Shell’s LNG strategy: Overcooked?

Executive summary

Shell plc is betting on a future where liquefied natural gas (LNG) plays a major role in the energy mix, particularly in emerging markets. Already the largest LNG trader in the world, the company has targets to grow its LNG business 20-30% by 2030.

Shell’s LNG growth strategy is based on a bullish outlook for LNG demand – one that is far above all the International Energy Agency’s (IEA) global LNG scenarios, including its highest emissions scenario which would result in 2.4 °C of warming. Whether this outlier position is a sound basis for a responsible LNG strategy, one that can deliver value for the company as the energy transition progresses, is tested in this research.

Our analysis finds a range of problems with Shell’s LNG Outlook 2024. It appears founded on assumptions that emerging market policymakers will prioritise capital intensive, imported LNG over cheaper and faster-to-deploy renewables - an unlikely scenario, unless gas is priced below its lifecycle production cost. It also misinterprets the IEA’s World Energy Outlook and other independent research in a way that exaggerates the future role of gas and makes its bullish outlook seem more mainstream.

These underlying flaws expose shareholders to the risk of Shell’s LNG portfolio eroding shareholder value. We modelled Shell’s LNG market position using Rystad data, finding it to have an unprecedented long LNG position, exposing it to downside risk should LNG demand, and hence price, fail to meet Shell’s expectations.

With serious questions over Shell’s bullish LNG outlook, its LNG book appears far from a sure bet.

Key findings

• To be able to compete with renewables in Asian emerging markets, Shell’s LNG prices would need to be so low that its LNG portfolio would erode shareholder value. To be competitive, prices would need to drop below $5/MMBtu^[1], which is significantly lower than LNG’s typical $8/MMBtu lifecycle cost as estimated by the IEA.
• Shell underestimates competition from renewables - and the extent to which they are cheaper, lower in emissions, more modular and reduce the risks associated with a dependence on energy imports.
• Shell’s LNG demand outlook significantly exceeds LNG demand in every one of the IEA’s scenarios, including its highest emissions scenario, the Stated Policies Scenario (STEPS), which would result in 2.4°C of global warming.
• Shell misinterprets the IEA’s scenarios in a way that makes its Outlook appear closer to a 1.5°C scenario than it actually is, and cites independent research in a way that appears to overemphasise the role of gas in decarbonising the Chinese steel sector.
• The misinterpretation of data and flawed assumptions raises major concerns around the oversight of the LNG strategy and the consequences for potential misallocation of capital. This is compounded by the fact that the remuneration structure is incentivising volume over value in integrating LNG growth targets this year.
• Shell has built an unprecedented long LNG position relative to peers. Its production profile and existing contract portfolio leave Shell with over a billion tonnes of uncontracted LNG between now and 2050. This exposure creates a strong driver for Shell to lobby to lock-in gas demand in emerging markets, where it gives limited insight into its lobbying activities.
• This long position exposes Shell to financial risk should LNG demand, and hence price, fail to meet its expectations. We estimate that the value of Shell’s LNG assets drops by $13 billion with each $1/MMBtu reduction in gas price.

Download a PDF of Shell’s LNG strategy: Overcooked? | 12/11/2024

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