Asian demand overstated by LNG bulls like Shell, Alberta

Now regular listeners will remember, my episode, my interview with, Anne Sophie Corbeau of Columbia University in episode 250, where she predicted that it would be sometime in the 20 thirties, and I kinda got the impression it would be more early to mid 20 thirties. The IEA says that it will LNG, will peak in 2030. My takeaway from these conflicting views is that the LNG future is very uncertain, and it doesn't support the case for a big expansion of west coast liquefaction which Alberta premier Danielle Smith is pushing hard for with the Canadian government. To review Shell's new report, I'm joined by Christopher Dolman and he's based in Edmonton. He's the LNG gas specialist in Asia for US based Institute For Energy Economics and Financial Analysis, so welcome to the interview, Christopher.

We should just do this exact same thing on the west coast. We should have a bunch of L and LNG, candidates. And I keep bumping up against, you know, con conflicting, forecasts. And, and this is one of them. And maybe you could just kinda walk us through what Shell is saying here.

You know? And, you know, they they have a a reason to sort of, you know, sell the growth prospects for, LNG going forward. And, you know, so the fact that they're calling, I think, a peak is a big deal. They they haven't done this before in previous outlooks. And the fact that, you know, as you pointed out, they've lowered demand by around 11 up to 11%, you know, is a big deal.

And we we think the reason they're doing that, well, I think, you know, it's kind of this outlook's been more transparent, I think, than others. They sort of, like, laid out their assumptions that are driving this. So I think they're reflecting, like, a couple realities, that are, you know, causing this peak. Mainly, you know, mature markets in Japan and, Korea are seeing, you know, due to demographics, nuclear and nuclear restarts, rising renewables, are starting to see, basically, you know, their LNG demand decline, and that will continue to decline, and that's being reflected here. The other thing is, you know, Europe is probably around peak, LNG, you know, import usage, you know, due to, you know, demand destruction, following, you know, Russia's invasion of Ukraine.

So, yes, there was a big jump, but, you know, now there's a lot of investment in just sort of moving away, you know, from gas, there, you know, with renewables and hydrogen. Yeah. So I think that's sort of, like, why you're seeing the peak. And now what I think they're thinking now is, well, we could still have this sort of rapid uptake in, you know, LNG demand, out to the 2040s over the next 15 years. And that will be driven you know in their view by you know the decarbonization of China, emerging Asia, uptake.

And, yeah. And so that's sort of what, you know, Shell's thinking here, and that's what's, you know, I believe driving their changing views.

We're gonna have growth to 2045 and everybody was thumping that tub as hard as they can. Then in the middle, you have fast transition, which is the International Energy Agency. And they they basically came out, you know, last late last year and said all fossil fuels, coal, oil and gas are going to peak by 2,030 and maybe even sooner depending on what happens in in Asia. And then you have the fastest school, which is represented by, you know, Kingsmill Bond and Rocky Mountain Institute and there are others who say that, oil and gas have already peaked. We're at peak.

Where what we're see experiencing now is the plateau, which is generally tends to be bumpy and there's, you know, demand and prices go up and down for a period of time before, you know, serious demand destruction sets in, and then you're on the decline curve, which they think will happen prior to 2030. So there's there are these 3 general narratives, and I would have to say that Shell clearly is in the slow transition narrative. You know, they are building the case and I'm rambling on here a little bit, but this is a favorite story of mine. In about 2018, Alberta government deputy minister went as part of a delegation to New York and met with one of the big investment houses there. And and the, the adviser, who will remain, nameless to protect the guilty, said to the Albertans, he said, look, I don't, you know, don't tell me that I don't need to know the data.

Give me a story. I need to sell us your story to my investors, so they'll keep the money coming. So just give me the story. And the story at that time was, hey, look. We got we have the recently released climate plan, and we're gonna start decarbonizing our oil and gas. We're gonna we're gonna get our emissions down. We're gonna be competitive. And the and the the executive went, okay. That's the story. I can sell that to New York investors.

The money will keep flowing. And I so now when I hear narratives like Shell, I can't help but be cynical. You know, how much of this is a narrative to keep investors who are now demanding capital back from oil and gas companies to keep them happy. And this is off topic a little bit, but I don't know. What what's your take on that on my hypothesis?

And if you look at, you know, some of the data, like in I think, you know, the IEA gas quarterly, they have, you know, metrics like how, you know, the what is it? Like, sort of like a contract ratio. How many contracts portfolio players have bought and how much they've sold. And when you look at that, I mean, the leverage of sold to bought is, you know, continually going down, and they have to make this market. So if you're, you know, basically saying that you're committing to the all this capacity underwriting all this capacity that you talked about in Qatar and in the United States coming on and LNG Canada over the next, you know, few years.

I mean, global LNG supply might grow a quarter, and a lot of that is due to your portfolio of purchases. You're gonna need to make markets for the portfolio, you know, buyers. You know, they need to go out into emerging Asia, into into China, into these areas, and grow the market. So I think part of the reason they're saying this is that, yeah, their, you know, their business sort of, depends on it. So yeah.

Basically, they're really banking on this emerging market in China sort of, rebound. But, you know, I think they're sort of underestimating some key barriers, to growing LNG there. Like, we're saying they're trying to make this market, but, in, you know, in emerging economies, there is some barriers to financing. There's also the fact that, you know, LNG is just more expensive to coal, so it's gonna be harder for it to pay more than a peaking rule. And, on top of that, there's, you know, China's decarbonization policy is gonna place constraints on gas demand growth and then in turn LNG imports.

We could go through some of those points 1 by 1 if you want.

And there's almost no role that I can see for more gas. Gas is about 3% of its, power sector fuel and I I just don't see that increasing. What's your take on

And in addition, they, there was also this, you know, basically, you know, the rise in geopolitical tensions, plus, like, you know, supply disruptions that have been happening with LNG around the world have sort of, you know, had them thinking, China thinking well electricity security is national security, so we need to to make sure we have energy in our own hands or have control over it. So coal, they produce, you know, 90% of the coal they consume. And if you even look at the source of their imports, they're countries that, you know, they're more or less aligned or non aligned with. Russia, Mongolia, and I believe Indonesia supply about 90% of those imports. And, you know, they're really investing in, you know, upping their productive capacity, so that, you know, they could not have, you know, coal supply disruptions like they did in 2021.

Yeah. So they are looking for coal. They're make looking to make their coal fleet more flexible to provide, you know, this ramping up and down, you know, sort of reliability that you hear, everyone say that natural gas needs to play towards an energy transition. So there is a slide in the LNG outlook, Shell's LNG outlook, that sort of says that, you know, renewables supported by gas reduce, you know, the, you know, coal, the role of coal in the power sector. And with China, that's it's pretty much you can word it like renewables supported by coal reduce the role of gas because, you know, they're not really turning to gas.

They, one thing about China is, yeah, sure. They're like a large producer of gas. They produce, you know, the 4th largest producer of gas. They produce more than Canada. They have a policy in place to limit basically their import dependence on gas to under 50%, and their, you know, their current, gas development plan, released in 2023.

And, also, yeah, if you look at the suppliers of LNG also, they're not as aligned, in terms of those who are growing. I mean, the United States, Australia, Canada, these are not as, you know, like, strategically aligned with what China wants. So, you know, it makes more sense for them to, you know, basically put, you know, as they as, you know, president Xi Jinping said, putting the rice bowl in your own hands, which is, you know, cool.

And the change in thinking that came in with the the, the current, 5 year plan. And we're still operating to a large extent on old assumptions that really are no longer true in China.

It produces solar panels, wind turbines, you know, batteries, you know, for the world and and for itself. And it is deploying these at such a significant scale. I mean, their plan and if you look at, like, you know, research by Carbon Brief and and, you know, other, energy, you know, institutes like that, I mean, they they're sort of saying that they believe China get through its renewable deployment decommissions, you know, earlier than their target of 2030, you know, sometime maybe around 20 2028 or so. So you know they are moving ahead towards you know peaking emissions before 2,030 and moving on to carbon neutrality by 2,060. I do think that some of the narrative is missing that they're doing that.

I think a lot of the narrative centers around, you know, their big uptake in coal capacity increases that, you know, they're building out, whoever that sort of misses that. You know, they're they're hoping for these coal units to provide flexibility and energy security and reliability. They they put in place they're putting in place, like, capacity, payment mechanisms to ensure that these coal units can remain profitable as, you know, their hours are gonna decline below, like, 4000 hours a year, you know, and probably be unprofitable without these payments, you know, due to the rise in, you know, solar, energy, solar and, wind that that they're deploying domestically.

And in the OECD countries as OPEC argues, yes, we're seeing more solar and and, and a decline in coal and though a rising gas. So there's this how does that balance shift between the various continents? Because they're not all the same and we see, for instance, in India, you know, big build out of of coal as well. And so that kind of fuels the the bearish, companies and the bearish analysts and and or sorry, the bullish is what I meant to say because they point to those markets as, as tremendous growth opportunities for LNG. But LNG is expensive and at the end of the day, these emerging economies, they pick what's cheapest.

A lot of times now that's solar all by itself or even if you attach storage to all or some of it. And I just don't see LNGs, the economics of LNG being competitive in the power sector.

But when you start looking at other emerging Asia, like, you know, there was a you you start LNG was cheap for a while, but then around 2020 since 2021, it got really volatile. And, you know, some economies, you know, had not just expense issues, but, like, full supply disruptions, like in Pakistan where, you know, basically portfolio players or traders were, you know, shifting their supplies away to Europe. And, you know, they were left with power shortages. And, you know, Pakistan is committed the last year to basically never building another LNG to power LNG to power facility. Then you have, you know, places like, you know, Bangladesh where you have, you know, the government needing to sort of subsidize some of these, or, you know, basically pay for, you know, these expensive imports and it still hasn't paid, you know, that import bill.

Yeah. So that's obviously expensive. And if you just look at, like, the recent contract that India signed with Qatar, I think it's around, you know, with current Brent prices, I think it's around $10 per MMBtu. That's about double what, you know, coal would be around there. You know, if you're gonna produce it or import it, you know, from Indonesia or produce it domestically or or or import it from Australia.

So, yeah, it isn't really competitive with coal for that base load power source. So, like, really, if it's gonna happen, it's gonna be more of a peaking role, but that's not really how it's being advertised by, you know, a lot of proponents.

So a lot, you know, a lot of proponents have been, you know, happy about that. But really, Vietnam hasn't been able to secure, like, an offtake agreement with, like, EVN for to offtake the power, like, basically a power purchase agreement, you know, so that because, basically, the volatility in the prices, make it so that there's disagreement over how, you know, that fuel cost should be passed through, which, you know, if it is, it's gonna be pretty expensive for consumers. And if it isn't, it's gonna be pretty expensive for the utility, which, you know, then the government's gonna have to figure out. So in Vietnam, you know, there is, you know, they're not really expecting, you know, a facility to come on tied to their like, a power facility tied to their LNG facility to come on for a few years, in maybe 2027, I think I read recently. Philippines, you kinda have a similar story with, they had sort of, like, a power supply agreement in place for 1, you know, one of these LNG import facilities, you know, to offtake the power, but then, you know, after, you know, the volatility that happened following, you know, Russia's invasion there, you basically have, you know, renegotiations about how this you know, how to deal with this.

So it was one thing to have a fixed price agreement, in the old days when LNG was cheap for several years in a row, but now seeing that, you know, reality of the potential volatility is sort of scared, you know, scared having scared people, and they're sort of so before that sort of, like, so ultimately, you need a long term contract into the l n LNG import terminal to get that certainty before you could get these off take agreements that are also long term in nature, like a power purchase agreement for the power producers. So a couple of issues need to drop. Perhaps, the looming oversupply, mid decade will help, you know, provide, you know, incentive to make those contracts, but we still without those contracts, it's gonna be difficult to see, growth really taking off in those two countries.

I think now we're talking about $24 at the bottom end of the levelized cost of energy estimates for solar is $24 a megawatt hour. I mean, it just is the cheapest electricity you can find. Is that a reasonable hypothesis that the falling costs and rising efficiency of renewables is simply going to be more than LNG can surmount?

They're starting to look at, you know, geothermal resources if, you know, some new advancements in geothermal technology could help them. They're also looking at, you know, imports through the Agian grid. But, you know, there are issues there, like you're talking about in terms of, will you want to export power, depend on imported power due to energy security? There's also issues about accounting. Let's say you are a country, who's going to export green power to another country.

You might want credit for that green power. You know, so there's some issues there with who gets credit for the reductions. But but anyway, one of the. But ultimately. Yeah, what were we sorry. Trail off there.

But having said that, yes, some countries are gonna have policies that, you know, related to energy security that may just constrain this development already. I mean, we kind of touched on China being an example. They even have a sort of a they drafted a gas utilization policy last year that really aims to constrain the growth of gas going forward so that it's managed and, you know, not import dependent system rise too much for the for the reasons we're we've kind of highlighted already.

But I also interviewed one of your colleagues a couple years ago who made the argument that you know, the the cost of doing an LNG plant on, you know, up in Kitimat and places like that is the capital cost is twice that of the, US Gulf coast. And at the end of the day, the operating savings that come with the colder climate in British Columbia and maybe, maybe cheaper gas or at least competitive gas just don't provide enough of a competitive advantage for large scale LNG investment on the coast and which is why we're seeing we're not seeing final investment decisions on many of the projects that are floating around out there. Would you share do you share that view, or do you have a different view?

They're they're not looking for because they're not looking for gas to provide energy security or to back up their renewable deployment. They're they're gonna reduce coal through their own renewable deployment. And, you know, in emerging Asia, there's other barriers, there to overcome. So I I think I would just sort of focus more on the Asia demand story, which says, you know, there could be limits to this. The other thing to look at would just be what are the contracts doing for these facilities?

I mean, I know that LNG Canada phase 1 has back and has, you know, pretty experienced marketers, you know, merchant utilities, and that sort of thing. And I believe, Woodfiber is completely be you know, is all BP, I think. I think out of all the other facilities, there's really only one contract signed thus far. So I think that might be a signal that, the demand isn't there yet, you know, in Asia, and that they have or that they haven't made the market yet. And I think that's more important than whatever, you know, the costs assumptions are now.

I do think that I mean, the main issue was probably getting that initial header pipeline CGL in, once and I believe it could be ramped up past phase LNG Canada phase 1 to, like, a higher capacity. So maybe there's some room for, you know, the brownfield expansions or whatever there are another LNG. But, I mean, Canada, but I think you need to look at who's under do they have the contracts underpin it? And when they do, I think, you know, then you could say there's a case for it. But right now, we're not seeing that.

And those two things together are maybe dampening some of the enthusiasm. We'll see we'll have to, I guess, monitor those going ahead to see if there's a change that would support an expansion of LNG on the West Coast or not support it. But it it it was it fair to say that right now we're kind of on the cusp that could go either way?

Even the I think the LNG bulls are starting to realize, oh, there's a lot of oversupply. So it's not just about the demand story or making the market. It's make trying to, shove more LNG onto the water in a period where prices are gonna be lower, profitability will go down, margins will go down. You're starting to see, you know, a future where one of the largest LNG importers is going to also become a reseller. That's Japan.

You know, they're looking at they're overcontracted. You know, JERA is trying to make markets in Southeast Asia to cultivate demand there to resell their volumes. So it's potential it's potentially you not just competing, you know, not just trying to find these demand markets, but competing with other people on the margin, you know, which I don't know. Like so I think that's that could make it, less likely, let's say, not on the cusp, but short of the cusp, is looming oversupply, and that could be another thing driving, you know, people making people more hesitant to, you know, underpinning these facilities. However, after we finish this podcast, maybe there'll be an announcement of, of an FID.

You never know. But yeah.