More LNG supply needed soon: Shell’s latest outlook

The LNG market faces major decisions in the coming years. Shell plc’s latest LNG outlook projects demand to reach 650-700 million tonnes per year by 2040. The company said clearly that more investment in liquefaction projects is needed to avoid a supply-demand gap expected by the late 2020s.

Some of the LNG supply is under construction, but only enough to take the world to just under 500 million tons per year by 2040, leaving a gap of 150 to 200 million tons, Shell forecasts.

That view is in stark contrast to pronouncements from organizations like the International Energy Agency (IEA), which say that no new fossil fuel assets can be developed if the world is to reach net zero by 2050 – the main goals of the Paris Agreement.

In the IEA’s net-zero scenario, LNG demand falls below 200 million tons per year by 2040. Even in the Announced Commitment Scenario (APS), which reflects nations’ pledges to the Paris Climate Agreement, they cumulatively fall short of the overall target, requiring less than 400 million tonnes of LNG annually by 2040.

So, what’s up? Why the variety of scenarios? Put simply, Shell’s demand forecasts do not envisage the world reducing its dependence on gas to the extent required by the Paris Agreement.

This might be bad news for the climate, but it might not be wrong.

China – one of the main buyers in the global LNG market alongside the EU and Japan – has nothing in its Nationally Determined Contribution (NDC) to the Paris Agreement to phase out LNG imports.

That NDC target is classified as “highly inadequate” and is closer to warming of around 3C than the upper target of 1.5 set in the Paris Agreement, according to Climate Action Tracker (CAT), an organization that tracks national climate contributions ° C China prioritizes economic growth and energy security over emissions cuts agreed with Paris.

Scenarios from Shell and the IEA show very different demand forecasts

Dilemma Days

This poses a dilemma for upstream and midstream gas developers. If they try to meet this demand, they are accused of locking up fossil fuel infrastructure. They can even have their credit ratings reassessed based on potential stranded assets.

Should the APS be achieved and all under-construction LNG supplies completed, this would already result in almost 100 million tonnes of LNG liquefaction capacity annually becoming stranded assets – and even the APS would fall short of the Paris Agreement targets.

But maybe those assets won’t be stranded. Already, EU majors have begun to turn their attention back to oil and gas, as the political reality of energy demand has cemented the idea that nations will prioritize energy security as the most important of the three pillars of the much-discussed energy trilemma.

If the demand curves are closer to those projected by Shell than those required by the APS, where is the upstream investment coming from?

One answer is Canada and US firms are showing a willingness to continue investing as discussed in last week’s update. Another answer is China itself. According to some estimates, China’s shale production will reach 20 bcf/d, which would make it the second largest producer in the world after the United States.

If upstream investment decisions are not made and demand does not decrease at the same time, long lead times will lead to a tight gas market and high prices. Of course, that will result in some contraction in demand – particularly in China, which Shell notes is increasingly taking over from the EU in providing demand flexibility in global gas markets – but it’s likely to be messy and costly for the global economy. As often noted, a step-by-step approach to the global economy is the most painless way to move away from fossil fuels.

Third way

Is there a third way? Optimists point to the world’s first zero-carbon LNG cargo delivered last year. The method to achieve this is to reduce operational emissions as much as possible and then offset them. The pilot cargo was supplied to Taiwan’s state-owned CPC Corporation by Shell Eastern LNG from the Gorgon project in Australia.

Sounds too good to be true? It could be easy. Technology to reduce operational emissions is expensive and doesn’t always work. Chevron Corporation’s $54 billion Gorgon gas export facility should inject at least 80 percent of the CO₂ it emits — but has so far only injected a third.

In the meantime, the climate protection industry has also come under criticism because of the different quality of its credits. In its State of Carbon Credits 2022 report released last year, carbon credit rating company Sylvera found that only 31 percent of the offset projects evaluated produced high-quality credits.

Others point to making LNG infrastructure “hydrogen-ready,” meaning it can be built for LNG now and used for low-carbon hydrogen later in the century. Recently announced EU import projects use this strategy.

But hydrogen is very different from methane, with very different infrastructure requirements. And while demand-side infrastructure can avoid difficult questions with the term “hydrogen-capable,” the supply-side certainly cannot.