Shell eyes return to LNG market equilibrium despite current 'weak' conditions

London — Shell sees a return to balance in the global LNG market as new LNG projects under construction complete by 2021, it said in its closely watched LNG outlook Thursday.

In the outlook -- the Anglo-Dutch major's fourth since it completed the purchase of the UK's BG Group in 2016 -- Shell said the global LNG market was currently suffering under "weak conditions."

Maarten Wetselaar, Shell's Integrated Gas and New Energies director, said this was due to "record new supply coming in, two successive mild winters and the coronavirus situation."

"We expect equilibrium to return, driven by a combination of continued demand growth and reduction in new supply coming on stream until the mid-2020s," Wetselaar said.

The global LNG market is seen by many as being currently in a state of oversupply, with supply growth from new projects from Australia and the US more than offsetting demand growth, which has been hit by mild winter temperatures and -- more recently -- the coronavirus outbreak in China.

The JKM Asian spot LNG price has fallen to its lowest ever level since S&P Global Platts began assessments in 2009, falling as low as $2.71/MMBtu last week.

Industry records

Shell said global LNG demand grew by 12.5% to 359 million mt in 2019, "a significant increase that bolsters LNG's growing role in the transition to a lower-carbon energy system."

It said an industry record of 40 million mt of additional supply became available and was consumed by the market.

Further, it said the "belief in long-term demand growth" triggered record investment decisions in liquefaction capacity of 71 million mt.

An increase in diversity of contractual structures also provided a wider range of options to LNG buyers.

"The global LNG market continued to evolve in 2019 with demand increasing for LNG and gas in power and non-power sectors," Wetselaar said.

Europe absorbed the majority of 2019 supply growth as competitively-priced LNG furthered coal-to-gas switching in the power sector and replaced declining domestic gas production and pipeline gas imports.

New spot-trading mechanisms and a wider variety of indices used for long-term contracts point towards LNG becoming an "increasingly flexible commodity," Shell said.

Asian demand

There was only a modest rise in imports to Asia in 2019, compared with the previous two years, a result of mild weather and rising electricity generation from nuclear power in Japan and South Korea, two of the three largest global importers.

In China, LNG imports increased by 14% in 2019 as efforts continued to improve urban air quality, Shell said.

In addition, Bangladesh, India and Pakistan imported 36 million mt in 2019 combined, an increase of 19% over 2018, pointing to emerging growth countries in Asia.

Over the longer-term, Shell said global LNG demand is expected to double to 700 million mt/year by 2040.

"Asia is expected to remain the dominant region in the decades to come, with South and Southeast Asia generating more than half of the increased demand," it said.