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Shell envisions LNG shortage in mid-2020s amid 'mismatch' in contract terms

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Shell envisions LNG shortage in mid-2020s amid 'mismatch' in contract terms

Royal Dutch Shell plc expects the LNG market to tighten in the near future, and urged the industry to resolve a "mismatch" in contract terms between buyers and sellers that the oil and gas supermajor says is leading to a drop off in final investment decisions for new liquefaction capacity.

In its 2018 LNG outlook released Feb. 26, Shell joined a chorus of experts warning of a coming LNG shortage. The global LNG market grew by 29 million tonnes in 2017, according to Shell, bringing total LNG trade to 293 million tonnes. With an "unprecedented" expansion of global liquefaction capacity now 45% complete, Shell warned that new investment decisions will be needed soon to meet strong demand growth driven by China and other emerging importers.

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That will prove a challenge in the current market, where developers of LNG export projects count on long-term contracts to receive financing. Buyers, meanwhile, are pushing for shorter and smaller contract terms in order to remain competitive in downstream markets.

"This mismatch needs to be resolved to enable LNG project developers to make final investment decisions that are needed to ensure there is enough future supply of this cleaner-burning fuel for the world economy," according to Shell, which became the world's largest LNG player after acquiring BG Group in February 2016.

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Shell is one in a growing number of banks, energy experts and even the International Energy Agency in cautioning that a possible shortage in the LNG market could develop, a notion that not long ago was largely dismissed as the U.S. and Australia planned to pump additional supply into a relatively new market. But following a drop-off in final investment decisions for multibillion-dollar liquefaction facilities, industry players and observers say a supply gap could emerge once already sanctioned export projects enter service.

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In the U.S., American LNG export pioneer Cheniere Energy Inc. could be the next developer to move forward with plans for new liquefaction capacity. Company executives on a fourth-quarter 2017 earnings call said they expect a final investment decision on a third LNG train at its Corpus Christi project "in the next few months" after signing a contract with a China National Petroleum Corp. subsidiary, the first long-term agreement of its kind with a Chinese company.

Four other U.S. LNG developers have fully permitted projects that have not yet received a final investment decision. A long list of others are still seeking federal approval.