Shell’s LNG China Gamble: Backing the Wrong Horse? - Africa’s premier report on the oil, gas and energy landscape.

Shell’s LNG China Gamble: Backing the Wrong Horse?

By Gerard Kreeft

Shell’s LNG Outlook 2024 forecasts that China will grow its LNG requirements more than 50% by 2040: rising to23Trillion Cubic FeetTcf (675Billion Cubic Metres (Bcm) in 2040 from 14Tcf(400Bcm) in 2023. Yet Shell’s optimism may be premature.

The Global LNG Outlook 2023-2027, published by the Institute for Energy Economic and Financial Analysis IEEFA, casts a more somber analysis for future LNG developments, in particular for China: rising domestic gas production, pipeline gas imports, and renewable power capacity could limit the potential for rapid LNG demand growth over the medium term.

China’s irony is that it is both the world’s largest coal user and the biggest producer of renewable energy. Within this irony it would seem to make sense that LNG could become a strong energy transition fuel. Yet this is not necessarily the case.

How will a floundering LNG market affect Shell’s dominant LNG position? Does Shell continue to have the agility to re-calibrate its strategy?

The Case of China

 Piped Gas Imports: China has a network of seven major gas pipelines, three of which are used for imported gas: Power of Siberia (Russia), Central Asia-China gas pipeline (Turkmenistan) and the Sino-Myanmar pipeline. The other four are supplied by regional China gas fields: Shaan Jing (Shaanxi), Sichuan-Shanghai, West-East (Tarim, Xinjiang) and Zhongxian-Wuhan (Sichuan). In 2022, China increased pipeline gas imports, primarily from Russia, to reduce exposure to skyrocketing LNG prices in the global market.

Piped gas accounted for a 42% share of China’s total gas imports in 2022, up from 35% in 2021, while the share of LNG imports fell to 58%. China has plans to expand pipeline import capacity with Russia by 2.5Tcf (70 Bcm) per year, as well as plans to increase connections with Turkmenistan by 30 bcm per year.

Domestic gas production growth: Domestic gas production in China grew from 5.75Tcf (161 Bcm) in 2018 to 7.5Tcf (209Bcm) in 2021. The continued growth of domestic natural gas production—typically the cheapest source of gas in China—may help restrain LNG demand growth.

Coal: China’s domestic coal output rose 9% to 4.5Billion metric tons in 2022. In January 2023, China lifted an unofficial ban on Australian coal imports, allowing three state-owned firms to import Australian thermal coal and one steel producer to import coking coal. IEEFA expects China coal imports to increase in 2023 as a result. According to media reports, China has approved 260MMT of new annual coal production capacity, bringing total capacity to 5.05Billion metric tons, a 10% increase from 2022. The higher coal capacity could also limit the increase in LNG demand.

Renewables: China has been the world’s largest and fastest-growing producer of renewable power for more than a decade: In 2020, China committed to have 1,200 GW of renewable capacity by 2030, but is on track to meet that goal five years early.

China could have as much as 1,000 GW of solar power alone by the end of 2026, analysts say, out of 11,000 GW needed globally to meet Paris Agreement targets by 2030. The country will build as much new solar capacity this year as the total installed capacity in the U.S., according to the Centre for Research on Energy and Clean Air.

China’s 2020 announcement that it would become carbon neutral by 2060 provided a powerful political signal favouring renewable investments.

Where did it go wrong?

A long-term LNG slow down for China is only a part of the puzzle. According to IEEFA the global demand for LNG is slowing:

Europe, although maintaining a high degree of importing LNG, is also increasing energy efficiency measures and wind and solar projects have become commonplace;

Japan and Korea, historically dependable LNG importers, are increasingly turning to nuclear, and renewables; and

South Asia, including India, Pakistan, and Bangladesh slashed purchases by 16% in 2022 and suppliers often defaulted on contracts to obtain higher prices elsewhere.

“After several years of weak supply growth, IEEFA anticipates that the global LNG market will see a tidal wave of new projects come online starting in mid-2025. The wave will likely crest in 2026, with the addition of 64Million metric tons of annual liquefaction capacity—the most in the history of the global LNG industry. The supply additions will boost global liquefaction capacity by roughly 13% in a single year. Liquefaction projects targeting in-service after 2026 may be entering a much smaller demand pool than bullish market forecasts anticipate. As new supply floods the market, today’s tight markets may give way to a supply glut, with lower-than-anticipated prices, smaller netbacks, tighter margins, and lower profits for LNG exporters.”

According to IEEFA’s forecast in 2023 only 5.8MMTPA (Million Tonnes Per Annum of liquefaction production will be developed, and in 2024 9.1 mtpa. Total LNG production capacity is currently 456 mtpa.

The turning point will be 2025.

IEEFA anticipates that roughly 17 MMTPA of liquefaction projects are likely to come online around the world in 2025—more than in 2023 and 2024 combined. New capacity additions will crest in 2026, with an estimated 64MMTPA of capacity coming online in a single year, and continue into 2027, when 37MMTPA of new capacity is expected to begin operating.

Africa’s LNG Future

Much of the new production will come from Qatar, USA and Australia. If 2026 and 2027 will see a sharp upturn in LNG liquefaction production how will this affect Mozambique’s two LNG projects which could potentially add 38.1MMTPA when fully functioning? Long term delays can only threaten project viability. And not proceeding sooner rather than later increases the chances of these projects being listed as stranded assets.

A more immediate threat is that of ENI’s Coral South project in offshore Mozambique which is already in operation. BP has contracted the entire output of Coral Sul for 20 years, having signed a free on board (FOB) contract with the project partners. In July 2022 it was reported that ENI was considering the possibility of deploying a second floating liquefied natural gas vessel in Mozambique. What does this mean for Rovuma and Mozambique LNG?

Shell’s Game Plan

The chief obsession of Wael Sewan, Shell CEO since January 2023, is to drive up the company share price. Yet the share price has barely moved—it was $65 at the start of April 2019 vs $64 February 2024. In his view Shell must mimic Chevron and ExxonMobil. While the Shell share price has remained virtually unchanged, Chevron has seen its share price in the same period increase 23% percent and ExxonMobil 25%

Shell’s total capex for the period 2023-2025 is between $22Billion-$25Billion per year, of which some 80 percent is earmarked for hydrocarbons. Not unlike Chevron and ExxonMobil.

 Sewan is attempting to change Shell’s narrative: that Shell is in the business of producing hydrocarbons, instead of also selling the illusion that its new energy policy matters. Europe’s oil majors, Including Shell, have seen their share prices flounder. Why? Because of their duality of messaging.  The European oil majors in the period April 2019-February 2024 (with the exception of  TOTALEnergies and Equinor), have seen their share prices underperforming badly:

BP  down from $44 to $36;

ENI down from $36 to $31;

TOTALEnergies was up from $56 to $65 ;

Equinor was up from $22 to $25.

The messaging of Chevron, ExxonMobil and now Shell is that they are oil companies, much in the tradition of John D. Rockefeller. This clarity of messaging is resonating with Chevron and ExxonMobil shareholders.

Shell’s Illusion

Prior to Sewan’s leadership, Shell had argued that its Upstream pillar ..”delivers the cash and returns needed to fund our shareholder distributions and the transformation of our company, by providing vital supplies of oil and natural gas.”

Yet Sewan is frank enough to demonstrate that this vision was an illusion. Depending on its upstream portfolio to lead the company to a bright new green future is perhaps central to Shell’s dilemma. Using funding from its upstream division to fund its green energy is in Sewan’s view a non-starter.

Yet Shell’s vision is also a testimony demonstrating how little the Green Alliance—Enel, Engie, Iberdrola, and Ørsted–is understood and viewed. What has set these companies apart is that they have created a huge competitive advantage which will be hard to challenge for newcomers. Moreover, they have moved well beyond simply dabbling in green energy. These companies have become specialists and now moving on to the next level: creating a digital platform on which value does not reside in owning resources but rather in managing data-driven ecosystems. Essentially borrowing a chapter from Uber, which does not own taxis or Booking, which does not own hotels.  Some members of the Green Alliance have established  new goals, such as CO2 neutrality by 2040 instead of 2050 to which Shell is pledged.

Yet while the Green Alliance has established its vision, green companies are still under-performing. Renewables have since 2021 taken a sharp nose dive–dropping some 50% based on the S&P Global Clean Energy Index (from 1994 in February 2021 to 1000 in December 2023). Yet what goes down will ultimately come up. Will green energy find a narrative to bolster their stock price and the waiting investor?

Shell’s Options

No doubt Shell will continue to pay out its annual dividend, which shareholders have come to expect. Less certain is its share price which continues to flounder.

Very troubling is the future of the LNG market. China’s rising domestic gas production, pipeline gas imports, and renewable power capacity are already limiting the potential for rapid LNG demand growth over the medium term.

Also troubling is Japan’s falling demand for LNG, marking an important shift in global markets. IEEFA has reported that… “ Japanese utilities — once considered purely consumers of LNG — are increasingly focused on marketing and reselling the fuel abroad, putting them in more direct competition with global suppliers.”

While it is true that Shell has a significant deepwater upstream portfolio, Shell’s true strength has been its global LNG portfolio encompassing the entire value chain. No doubt Shell will have to address the falling LNG demand in the weeks and months ahead.

Then there is the issue of Shell’s green assets, which under Shell’s present management have been placed on a back burner. What will Shell do with its green assets? Do not be surprised if Shell’s green assets are spun-off in a new venture. Shell’s REFHYNE Project, the Rhineland Refinery in Germany, could well become the precedent that the company needs to ensure it becomes the leading supplier of green hydrogen, where hydrogen production is powered by renewable energy for industrial and transport customers. Could the REFHYNE Project be duplicated many times over to ensure that green technology becomes a key ingredient in the energy transition?

Pay attention to Shell’s Pernis refinery in the Netherlands. One of the largest in Europe, Pernis refinery has a 400,000 b/d capacity and a complexity enabling the processing of many different crude types. The site is already deeply integrated with chemicals production and is being transformed into an integrated energy and chemicals park that will deliver low-carbon products.

 Final Comments

Wael Sewan, CEO of Shell, has seen as his goal the re-positioning Shell as a major hydrocarbon producer. A peer of Chevron and ExxonMobil. Yet in terms of stock market price the Shell share has continued to flounder while Chevron and ExxonMobil have seen their stock market values rise.

A key reason can be attributed to the European majors having a duality of message: wanting to be both an oil producer and seen as representing new energy. The net result: leaving the European oil stocks in the doldrums.

Sewan’s goal has been a singular drive to leaving the image of this duality behind him to become a leading hydrocarbon company. Then to see the global LNG market floundering—viewed as Shell’s growth engine and  intermittent fuel for the energy transition—is a bitter pill to swallow.

Is there a Plan B or C? If so, please contact Shell.

 Gerard Kreeft, BA (Calvin University, Grand Rapids, USA) and MA (Carleton University, Ottawa, Canada), Energy Transition Adviser, was founder and owner of EnergyWise.  He has managed and implemented energy conferences, seminars and university master classes in Alaska, Angola, Brazil, Canada, India, Libya, Kazakhstan, Russia and throughout Europe.  Kreeft has Dutch and Canadian citizenship and resides in the Netherlands.  He writes on a regular basis for Africa Oil + Gas Report, and guest contributor to IEEFA (Institute for Energy Economics and Financial Analysis). His book ‘The 10 Commandments of the Energy Transition ‘is on sale at https://books.friesenpress.com/store/title/119734000211674846/Gerard-Kreeft-The-10-Commandments-of-the-Energy-Transition

 

 

 

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