Longer LNG Contracts Back in Favour: Shell
Term contracts to purchase liquefied natural gas doubled in their average duration to over 13 years in 2018, Anglo-Dutch major Shell told journalists February 25.
Director of integrated gas and new energies Maarten Wetselaar and executive vice-president for gas and energy marketing and trading Steven Hill said that three mega-trends – population growth, climate change abatement and air quality measures – were driving gas demand.
"We take the final investment decisions based on the mega-trends," Wetselaar said, and leave it to the "very competent" trading division to sort it out afterwards. The short term does not drive the major decision making, he said, commenting on today's lowish prices of about $6/mn Btu delivered to Europe. At that level, US LNG just about makes a margin in Europe, he said.
Outlining their reasons for bullishness they said that while spot trade was growing the current low prices will prove transient and and buyers are anxious to avoid shortages, as corporate and political strategies depended on accessing the cleanest fossil fuel. Hill said that last year, which had been expected to see a glut of LNG on the market, had in fact turned out tight, and more volume had been sold on long-term contracts than in the previous two years combined. He clarified to NGW that those contracts excluded those on which Shell was buying from itself, such as LNG Canada, its LNG project on the west coast on which it is partnered with Petronas, Petro China, Mitsubishi and Kogas.
Shell estimates it sold 22% of the physical LNG market last year, with 71mn metric tons of the total 319mn mt. Of that it liquefied 34mn mt; took 25mn mt on offtake agreements, and arbitraged another 12mn mt on the spot market.
New LNG projects typically require long-term sales agreements to secure financing, although Wetselaar said that the company did not like to tie final investment decisions to long-term contracts, as the buyers could then use that pressure to take FID to negotiate prices downwards.
"We take final investment decisions when they are optimal, and sign long-tem contracts when that is optimal," he said. LNG Canada took FID with the output to be sold by the partners. The ExxonMobil-led Rovuma LNG in Mozambique is following a similar model; while the project operators have not yet formally taken the decision to build, all the offtake has been allocated.
From 2014 through 2017, LNG buyers had increasingly been looking to sign shorter, smaller and more flexible contracts. Shell warned in its 2018 LNG Outlook that this mismatch between suppliers' and buyers' needs would have to be resolved to enable developers to go ahead with new projects.
Strong demand for cleaner-burning fuel in Asia continued to drive rapid growth in LNG use in 2018, with global demand rising by 27mn m to 319mn mt, according to this year's outlook. Shell expects demand to reach about 384mn mt next year, as new import capacity comes on line.
Europe and Asia are expected to absorb all this additional supply but Shell still expects supplies to tighten in the mid-2020s. Ongoing efforts to improve urban air quality saw China’s imports of LNG surge by 16mn mt in 2018, up by 40% from 2017.
On the supply side, Australian LNG exports caught up with those of long-time leading supplier Qatar towards the end of 2018 and are expected to rise by 10mn mt in 2019. Both countries are well-positioned to supply rapidly developing economies across Asia with gas they need to improve air quality by displacing coal-fired power and heating.