Shell’s LNG Outlook webcast is Monday Feb 26 and we expect to hear another continued bullish view on LNG markets –there was no LNG supply glut in 2017, it’s a rather tight LNG market and the LNG supply/demand gap is emerging in the early 2020’s. Shell could easily title the presentation “we told you so” because they have been clearly saying so for at least several months. The difference is that others have seen the H2/17 data support Shell’s call, are now sharing this view, and are looking to see what new LNG supply projects can be advanced to fill this near term gap, Its not just a supply gap that is changing. There are big changes to contract terms, duration, pricing and destinations, and these changes increasingly drive large LNG buyers to global LNG supply leaders with the diversified LNG businesses to deliver LNG supply as required. Shell’s bullish LNG view on Monday will bring focus to what’s the next LNG supply project. Shell has been giving clear hints that its LNG Canada project is likely the next FID on its list. We don’t think a LNG Canada FID comes before the summer. But unless Shell makes a big change in direction on LNG Canada, we expect the hints on Monday to continue to point to LNG Canada as the next likely FID, and likely in 2018.
Shell’s LNG slide deck on Monday should be titled “we told you so”, it’s a rather tight LNG market. We don’t expect to see any surprises in Shell’s LNG market outlook – a positive outlook similar to what was outlined in its Nov 28, 2017 Management Day. Shell didn’t say much in its recent Q4/17 call, saving the LNG details for Monday’s LNG outlook. But at the Q4 results press conference, Platts reported [LINK] comments from Shell CEO van Beurden “There is not going to be a glut, the market can absorb new supply,” van Beurden said. “The glut has not played out, just as we said would be the case. In fact we see a rather tight LNG market,” he said, pointing to strong Chinese gas and LNG demand. Van Beurden said it was understandable why commentators may have forecast a glut because “supply additions are more visible than demand growth.” This rather tight LNG market is the theme we expect on Monday. And van Beurden is telling it like it is – Shell had a great early call on how LNG markets had dramatically shifted in 2017 and that the shifts would lead to LNG markets moving to undersupply years before expectations. Last summer, the consensus view, including Shell’s supermajor competitors, was that LNG markets were in oversupply in 2017 and would be oversupplied to ~2025. Whereas Shell clearly laid out a contrary (and not really accepted) very bullish view in a Sept 5, 2017 Bloomberg terminal video conference presentation by Maarten Wetselaar, Shell’s Integrated Gas & New Energies Director. Our Sept 20 2017 blog “Shell: “Every LNG Cargo That Could Technically Be Produced In This World Has Been Produced And Has Found A Well Paying Customer” [LINK] noted Wetselaar’s view “So this market is in more balance than people perhaps perceive”. This was not the consensus view, and we saw having a balanced starting point in 2017 as a material change for the go forward LNG view. There was also key data to support Shell’s view that LNG was not in oversupply in H2/2017 – Japan spot LNG prices were higher YoY and not lower. We look at this data and say it is reflective of a LNG market that is balance or at least where the market is absorbing LNG cargos.
Japan Spot LNG Prices – YoY Monthly Change
Source: Japan Ministry of Economy, Trade and Industry, Stream Asset Financial
Global LNG markets are changing and leaders like Total are moving to supply and contract diversification as LNG becomes commoditized. It will be interesting to see if Shell outlines their LNG asset strategy as clearly as Total did two weeks ago. LNG markets are changing in more than the supply/demand outlook. There are changes in contract terms, contract length, pricing points, and supply and demand locations. These changes have forced the global LNG leaders to build diversified LNG business models. Total’s recent Q4 call Q&A highlighted its push to diversify its LNG operations, including supply, as LNG commoditizes at very high speed and how over the past two years “this divserification we managed to generate more than $1 per million btu of added value just by playing on flexibility, optimizing the destination and the sources of our [indiscernible] (01:49:16) supply”. Total is pretty comfortable that they now have a good mix of global diversity in its LNG business, which is the key to the changing LNG market. Total said “And we have a strong belief that this LNG market will intrinsically become a commoditized market and flexibility is of essence. And size or flexibility, in fact, is illustrated by this chart, where you can see that we will have position in all the main regions of supply including the U.S. I will come back on it. We have a well-balanced mix of equity, liquefaction and third party supply. And we will have also customers in all main regions, a large portfolio of Asian customers in traditional markets like Japan, Korea, Taiwan, including Taiwan with new – which Engie brings to the portfolio to us. And also in China, obviously, where we have moved some positions.”
Yesterday, an LNG competitor reminded us of the value of Shell’s supply diversification to large Asian LNG buyers. Yesterday, we met with Pieridae Energy CEO Alfred Sorensen. Pieridae’s Goldboro (Nova Scotia) LNG project is significant as it could well be the last, or one of the last, independent single LNG projects to move ahead given its advantage of its long term take or pay contract with Uniper. We are in the camp that sees a strong probability for Pieridae to go FID in 2018, perhaps as early as this summer, primarily because of the strength of this long term take or pay contract. But it wasn’t a coincidence that Sorensen focused on locking up the buyer first and by doing so, he was able to remove the big LNG project risk off Pieridae’s balance sheet. Yesterday, he relayed the challenges of his prior BC LNG project experience in its push to get large Japanese utility LNG buyers. They may have liked his advantages, but they told him they would have to go Shell for the diversity of supply ie. the comfort that Shell would be able to deliver LNG at all times from its diversified supply portfolio. Nothing has changed for large utilities, they still need security of LNG supply that comes with size and a diversified supply portfolio. This also gets even more complicated (or difficult for the LNG supplier) by the change to a mix in contracts from longer term to more shorter term contracts. It becomes increasingly tougher for a single LNG project (apart from Pieridae) to get off the ground without supply diversification. Alfred defined it clearly – the risk for LNG projects use to be on the LNG purchaser’s balance sheet, but now the risk has shifted to the LNG supplier’s balance sheet. We still believe the ability of a major LNG player to supply LNG from a diversified LNG supply base provides a competitive advantage to locking up buyers, especially any utility. Our bullish LNG view was also driven by China’s urgency to deal with pollution and was detailed in our Sept 20, 2017 blog “China’s Plan To Increase Natural Gas To 10% Of Its Energy Mix Is A Global Game Changer Including For BC LNG“ [LINK]. That blog concluded with the diversification advantage of LNG Canada “BC LNG will have to be cost competitive, but it also gives Shell more diversity to its LNG supply – a good thing for a global supplier of LNG”, and finally “And perhaps most of all for Canada, its why we see a better chance than ever to see a Shell FID on its BC LNG in 2018.”
Shell’s Q4 call Q&A hinted that LNG Canada is at the top of Shell’s next LNG FID list. Shell’s recent Q4 call was another excellent example of how the best insights on earnings calls come from the Q&A and not from the prepared management remarks. We looked at their disclosure on the Q4 call and on their pre-FID slide, and linked back to the recent Shell management day (see our Dec 3, 2017 Energy Tidbits). Unless the Shell CFO made a mistake in the Q&A and forgot to include a reference to Lake Charles LNG, she seemed to imply LNG Canada is the top of the list for the next FID. Shell’s Q4 slide deck pre-FID slide listed the Vito GoM platform, LNG Canada and Lake Charles LNG (Gulf Coast). However, in the Q&A, mgmt. was asked about which projects might be in the lead for capital for a new FID. Shell’s CFO replied “that’s probably unfair but maybe a handful”, and then “Important decisions that are on the horizon for us with no preference because that’s not appropriate, but we’re looking at things like our Vito projects in the Gulf of Mexico, LNG Canada, another important decision for us in the next couple of years.” Assuming she didn’t make a mistake of omission, she did not mention Lake Charles, just LNG Canada. Not mentioning Lake Charles was interesting and different than the Nov 28, 2017 management day, when Shell forecast a “supply/demand gap emerging early 2020’s”. At that time, Shell highlighted both Lake Charles and LNG Canada as the next potential LNG FID. Mgmt said “Our aspiration is to lower the all-in supply unit cost for this new LNG of our new projects towards $5 per MMBTU. Some of these opportunities, like LNG Canada in Lake Charles are post-FEED and near-term investible if we choose to go ahead. Others such as Abadi and Browse in Asia Pacific, and Tanzania in East Africa are pre-FEED and, therefore, medium-term investment opportunities.”
Then of course there was the big Shell CEO tease about a massive project in Canada was about to be approved. At Davos, Shell’s CEO van Beurden made what can only be called a big tease and one that points to Shell probably going FID in 2018 for its LNG Canada LNG export project in BC. The National Post ran a story [LINK] that didn’t get much attention “PM Trudeau applying pressure on U.S. in NAFTA talks, says Wilbur Ross’ because markets were interested in what happens to NAFTA. However, there was also an excellent commentary on Shell’s LNG Canada project. The Post wrote “In the early evening, Trudeau met with the head of Royal Dutch Shell, Ben van Beurden, who said in front of reporters his company is looking to invest in a major “green” project in Canada. “We are looking indeed … probably investing in the greenest and cleanest energy project ever built and probably looking at the largest single investment ever made in Canada,” van Beurden said without elaborating. To which Trudeau replied, “Very exciting.” We are not aware of any other project in Shell’s inventory that could fit this description and believe van Beurden must be referring to its LNG Canada project.
We don’t think a LNG Canada FID comes before the summer, but Shell’s Mon LNG Outlook will likely get even more to believe LNG Canada is likely going to FID in 2018. We don’t expect to see a LNG Canada FID until the summer. After all, LNG Canada is not just Shell, and we would expect to see a coordinated approval by all of the other joint venture partners – CNPC, Kogas and Mitsubishi. And LNG Canada is still trying to grind down the project costs. On Monday, Shell is probably not going to say we told you so, but we expect them to continue to say the same LNG market themes as Wetselaar did on Sept 5 – it’s a tight LNG market, the market is balanced, all new LNG supply is being absorbed by demand, and a supply/demand gap is emerging for the early 2020’s. And we expect them to portray LNG Canada as they have in the recent disclosure – its near term investible (FID ready) if they choose to go ahead. LNG Canada also provides a new geographic supply source that will fit into Shell’s strategic positioning for changing LNG markets. And unless Shell makes a big change from its Q4/17 call comments and Van Beurden’s Davos comments, we have to believe the hints will continue to point to LNG Canada as the next to go to FID and likely in 2018.