Shell warns of ‘incredibly’ tight gas market, but ready to supply more LNG to Europe

S&P Global

PLATTS

Shell warns of ‘incredibly’ tight gas market, but ready to supply more LNG to Europe

• Author Stuart Elliott 
• Editor Alisdair Bowles 
• Commodity LNG,  Natural Gas

HIGHLIGHTS

Warns of more volatility if Russia hit by sanctions

Calls on Europe to be ‘proactive’ on supply security

LNG cargoes likely to continue to come to Europe

Shell is prepared to do what it can to bring more LNG to Europe to help mitigate the impact of any potential sanctions on Russian energy, but warned of an “incredibly” tight market and called on Europe to be “proactive” in managing its gas supply security.

There remain concerns in the European gas market that Russian gas supplies could be disrupted in the event of an escalation in the standoff between Moscow and the West over Ukraine and any potential imposition of sanctions against Russian energy.

“If harsh sanctions are applied, I think undoubtedly there will be volatility,” Shell’s head of integrated gas, Wael Sawan, said at the launch of the company’s latest annual LNG market outlook.

“And we stand ready to look at options to be able to bring some of the unparalleled LNG scale that we have globally to be able to supply Europe as and when we can,” Sawan said.

“But it’s important to recognize that it is an incredibly tight supply-demand market at the moment, and so those cargoes are not freely available,” he said.

Spot LNG prices remain at sustained highs after the S&P Global Platts benchmark JKM price hit a record high $56.33/MMBtu in October.

The JKM was assessed at $23.69/MMBtu on Feb. 21, still 275% higher year on year.

European cargoes

LNG deliveries into Europe picked up toward the end of 2021 as higher prices drew cargoes away from Asia.

Steve Hill, Shell’s executive vice president for energy marketing, said demand in Asia for restocking was not as high as last year, meaning cargoes could continue to come to Europe.

“The discretionary cargoes only started coming to Europe at the end of 2021, but at the moment they’re still coming,” Hill said.

“The fact that it wasn’t such a cold winter, Asia isn’t suffering from low inventories so it doesn’t take the same need to restock as it did this time last year,” he said.

“Therefore, you’d expect to see more cargoes come to Europe because of the demand here and the need to rebuild inventories,” he said.

European gas stocks remain at low levels for the time of year, with sites just 31% full as of Feb. 19, according to data from Gas Infrastructure Europe.

Sawan said European governments could also do more to ensure storage sites are filled.

“From a storage perspective, it’s not like there’s a shortage of storage. What is important is to keep that storage full. There are policies that can be put in place to be able to make sure storage is full,” he said.

‘Proactive’

As well as storage policy, Sawan said Europe needed a coordinated approach to energy security, including domestic production which has been in steady decline.

“Choices are being made in Europe that could potentially limit domestic gas production,” Sawan said, describing it as output that had been a “base” platform for Europe in the past.

“There isn’t one magic bullet — it’s going to be a combination of domestic production, imports, storage, all working together in a coordinated way,” he said.

“I think it’s important right now to continue to be proactive in Europe to be able to set this winter and following winter up for success.”

There has also been a lack of new long-term supply contracts being signed in Europe with external suppliers due to concerns over security of gas demand amid Europe’s push toward net-zero.

“What causes a lot of uncertainty for people entering into long-term contracts is uncertainty over future regulation, future government policies on gas’s share in the energy mix, and the tax environment and carbon pricing environment,” Hill said.

“That’s probably what’s holding European buyers back more,” he said.

That is in contrast to China, which has been very active in securing long-term deliveries through long-term contracts.

“While we can see China taking action to improve its security of supply going forward, we’re not seeing the same action happening in Europe,” Hill said.

“It is quite tough for a European utility to sign a long-term contract at the moment. That’s one of the challenges Europe has — that it is hard to take the actions to ensure security of supply through long-term contracting,” he said, adding that as a result European buyers were more exposed to the spot market.

Hill did say that Europe was still entering into or extending some contracts but on a shorter-time frame. “You do see four-year or five-year contracts that maybe are not announced in the same way as 20-year contracts are,” he said.

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