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Shell to Chevron Awaiting Demand From LNG Market in `Pause Mode’

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James PatonRebecca Keenan and Dan Murtaugh: April 12, 2016

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The over-supplied LNG market is in hiatus as energy giants from Chevron Corp. to Royal Dutch Shell Plc and Woodside Petroleum Corp. await a surge of demand from countries seeking access to energy.

Liquefied natural gas producers are in “pause mode” as low prices have stalled development of new projects, Woodside Chief Executive Officer Peter Coleman said today at the LNG18 conference in Perth. That respite means that coming years demand will exceed supply, causing prices to rise back to higher levels, Shell CEO Ben Van Beurden said.

The price cycle underscores difficulties in timing the construction of multi-billion dollar projects that take years to come online. Companies have to focus on long-term natural gas demand which is expected to grow by 35 percent over the next 20 years, Chevron CEO John Watson said.

“There is LNG that’s coming on line and it’s clear that there is some surplus. Customers are doing what you would expect them to do, they are going to take advantage of that in the short term,” Watson said. “Once you see that surplus absorbed, you will see that market re-emerge.”

No Pressure

Spot prices for LNG in Singapore fell below $4 per million British thermal units on Monday, according to Singapore Exchange Ltd. That’s the lowest level since the exchange began tracking it in September 2014. It’s plunged from $14 in October 2014.

As oil prices slid about 60 percent since mid-2014, more than $400 billion of proposed energy projects have been delayed until 2017 and beyond, according to consulting firm Wood Mackenzie Ltd. Woodside and partners Shell and BP Plc in March scrapped plans to develop the $40 billion Browse liquefied natural gas project in Australia after the plunge in energy prices.

“We are not under the pressure of having to develop at the moment,” Coleman said. “Industry is in this hiatus, in this pause mode where there is really no market to sell into, so it gives us a chance to step back and say what is the best way to move.”

Demand Optimism

The market could see a deficit of 75 million metric tons of LNG per year by 2025, which would require $250 billion in investment through 2020, Sanford C. Bernstein estimated in November. The market is well-supplied to 2018 and possibly to the end of the decade, it said. Annual demand in Asia-Pacific may gain 36 percent to 245 million tons by 2025, Western Australia’s Premier Colin Barnett said today.

“The industry may be cyclical and sometimes volatile, but the long term growth trend is undeniable,” Barnett said. Woodside may decide to develop Browse within the next three-to-five years, he said later to reporters. “I am very optimistic about the demand for gas, so I have no doubt Browse will go ahead.”

Demand is also coming from new markets including Thailand, Pakistan and Poland, Shell said. Australia may increase LNG sales to Europe as the continent struggles with security of supply via pipelines, Barnett said.

Oil and LNG prices have historically been linked because traditional long-term contracts priced the gas in relation to crude. While Brent oil has surged about 50 percent since hitting a 12-year low in January amid the worst energy crash in a generation, LNG has fallen 28 percent in the same period. Shell expects most LNG to continue on the long-term model based on a mixture of oil and natural gas indices. Short-term prices will be volatile, Van Beurden said.

“Shorter term LNG will go through different pricing environments,” he said. “At the moment there is a bit more depth, a bit more room in the market, so short-term prices are probably a little bit discounted. When we see that shortness disappear, and the market goes tight again, it will price above the long-term.”

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