucks are using more LNG – but mostly from older sectors, such as power, heating and industries where the carbon-based molecules are key, not the kilowatt-hours. According to Shell's Integrated Gas & New Energies Director Maarten Wetselaar, "Power needs to decarbonise, while also growing very fast," and that sector alone would account for 45% of the demand growth for gas, until 2030.

Shell's Prelude FPSO, due to start this year

(Credit: Shell)

The number of LNG importing countries has gone from 10 at the start of the century to 35 today, thanks to lower costs and higher flexibility.

Governments are attracted by the idea of reliable energy supplies that can be bought on spot markets at the rate of a few cargoes a month, and fed into quick-to-build, clean power plants. This promotes economic growth while not breaking any carbon reduction commitments or entailing constricting long-term contracts backed by triple-A credit ratings, the Shell executives said.

Geographically, Asia would see 40% of the gas demand growth, while only accounting for 20% of global gas demand now, they added. China is the most interesting area owing to the sheer scale of its energy demand. A small percentage shift away from coal to gas would mean a very steep rise in gas demand, not all of it to be satisfied by pipelines. 

BP last month forecast that China’s energy intensity will decline by 3%/yr, quicker than the projected global average, converging on US levels by 2035. China’s consumption of natural gas would also increase sharply with its share almost doubling between now and 2035 to 11%, added BP.

William Powell