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5 Things Royal Dutch Shell Wants You to Know About LNG

By Maxx Chatsko - Mar 18, 2018 at 6:32AM

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The energy giant's 2018 LNG outlook report contains plenty of insights for investors.

Last year, the United States added roughly 16.7 gigawatts of net power generation capacity to the grid -- and 95% of it came from renewable sources. The U.S. Energy Information Administration even expects wind power to overtake hydroelectric as the largest source of renewable energy by 2019 at the latest, providing close to 7% of the nation's total electricity. Similar investment patterns are playing out across the world.  

While it's an incredible (and encouraging) trend to be sure, focusing the discussion on the rise of renewables risks creating a narrative that excludes some important data points, such as those detailing the globe's nearly insatiable appetite for natural gas, which is now easier than ever to transport thanks to the overnight maturation of liquefied natural gas (LNG) markets.

It's a timely development, especially considering that natural gas will become a key tool allowing countries to meet their climate goals -- even helping renewables capture greater market share. Luckily for forward-thinking investors, Royal Dutch Shell (RDS.A)(RDS.B) recently published data and its outlook for what's ahead. Here are five things the energy giant wants you to know about LNG.

An investor looking at a green bar chart showing growth.

Image source: Getty Images.

1. Global LNG trade is booming

The overnight formation of a global LNG market was easy to predict. After all, once construction got underway for massive export terminals, which supercool natural gas to condense it into a liquid and make it easier to transport across oceans, the only thing left to do was wait. But there have still been surprises, such as the pace of demand growth.

The global LNG market was expected to grow by about 23 million metric tons (MT) from 2016 to 2017. Instead, it grew by 29 million MT -- 26% higher than expected -- to reach 293 million MT total. Royal Dutch Shell says we ain't seen nothing yet.

After adding about 71 million MT of LNG liquefaction capacity in the three-year period ending in 2017, the world is slated to bring over 80 million MT of capacity on line between now and 2019. Current projections say that will easily cover demand through at least 2020, but given the shortcomings of recent projections, things may not play out quite as expected. 

A supply and demand chart being written by someone with a green marker on a whiteboard

Image source: Getty Images.

2. A global supply crunch is looming

Even if current projections call for relative market balance between supply and demand in the near term, Royal Dutch Shell has warned that much more investment is needed to avert a massive supply crunch in the early 2020s. It might be right.

That's because the world is expected to add over 40 million MT of new LNG liquefaction capacity in 2019 but less than 2 million MT the following year. Due to the massive capital requirements, complexity, and lengthy construction time of LNG liquefaction facilities and export terminals, that's a problem -- and not one that can be resolved in short order.

The steep drop-off in investments needed to grow supply in lockstep with demand is a result of shifting dynamics in the market. Countries purchasing LNG want smaller volumes and more flexible contracts, while companies exporting LNG want larger volumes and less wiggle room so as to provide certainty to shareholders and creditors. Right now, there's a stalemate -- and Royal Dutch Shell thinks the market will pay the consequences sometime in the next decade.

An LNG tanker at an export terminal.

Image source: Getty Images.

3. Fast and flexible ships are driving growth

Hundreds of billions of dollars invested in LNG liquefaction facilities and export terminals certainly go a long way toward driving market growth, but Royal Dutch Shell notes that there are other signs of a healthy ecosystem. One important indicator of a robust market: the proliferation of special vessels called floating storage regasification units (FSRUs).

While these ships can serve as LNG carriers, they can also offload LNG cargo directly into offshore and onshore natural gas pipelines. It may sound trivial, but safely converting liquid bounties into their more familiar gaseous state requires a special process -- and often requires special (and expensive) land-based infrastructure. FSRUs can combine the tanker and terrestrial regasification infrastructure into one, greatly increasing the flexibility of LNG trade by allowing smaller ports to receive cargoes. 

The market can't seem to get enough of the fast and flexible capabilities of FSRUs, which went from being virtually nonexistent in 2008 to delivering close to 12% of all global LNG trade in 2017. The trend is likely to continue: 16 countries can receive shipments from these special vessels today, while another 13 are building or considering investing in the required infrastructure. 

Rows of solar panels with two wind turbines in the distance, under a blue sky.

Image source: Getty Images.

4. LNG helps, not hinders, renewables

There are quite a few reasons countries import LNG. Some use shipments to offset declining domestic production of natural gas. Some lean on it to ease geopolitical concerns. Some use imports to help meet growing energy needs. Some are even using LNG to support power generation from renewable sources.

That's because gas-fired power plants can quickly respond to fluctuations in demand from the grid, unlike nuclear or coal. So when a drought lingers in Brazil for longer than expected, the country can import LNG on the spot market to offset the lost output from hydropower facilities, even if it's only temporary. Similarly, countries that have installed a large capacity of solar power can use imported LNG to keep the lights on during the evening and early morning, when solar output dives. California is currently using this strategy, which allows it to continue investing in solar as it waits for energy storage infrastructure to catch up.

Remember, not every country can import natural gas through land-based pipelines, but many could benefit from the energy source's flexibility. LNG makes those advantages more widely available to more of the globe. 

The inside of a cooling tower at a power plant.

Image source: Getty Images.

5. LNG is needed to reach climate goals

Natural gas is increasingly being used to directly support renewable energy investments, but the two are also working synergistically on another level: meeting climate goals.

Coal-fired power plants currently generate 37% of the world's electricity. In countries with bountiful natural gas reserves, such as the U.S. (on tap to become the world's third-largest LNG exporter by 2020), coal's eulogy is in the process of being written. It's a bit more complex in countries lacking natural gas reserves, such as China and India, which each rely on coal for nearly 75% of their electricity generation. 

It should be no surprise, then, that China and India are among the fastest-growing consumers of LNG and are using it to meet goals spanning climate, air quality, and geopolitics. If LNG allows these coal-hungry countries to stall the growth of coal generation capacity, or even begin replacing it, then the planet will be able to slash emissions even more quickly than relying on renewables alone. 

Royal Dutch Shell is bullish on LNG

It's easy to see why natural gas and LNG are neglected in favor of renewables in discussions about the future of energy, but forward-looking investors may want to be more open-minded. Even if you believe that distributed and renewable energy should be the ultimate goal of human civilization, it's impossible to dismiss the role natural gas and LNG will play in helping to deliver that outcome.

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