LNG: essential transition fuel or dangerous misstep?
Many oil companies have set aggressive targets for LNG, but investor sentiment tends to be murkier
Shell, the world’s foremost Liquified Natural Gas (LNG) trader, argues that it has a critical role to play in the energy transition. It is easy to see why: in the first quarter of 2024, bumper LNG sales drove most of its $7.7bn in earnings growth.
The company says that the “lowest carbon” fossil fuel produces 50% less carbon emissions than coal when used to generate electricity, helps to maintain grid stability as the share of renewable energy grows, increasingly powers transport and shipping, and provides energy security in the coming decades.
The planned expansion of its LNG capacity is also a key element of its new energy transition strategy, which was adopted at its AGM in May.
Its forecasts for LNG demand go to about 680 MTPA by 2040, which is 30% higher than the IEA steps scenario (a 2.4 degrees world), and much higher than the IEA NZE scenario, suggesting that the company is betting on a severely delayed transition.
Nick Mazan, UK lead at the Australasian Centre for Corporate Responsibility (ACCR), has been analysing Shell’s LNG strategy and regularly speaks with Shell’s investors. He told Net Zero Investor that Shell’s investors do not universally share the company’s optimism for the future of fossil gas.
Indeed, some institutional investors including AXA, Amundi, Brunel, London CIV and Nest have publicly criticised the expansion of LNG capacity and pushed for a vote against Shell's transition strategy. While the strategy was adopted by a majority of shareholders, fears about the sustainability of LNG remain, Mazan warns.
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“The company’s exposure to LNG and how that exposure evolves over time is top of the list of shareholder concerns,” he explained.
Despite this focus on LNG, Mazan worries that most portfolio managers still “underappreciate” the risk fossil fuel companies are taking in terms of investing in more LNG infrastructure.
Lobbying and dodgy numbers
The first concern is that Shell’s aforementioned LNG forecasts may not be guided by objective analysis but wishful thinking, Mazan argues.
“Asset owners, managers and policy makers need to ask themselves whether oil companies are a reliable source for forecasting future LNG demand, when they are actively lobbying in these markets and have such an entrenched interest in that demand going up in the future,” Mazan said. “Over-investment in supply is a risk for investors, and when companies like Shell are putting forward particularly bullish forecasts, the intention behind and veracity of these claims really needs to be challenged by investors.”
ACCR has uncovered instances of “what appears to be misrepresentation of data” in Shell’s LNG forecasts.
For example, ACCR claims that Shell’s 2024 LNG outlook “overstates the role of gas in Chinese iron and steel decarbonisation in its representation of independent research”.
Moreover, “gas switching is not a long-term solution for steel unless combined with carbon capture and storage (CCS), which remains unproven at scale and prohibitively expensive”.
The Institute for Energy Economics and Financial Analysis (IEEFA) also notes that the outlook “overlooks Chinese policies designed to limit gas dependence and mistakenly attributes energy efficiency gains and electrification to gas adoption”.
The official Shell position is that “gas and LNG are important for sectors where electrification is challenging, such as high temperature industrial processes. They provide the necessary energy intensity and reliability that renewables cannot match, helping industries like cement and steel on their decarbonisation journeys”.
Asian energy demands
Mazan notes that Shell’s LNG lobbying efforts are particularly notable in Asia, where energy demands are set to double by 2050.
The IEEFA said in February that Shell is pinning its hopes on rapid demand growth in China and other Asian countries that may never materialise.
One of Shell’s key marketing points for LNG in Asia is that it provides “energy security.” But last November, the Manila-based Asian Development Bank (ADB) said that the LNG price volatility of the past few years had tarnished LNG’s reliability in the region.
The ADB report pointed to several gas-to-power and LNG import projects that had been delayed in Vietnam and the Philippines due to price volatility and supply unreliability. “The delay in gas-fired power plant caused power outages in several cities in Vietnam, including Hanoi [the capital],” it said.
LNG price and supply volatility also caused both energy outages and economic crises for Pakistan and Bangladesh due to the countries' reliance on the fuel for their respective power sectors.
“The reality of the past three years is that the massive upswing in commodity prices made LNG horrible for energy security in many Asian countries,” Mazan said. “Many emerging markets, which relied on LNG imports, were pushed out of the market by Europe’s sudden demand spike following the Russia-Ukraine conflict.”
“Many of those countries have now changed their plans because they don’t want to go through that again.”
Mazan argued that domestic stocks of renewable energy are looking to be a much better way to provide energy security in the long-term.
Chinese export data shows that, over the last six months, Pakistan has imported the equivalent of 26% of its grid in solar modules from China.
“In Pakistan we’re seeing a revolution in terms of decentralised energy construction, because solar power is just so cheap and easy to construct,” Mazan continues. “Investors should ask themselves how LNG can compete with those price points.”
Part of the cheapness of solar is down to an “oversupply” of Chinese solar modules, Mazan explained.
Coal argument is not clear cut
Another of Shell’s arguments is that LNG may be a fossil fuel but at least it’s better than coal. The argument largely depends on the assumption that policymakers in Asian countries that still depend heavily on coal power plants will switch to gas before renewables.
“We think developing countries will pursue those technologies which are cheapest and fastest to scale and provide the most energy security,” Mazan added. “That is looking like renewables and batteries, despite the challenges around intermittency and the grid.”
There may be exceptions to this general rule. For example, Singapore is a small country without enough physical space for large scale renewable energy generation. A complete switch to clean energy may therefore leave the island dependent on renewable energy imports.
“Firstly, we need to figure out how to abate methane emissions associated with gas and LNG, because if we can’t do that, it may not be any better coal,” said an Asian investor who supports LNG, albeit with caveats.
Developers also need to think hard about the “lock-in” effects around new gas power stations. The ideal situation is that the power station doesn’t “lock the gas in for multiple decades” and can also be hydrogen and CCS [carbon capture and storage] ready.
“The reality is that in Asia over 900 million people still either lack access to energy or at least to reliable, affordable energy,” they said. “And demand is growing fast. Taking all that into account, it’s hard to say shut down coal and only use renewable energy. There is room for gas and LNG, so long as it’s done in a responsible way” the investor added.
“We need to phase out coal and turbocharge the green, but we also need to be sensitive to the nuances of individual countries and their needs.”
Shell reports bumper LNG sales but asset owners warn it is not Paris-aligned
