Shell's lofty ambitions for Asian LNG demand face price hurdle

(Reuters) - Shell's forecast that global demand for LNG will surge by more than 50% by 2040 is both bold and questionable, with some of the underlying assumptions not supported by current trends, especially in the key Asia markets.

The oil major released its LNG market outlook on Wednesday in which it estimated LNG demand will reach 625-685 million metric tons per year in 2040.

Global imports of the super-chilled fuel were 404 million tons in 2023, according to data compiled by commodity analysts Kpler, which was a record high and up from 395 million in 2022.

LNG imports have risen every year since 2012, when Kpler estimated global demand at 240 million tons.

Given the rapid and sustained growth in LNG imports over the past 11 years, Shell's forecast may seem reasonable and achievable.

However, the details may give some pause for thought.

Shell's case is largely built around robust demand growth in Asia, especially in China, which reclaimed the title of the world's top LNG buyer in 2023 from Japan.

"China is the market that we are most bullish about this decade. And one of the reasons for that is the massive amount of new gas infrastructure that is coming on stream at the moment," Steve Hill, executive vice president for Shell Energy, told analysts on a call after the report was released.

It is accurate that China is building significant new natural gas infrastructure, with one example being the 51.5 gigawatts (GW) of new power plants currently being built, according to data compiled by the Global Energy Monitor (GEM).

While that figure does look impressive, it fades in comparison to the 139.8 GW of coal-fired capacity China is currently building.

China has an operating fleet of 1,136.7 GW of coal-fired generation, but only 121.1 GW of gas- and oil-fired generation, according to the GEM.

What the GEM numbers show is that while China's demand for natural gas is likely to rise in coming years, it's reliance on coal as the mainstay of its electricity generation is locked in for decades to come.

There is a reason for this, and put simply it's because China has vast resources of coal, and it can easily import any additional fuel it requires.

But most importantly coal is cheap, and is likely to remain considerably cheaper than LNG in coming years, unless Shell is also predicting a sharp decline in LNG prices, which would seem unlikely given the company expects a tight market for LNG in coming decades.

LNG TOO PRICEY?

Cost is the reason why LNG is going to struggle to make the huge inroads into Asia that Shell is predicting.

The spot price of LNG delivered to north Asia LNG-AS averaged around $18 per million British thermal units (mmBtu) in 2023, down sharply from a Ukraine invasion peak of $70.50 in August 2022, but still higher than the historic range of the past decade, which is closer to $10.

Even if a long-term spot price of around $10 per mmBtu is assumed, thermal coal from top exporter Indonesia is about half the price on a contained energy basis.

While gas-fired plants are more efficient than coal equivalents, LNG prices would have to retreat sharply for the fuel to be competitive with coal.

What it appears China is doing is keeping its reliance on coal to provide the bulk of its electricity, while at the same time boosting the use of electricity in its transport and energy systems.

This has the impact of lowering import bills for crude oil, and potentially for LNG as well, while still delivering a small cut in carbon emissions as running an electric vehicle from a 60% coal-fired grid results in lower emissions than using diesel or gasoline once the vehicle travels a certain number of kilometres (miles).

Coal also has a rock solid foothold in India and Indonesia, which both have vast domestic resources and a price incentive to use their own coal rather than expensive imported fossil fuels, such as LNG and crude oil.

LNG does have advantages over coal insofar as it may help lower carbon emissions, which may become a more pressing concern for Asian countries, especially if their trade with Western countries becomes subject carbon adjustment taxes.

LNG is also flexible and could conceivably be used to replace coal in industrial processes such as steel- and cement-making, but again, cost disadvantages will have to be overcome.

If LNG in Asia is going to reach Shell's lofty ambitions, it will likely have to be significantly cheaper than what it is currently, or has been in the past.

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