New research: "Shell’s LNG strategy: Overcooked?”

The Australasian Centre for Corporate Responsibility​ (ACCR) has today published research that suggests Shell plc’s ambitious LNG growth strategy risks eroding shareholder value.

“Shell’s LNG strategy: Overcooked?” analyses Shell’s bullish outlook for future LNG demand, which exceeds all the International Energy Agency’s (IEA) global LNG forecasts. It finds that Shell’s LNG Outlook 2024 is betting on demand coming from a range of sources, primarily emerging markets, however:

• 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. Prices would need to drop below $5/MMBtu - significantly lower than LNG’s typical $8/MMBtu lifecycle cost, as estimated by the IEA. In this price environment, Shell’s:

  • producing assets would have minimal value
  • under construction projects would erode US$10 billion
  • pre-FID projects would not be sanctioned.

• Shell underestimates competition from renewables, which by 2030 when Shell has 40 Mt of uncontracted LNG, will be significantly cheaper than gas power in key emerging market economies Vietnam, the Philippines and Thailand.

• Shell incorrectly cites independent research to exaggerate the role of gas in decarbonising the Chinese steel sector. It also misinterprets the IEA’s Net Zero Emissions (NZE) scenario - the IEA’s only Paris-aligned scenario – with the effect of incorrectly showing that Shell’s forecast is closer to a 1.5°C scenario than it actually is.

The research also models Shell’s LNG market position using Rystad data, finding:

• Shell has built an unprecedented LNG long position relative to its peers. It has the world’s largest uncontracted LNG volume, with over a billion tonnes to 2050 – making it more exposed than any other company to a softer LNG market.
• This long position exposes Shell to financial risk should LNG demand, and hence price, fail to meet its expectations. We estimate the value of Shell’s LNG assets drops by $13 billion with each $1/MMBtu reduction in gas price.

Commenting on the research, ACCR’s UK Company Strategy Lead, Nick Mazan, said:

“Shell’s forecasts for LNG demand growth seem more based on hope than a reasoned and pragmatic understanding of energy markets.

“Shell assumes that emerging market policymakers are going to prioritise capital intensive, imported LNG over cheaper and faster-to-deploy renewables. But this would require gas to be priced below its lifecycle production cost - a scenario that would be detrimental to Shell’s investors.

“Shell’s seeming willful blindness to the growing cost-competitiveness of renewables in Asia, and other major shifts in the global energy market, raises questions for investors about the adequacy of governance at the company.

“This gamble on gas means Shell’s financial exposure to LNG prices is rapidly expanding - it has the largest exposure of all oil and gas supermajors.  If low-price scenarios eventuate - a distinct possibility, particularly if the IEA’s forecast “glut” eventuates - then the company and its shareholders could face significant value destruction.

“Shell’s long LNG position creates an incentive for the company to lobby to lock-in demand for LNG. Investors have already signaled concerns over Shell’s poor transparency on its emerging market lobbying and are eagerly awaiting promised improvements – this research highlights how critical this is.”