US LNG Costs 'the Target to Beat': Shell

New upstream LNG projects need to be cheaper per metric ton per year than those built in the US, said Shell's integrated gas and new energies boss, Maarten Wetselaar.

Launching the company's 2018 LNG Outlook in London February 26, he said that if you are not a US exporter, you need to make sure your cost profile is competitive with US projects; and if it is, then US LNG will be constrained. Companies will not take a final investment decision on their upstream LNG project just on the basis that it works in today's price environment; they will wait until the integrated cost on an mn Btu basis works over a 30-40 year life-span, Wetselaar said: "That is what drives the timing."

Shell's executive vice president for gas and energy trading Steve Hill added that the presence of the US gave the LNG market "a lot of comfort. It is a stable country, the gas is there and the cost structure is reasonably transparent." 

The world – China in particular – is accommodating all the LNG that suppliers can throw at it without causing prices to fall, yet a supply-demand gap is opening up from the middle of the next decade. Third-party financing has become harder, as lenders are less certain of their returns. Buyers have become wary of locking themselves into decades-long contracts as their own demand is so uncertain, whereas at the start of this decade two thirds of LNG buyers were regional monopolies, able to pass on all the costs plus their own profit on to their customers.

Shell's view is that companies with a strong balance sheet will have to finance some of these projects themselves in order to take final investment decisions; other projects, whose offtakers may be less creditworthy, may well need to find alternative arrangements to the conventional banks.

Shell is expecting an up-to 200mn mt/yr year supply gap to begin to open up from the mid-2020s based on various demand forecasts so that, by 2035, there will be a need for twenty new projects each of 10mn mt³/yr export capacity. In contrast, less than 5mn mt/yr of liquefaction capacity was sanctioned in 2016-17.

That is despite the fact that LNG demand is likely to grow faster than demand for pipeline gas, and gas itself is forecast to see the fastest growth of primary energy sources as policy decisions reduce coal in the heating and power sectors, and even oil in some applications such as road and marine transport. Shell sees 30% energy demand growth globally, or 1%/yr from 2017 to 2035, but gas demand growing by 2%/yr and in Asia by 3%/yr.

While much is made of the growth in renewables, Shell doubts that the seasonal demand pattern will end, even if batteries do allow some storage for very short periods of time. Molecules are also needed for heavier transportation and in petrochemicals, and cannot be replaced.