Shell's LNG optimism for Asia has a volume vs price conundrum: Russell

It's not really a surprise that one of the world's largest liquefied natural gas companies is bullish about the long-term view for the super-chilled fuel, but Shell's outlook also has inherent contradictions.

Shell SHEL released its annual LNG outlook last week and forecast that demand will surge about 60% from current levels by 2040, largely driven by strong economic growth in Asia, the impact of artificial intelligence and the need to cut emissions in heavy industries and transportation.

Global LNG demand will rise to between 630 million and 718 million metric tons by 2040, up from 407 million tons in 2024, Shell said.

Drilling down into Shell's forecasts reveals a significant potential supply gap, with the London-listed major estimating that LNG supply will rise by 170 million tons from current levels by 2030.

Putting together the 407 million tons of demand in 2024 with the additional 170 million of supply, gives a total of 577 million by 2030.

This is 141 million tons short of Shell's upper range of 2040 demand, meaning that in the decade between 2030 and 2040 LNG producers would have to bring on a significant volume of supply.

The question for the market is whether it's likely that LNG companies have the ability to actually increase supply by that much and, if they do, what kind of price incentives will be necessary to make sure the investments happen.

It's here that the contradiction in Shell's outlook becomes more apparent.

If demand is going to rise as strongly as Shell expects, it's likely the price of LNG will have to remain competitive against alternatives, especially in Asia, the top-importing continent and a key driver of the bullish demand forecasts.

However, if LNG prices are going to remain affordable on a relative basis to coal and renewable energies, then LNG producers will find it harder to secure the massive capital needed to fund the huge expansion needed.

In other words, in the coming decades LNG companies likely have a choice between higher volumes or higher prices, but can't have both.

This isn't spelled out in the Shell outlook, which doesn't make long-term price forecasts, but it's difficult to construct a scenario where both LNG volumes and prices are strong.

This is especially the case in Asia, where the three most populous countries with the highest potential growth in energy demand also happen to be the three biggest producers of coal.

China, India and Indonesia produce more than 6 billion tons of coal annually and have strong incentives to keep doing so from a cost and energy security perspective.

China is also the world's biggest producer of renewable energy and added 355 gigawatts of wind and solar generation capacity in 2024.

China boosted its imports of LNG in 2024, with customs data showing arrivals of 76.65 million tons, the second-highest on record.