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Contract flexibility needed to grow LNG market: Shell

20 Feb 2017 19:10 GMT
Contract flexibility needed to grow LNG market: Shell

London, 20 February (Argus) — Short-term flexibility is key to ensuring continued growth in the LNG market in order to reach its potential growth rate of around 5pc/yr to 2030, Shell said today.

The company said that within the energy mix, gas is set to see the most demand growth of all supply sources, accounting for almost half of the forecast new demand for energy.

Shell said it expects growth in LNG demand to outstrip pipeline supplies. "The outlook for LNG demand is set to grow at twice the rate of gas demand, at 4pc to 5pc a year between 2015 and 2030," said Maarten Wetselaar, director for integrated gas and new energies at Shell.

LNG contract flexibility

The flexibility within the LNG market that Shell said was required to meet this forecast growth needs to come from all across of the gas value chain. Supply deals will need to be more flexible in terms of volume and length of contract. The average length of LNG supply contracts has fallen year on year from almost 14 years in 2013 to around seven years for deals signed in 2016. In 2008 the average contract length was over 18 years. Shell said that LNG is increasingly moving away from these old, decade-long contracts that were often only offered on oil-linked pricing structures.

The average volume of contracts signed in the past three years has been for around 0.7mn t/yr of LNG. This has more than halved from the previous three-year average between 2011 and 2013 of around 1.6mn t/yr, according to Shell.

Pricing structures also benefit from remaining flexible, Steve Hill, Shell's executive for gas marketing and trading, said. Hill said that buyers like the flexibility that LNG offers, citing contracts offered on an oil-linked basis, fixed prices, or tied to national gas hubs such as the UK's NBP and the US' Henry Hub as common examples.

Hill said that LNG is becoming more commoditised as liquidity improves and is now displaying more visible pricing signals, but stopped short of suggesting that LNG will move to a single global index price in the near future. "Buyers have different pricing drivers for different reasons, [LNG is] not an industry where all participants are asking for that," he said.

Shell recognises the need to approach new contracts on an increasingly boutique basis, and for even large energy majors to be open to smaller scale supply opportunities within the LNG industry. Hill said that recent deals Shell has signed in Malta and Gibraltar are key examples of this. Shell is supplying Azeri national oil company Socar in the latter's marketing agreement to sell LNG to Malta. In Gibraltar, Shell signed an agreement to build and supply an LNG terminal in August 2016. Shell designed the terminal, which is expected to import around 36,000 t/yr of LNG, and Wetselaar said it could be used as a template for other similar small-scale developments around the world.

Wetselaar said that the LNG market needs to be able to respond to demand switching on and off relatively quickly, and have the flexibility to respond to significant changes in volume movements, referring to the withdrawal of Brazil from the spot market as a change that the market needs to be able to adapt to. Year-on-year LNG supply to Brazil shrank significantly in 2016, mainly because of a recovery in hydroelectric water reservoirs.

In addition, the company said that some LNG supplies may need to accept a greater level of risk, as countries with lower buyer credit ratings seek to purchase LNG cargoes with potentially lucrative contract terms. In 2008, only buyers rated by Moody's and Fitch as an A or B credit rating held term LNG contracts. Tenders from non-investment grade buyers began to be awarded in 2012 and by 2016 these buyers accounted for nearly 50pc of the LNG market. These include new importing countries such as Egypt and Pakistan.

Demand growth forecasts

In Shell's outlook, the largest regional growth in demand for gas will come from Asia, which will account for 39pc of demand growth. Countries within the Americas and the Middle East will also become increasingly large importers of gas, with the two regions accounting for 25pc and 15pc of gas demand growth, respectively.

The company forecast that countries solely dependent on LNG for their gas use, such as global import leaders Japan and South Korea, will see only little growth in the next 13 years to 2030. Emerging LNG importers in this category, such as Jamaica and Panama, will provide small but significant growth in this market sector. In Shell's outlook report, countries that are solely dependent on LNG for their gas supplies import around 110mn t/yr of LNG at present, and this may grow to 120mn t/yr by 2030.

Greater growth is expected within gas markets in which LNG either complements pipeline supply (such as China and southern Europe); replaces declining domestic production (Egypt, Pakistan and India); or where LNG acts to balance the gas market (in particular northwest Europe). Shell indicates that the pipeline complementary market will grow from around 65mn t/yr to 115mn t/yr by 2030.

The company expects even greater growth in the domestic replacement market, from around 25mn t/yr at present to over 110mn t/yr by 2030. Shell said that the balancing LNG market of northwest Europe, which the company said in 2015 imported around 15mn t/yr of LNG, may more than double to around 40mn t/yr by 2030.

Within Europe as a whole, Shell said that with domestic gas production set to fall there is scope for both LNG and Russian pipeline imports into the region to grow. Shell said it believes LNG will see a relatively larger increase in market share, and may account for around 20-25pc of all European gas supplies by 2030, at least double the market share at present. Russian pipeline gas may account for nearly 40pc of supply to the continent, up from around a third of supplies in 2015.

China represents the biggest opportunity for gas demand growth, Shell said, and that despite gas representing only 5pc of the energy mix at present the country still had the third-biggest source of gas demand in the world because of the volumes involved.

And with the government targeting a gas mix of 15pc by the end of next decade, the country may become the single largest global consumer of gas. Last year, China recorded the highest growth in net LNG imports of any country, up by nearly 8mn t in 2016 from the previous year, yet in 2015 China generated only 4pc of the global demand for LNG.

Shell said that although China has multiple sources of gas available to it, including unlocking the vast shale gas reserves in the country, it expects LNG imports to reach over 73mn t/yr by 2030, representing 16pc of global LNG demand.