LNG can only help to a limited extent in the current gas crisis

"If there are tough sanctions, we will try to divert LNG volumes to Europe as much as possible," Shell managers Hill and Sawan said at the recent presentation of the "Shell LNG Outlook." However, this is currently an "incredibly tight market".

Shell managers Wael Sawan, Director of Integrated Gas, Renewables and Energy Solutions, and Steve Hill, Executive Vice President Energy Marketing, were more reserved in their comments at the presentation of the annual Shell LNG Outlook. EU Commission President Ursula von der Leyen had stressed several times in recent days that even if supplies from Russia were disrupted, supplies would be secure this winter: "We are currently in a position to replace Russian natural gas with LNG supplies, which we will receive from our friends in all parts of the world."

Sawan was more cautious about the potential of such "friendship deliveries": "If there are tough sanctions, we will try to divert as much as possible LNG volumes from the now enormously large LNG market to Europe. But you have to take into account that it is currently an incredibly tight market. Free volumes are not readily available." Sawan and Hill pointed out that because LNG supplies will continue to be tight in the coming years, more long-term contracts were being signed in 2021 to secure volumes from new liquefaction projects. However, it was not European suppliers but mainly Asian companies that signed such contracts. First and foremost, of course, China. Contracts typically lasting 15 years for more than 20 million metric tons of LNG (about 26 billion m³, or about 290 TWh) were signed by Chinese LNG importers last year. The total volume of new long-term contracts was about 32 million tons of LNG (42 billion m³, or about 460 TWh). This means China has done much to improve its security of supply, Hill said, while Europe remains vulnerable and increasingly exposed to LNG spot market price volatility. But Hill also cited the dilemma faced by European utilities, saying that given the uncertainty about the future of natural gas and its role in Europe's energy mix, it is very difficult for them to sign long-term contracts, thereby increasing security of supply. Sawan added that everything must be done in Europe to secure supplies for this winter and for the coming winter. This is especially true for filling storage facilities, he said, but the entire environment must also be geared toward securing supply. Sawan characterized the problem in Europe as follows: Natural gas production in the EU has declined significantly, there is a lack of clear policy on storage management, and dependence on the spot market has increased. "This needs to be reformed urgently," he stressed. The EU must ensure that existing storage facilities are filled, he said.

The EU Commission sees this point. In a still unofficial Feb. 18 communication to the EU Parliament and Council on joint action for more affordable, secure and sustainable energy, it proposes, among other things, introducing a legally binding obligation for all member states to ensure a yet-to-be-determined storage fill level on Sept. 30 of each year.

Although the two Shell executives did not spread euphoria regarding the supply of LNG to Europe, given the tight LNG market, they underlined the current importance of LNG supply for Europe. Since December 2021, LNG supply in northwestern Europe has increased significantly, and the U.S. in particular has supplied a significantly larger share of its exports to Europe since then. But it is probably not so much the diplomatic activities of the EU Commission - as it claims in the aforementioned paper - but simply the price signals that have led to the additional LNG supply. Until November, the most widely used Northeast Asian spot price index, the Japan Korean Marker (JKM), was still up to 5.00 USD/MMBTU above the TTF price (always juggling units in global gas trading, in which case it is around 14.00 Euro/MWh at the current USD/Euro exchange rate).

In December, up to 10.00 USD/MMBTU (28.00 Euro/MWh) more was paid at the TTF than in Northeast Asia. In January, the premium was still up to 5.00 USD/MMBTU. In response to a journalist's question as to whether the high level of supply will be maintained in the summer of 2022, Hill said with all due caution: "At the moment, gas in Asia is again paying a little more than in Europe, so we are entering a more stable environment. But the European markets will remain very volatile, depending on the news. But because the winter was mild in Asia, there is not the same need to refill storage there as in Europe. Therefore, we expect LNG supply to remain high, as the corresponding demand is there."

Hill did not want to give a forecast of the price development and the gas supply situation in Europe this summer. Current forward prices signaled a continued high level until mid-2023. However, this is not a forecast, he stressed, but the expected price development of traders based on the current information situation. Prices could also change significantly again in both directions. He said that a scenario was quite conceivable in which European market participants would be able to fill storage facilities sufficiently in the summer so that the next winter would be more relaxed. Much depends on Russian gas supplies, however, but this is not the only factor of uncertainty, Hill said. Shell identified an additional factor inherent in trading that contributes to volatility in trading prices. More and more hedge funds are active in the trading market. "On individual trading days, price movements are less and less correlated with the latest news on fundamental factors," Hill said, adding, "This is because new players are simply moving money in and out of the market." This development, he said, is so significant that it was included in the LNG outlook presentation. But - Hill is clear - the high price level is driven by fundamental factors. The tight market situation is likely to remain for Europe, and the options for policy action in the short term are likely to be limited. But it is remarkable that Shell managers are calling for political action and intervention in the market.