Good afternoon, ladies and gentlemen. Welcome and thank you for joining us here today, and it's nice to see some familiar faces in the room once again, and also thank you for everybody online joining us. My name's Steve Hill. I look after Shell's LNG and gas and power marketing trading businesses, and I'm going to take you through our LNG outlook. This is the third time we've produced it. This is the longest version we've ever presented, but I will try to keep the presentation down to about 40- 45 minutes and then allow some similar amount of time for questions and answers afterwards. Starting with the contents, we've used a similar format to last year. We have three sections and actually some of the messages will be quite familiar from what we told you last year.
Last year we talked about the growing recognition that gas and LNG specifically have in the world as it tackles air quality challenges and climate change challenges. This year it's more of the same. We see more policies supporting LNG and gas, and we see the importance of gas in the energy transition being more recognized and accepted around the world. Last year we also told you that in 2017 the market had seen expected supply growth, but it had all been unexpectedly absorbed within Asia and that the consensus at the time, this time a year ago, was that clearly was a one-off. It wasn't sustainable. What we're going to tell you this time is exactly the same thing happened again, and therefore we'll explain why that happened.
Also last year we talked about the need for new LNG projects to be sanctioned and the challenges that the market was seeing that was not enabling projects to be sanctioned at that time. The industry is now in a much better position and projects are being sanctioned and we'll tell you why that's happening and therefore why we have less concern over the future of the industry. We'll also recognize that there are some bearish factors affecting the LNG and gas markets in the near term. We'll explain why they're expected to be transient and manageable and why we still have a very positive outlook for LNG. We'll get into that at the start of the third section.
Just to explain one of the reasons for that, I think when we met this time last year, we saw snowflakes falling out of the window and here we are in London in a very sunny afternoon and the gas industry is always partially affected by weather as well as many other factors. Getting into the story, the growing recognition for the role of gas and LNG as the world tackles poor air quality and climate change. If you're familiar with Shell presentations, you'll have seen many different versions of this slide. It talks about the LNG challenge that we face. This version is quite focused on the gas market specifically, but the message is the same. More people with more wealth and growing aspirations will result in more energy demand going forward.
At the same time, the world has two significant challenges to face, one around air quality and one around climate change and CO2 emissions. Therefore, we'll talk about gas and LNG's role quite a bit in addressing these factors. There's a lot of data points on this slide that I won't go through. The one I'll bring your attention to, because it's quite important for this story, is the bottom of the middle column where we talk about electricity increasing from 18%-50% of the overall energy mix. We often hear debates about the future of energy very quickly becoming debates on the future of the electricity market.
What people often miss is that even over the long term, there's an expectation that at least 50% of energy demand will be supplied by something other than electricity. In a world where people and customers are looking for cleaner energy solutions, today natural gas is that solution. Starting with an overview of the overall energy market. The left-hand chart here shows the expected growth in how the world will meet its future energy needs between now and 2035. As you can see, the growth in supply is expected to be dominated by gas and renewables. Between the two, they are expected to provide over 70% of the increase in energy demand. Gas being the largest contributor of any energy source at just over 40%. The right-hand chart shows how uneven the gas penetration in the energy mix is around the world.
In many developed markets it's 20%-30%. In the U.S. it's higher still. It's increasing. In all these examples it's increasing. In India and in China, the two markets that we talk about most as driving energy demand growth, gas is coming from a very low penetration. Over this period in India we forecast, or the industry forecast gas to grow from 6%-8% of the energy mix of a growing market, and in China from 7%-13% of the energy mix of another rapidly growing energy market. These forecasts you could argue are conservative. The governments in both of those countries have much higher aspirations.
In India the government talks about 10% gas in the energy mix and in China 15%. Governments are very important to this story because government policies and new government policies this year have been very helpful to the LNG and the gas industry. Here's three examples. The first chart, it's hard to see on the screen, but maybe you can see it in your books well, talks about taxes in Korea. Historically, coal benefited from low taxes as the government policy was to encourage coal as an affordable and abundant source of energy. Gas, on the other hand, was seen as a premium fuel, and therefore had a higher premium tax rate. Last year, the government has corrected this distortion. It reduced the taxes on LNG imports by 74%. It increased the taxes on coal by 24%.
The tax regime in Korea now encourages a cleaner form of power generation rather than the dirtier form. The middle chart talks about China. Obviously, the Chinese government efforts to improve air quality are well understood now. You see as a result, the rapidly increasing gas demand in China. If you go back before the start of this chart in 2000, Chinese gas demand was just 20 BCM. By 2010, that had increased to 100 BCM, so the size of the U.K. and Netherlands market combined. Last year it was almost 300 BCM, so that made it the world's third biggest gas market. The government forecast is to reach 10% gas penetration by 2020, only two years away, which would create almost another 100 BCM of gas demand. Finally, we show the chart showing the carbon price in Europe.
As you see, this has increased significantly over a recent period, over a very stable low price that we saw for many years beforehand. This change was driven by the government changing the carbon mechanism, removing allowances faster, and therefore causing carbon prices to increase, and again, favoring gas versus coal and power generation in Europe. This is three examples. There are many more in Europe. Coal is no longer eligible for capacity market payments from 2025. Germany plans to phase out lignites by 2022, and then coal by 2038. In Taiwan now, the government policy is for no new coal power plants or no expansions of existing power plants. Bangladesh has reduced its duties on LNG imports from 26%- 5%. Many changes around the world by governments recognizing the role of gas in the energy transmission, transition, sorry, and supporting it.
Going back to the point that I highlighted earlier. People debate the future of energy, but they're really talking about the future of electricity. What this shows on the left-hand side is when you look at where the demand for gas is growing rapidly, it's not in the power sector. It's outside the power sector. In 2017, it was virtually all outside the power sector. In 2018, we saw demand for gas in power grow, but demand for gas outside the power sector grow much faster. Again, when we look to the future, we see 40% of the expected gas demand growth to be in the power sector, but 60% gas demand that's probably much more sustainable and less uncertain to technology changes to be outside. Focusing on the power sector at first.
We have made the case for some time that renewables is not a threat to gas in power. Renewables creates an opportunity. The world wants clean and cheap and flexible and reliable power supply, that comes from the combination of gas and renewables. This chart on the left side shows how LNG and renewable power generation in Spain are complementary. On the windy days, you see less LNG sent into the system, on non-windy days, you see LNG spiking up to balance. Excuse me. This isn't the best chart that we have to show the offset we've used forces the same message that how there is a natural complementary relationship between the two. Then on the right-hand side, we have a chart showing how the nuclear generation fleet in the world is aging.
You could produce a similar chart for coal, but the message really is not specific to nuclear. It is the opportunity for gas in the power sector isn't just to supply growth in power demand, it's also to replace aging coal and nuclear generation capacity. Moving on to the non-power sector, the best example for that at the moment is China. The first chart shows two things. It shows the amount of gas consumed in Beijing over the last decade as the red line, which we see increasing year-on-year. It shows the amount of pollution in the air in China, which is the gray vertical bars, which we see decreasing. Again, clearly there is a very strong correlation between the two this time. As Beijing has consumed more gas, its air quality has improved.
We see a 78% improvement in winter air quality over the past five winters driven by this coal-to-gas switching. On the right-hand side, we also show that China is achieving CO2 emissions benefits. While it's not focused on this, it's focused on the air quality challenge. As China addresses its air quality, it also reduces its CO2 emissions. This reduction in CO2 from this group of cities and provinces in China has been the equivalent of taking 34 million cars off the road or all the annual emissions from either Pakistan or the Philippines in a year. We've talked about gas in general. Talking about LNG specifically, it brings flexibility to gas markets. This chart shows two ways in which it brings flexibility.
The first is the example of the U.K. market this time last year, where we had a very cold winter or a very cold spell that caused an increase in gas demand in order to keep the U.K. warm from the Beast from the East weather phenomenon. We saw a rapid increase in LNG sendouts from the U.K. and deliveries into the U.K. that allowed the U.K. to stay warm during that period. Then also a few weeks later, we saw a lot more LNG sendouts as at the end of the winter, the U.K. ran out of gas and storage, and again, LNG was able to respond and meet gas demand requirements to supply the heat to the U.K. This is an example of LNG meeting unplanned, unexpected demand. The other chart on the right shows LNG meeting seasonal, predictable demand.
In Kuwait, there is a lot more gas demand in the summer than the winter because it's driven by air conditioning demand rather than heating demand. The LNG is able to provide the flexibility that Kuwait needs to meet its high summer electricity demand requirements. They are different examples of different uses of LNG. What we see with the new markets that came into the LNG industry last year was, again, countries choosing LNG to be a supply for their natural gas for different reasons. Bangladesh is a well-developed gas market. Natural gas meets over half of the energy demand in Bangladesh. This is a case where domestic production was falling, and therefore LNG was able to supply existing demand through existing infrastructure to meet existing customer needs.
Panama, on the other hand, was a new gas market where LNG was bought in to replace old oil-fired power generation and complement renewables, mostly hydropower. Panama is also an attractive market for us because lots of LNG ships are, while they don't discharge cargos in Panama, they pass through to use the Panama Canal. It creates a great opportunity for an LNG bunkering business. Finally, Gibraltar. Like Panama, it was driven by replacing diesel in this case, but replacing oil-fired generation with new gas-fired generation for environmental benefits. It was also an example of how LNG can be competitive to supply small-scale demand, and it provided a solution to Gibraltar's desire to have natural gas without relying on pipeline supplies from its neighbors. Again, LNG brings many different advantages to different countries and different markets.
One market where we see a lot of opportunity is in transport. Transport represents about 28% of overall energy demand today and about 23% of emissions. About half of that transport is cars and light-duty vehicles for which there's probably better solutions. The other half of that energy demand for transport is for trucks and for shipping. For heavy-duty transport, where you have to transport large loads long distances, we don't think batter happening in road transport in China, where you see on the left-hand side of this chart, there are now almost 400,000 trucks and buses that are fueled by LNG on the road in China. That's partially driven by the environmental benefits, but more so the economic benefits. LNG is just cheaper than diesel.
We now see 7 million tons a year of LNG demand from road vehicles in China, supplied by over 2,500 fueling stations. In Europe, we're at a much earlier phase of development, just over 5,000 trucks on the road, but a similar trend may be 10 years behind. By 2030, the forecasts are for almost 300,000 LNG trucks to be on the road in Europe, benefiting from policy support as Europe looks to phase out diesel, and now benefiting because almost all of the OEMs are now providing LNG options for their trucks. To wrap up this section, LNG continues to be the fastest-growing part of the gas market, and the gas market is still growing at about twice the rate of the overall energy market.
We see a lot of the growth coming from Asia, about 60%, but growth from all the key gas markets around the world. Within Asia, we see three key areas of growth. In China, we expect LNG imports to double over this period. In South Asia, India, Pakistan and Bangladesh, we expect to see LNG imports triple. In the rest of Southeast Asia, particularly Thailand, Philippines, Indonesia, we expect to see even faster growth rate for LNG imports. The fundamentals tell a very positive story for the LNG market going forward. If we now move on to our reflections on 2018. This chart shows the wave of growth that we've been seeing coming and receiving in the market for some time now.
The LNG market was expected to grow by about 50% from 2015 to 2020, from about 240 million tons to closer to 400 million. Driven by a lot of sanctions that happened in new projects in Australia and the U.S. By the end of last year, 70% of that new LNG production was online and had been absorbed by the market quite comfortably. The right-hand chart shows the profile of the new projects that has come on and the expected profile going forward. What we actually see is less LNG new projects started up than forecast last year, and the profile of the remaining projects is now a little bit delayed, which helps the market absorb these volumes.
When we compare what happened in 2018 to the forecasts at the start of the year, we see very different things on the supply side and on the demand side. On the supply side, we see that the expected supply growth from Australia and the U.S. and Russia happened. In fact, the market grew a little bit more than forecast. At the start of the year, we were forecasting a growth of 20 million tons of supply. It turned out to be closer to 30 million tons. The reason for that was that new trains in Russia came on stream earlier than expected, and existing projects operated at a higher throughput than forecast, kind of offsetting the delay in some of the new projects being started up on the U.S. Gulf Coast. A couple of interesting data points.
In November last year, Australian LNG production exceeded Qatar production for the first time ever. Over the year, the liquefaction capacity in both the USA and in Russia doubled on previous numbers. On the demand side of the equation, we see something quite different. Obviously, the demand growth was the same as the supply growth, but whereas the industry was forecasting that most of that additional supply would be absorbed within Europe in 2018, in actual fact, most of it went to Asia. Very similar pattern to what happened the previous year. If we move on, we can kind of see what happened with a bit more granularity. This shows the growth or the reduction in LNG imports in countries year-on-year in yellow, compared to the forecast in gray. I'll leave China to the next slide.
It was obviously the biggest story of the year, if you look at what happened in other markets, on the right-hand side where the markets grew. In Korea, you had several factors. You had a heat wave, you had some cold weather at the start of the year, and you had lower generation from nuclear power plants. In India and Pakistan, you had LNG replacing domestic production. You had new markets coming on stream in Bangladesh and Canada. As a result, the U.K. didn't see the big increase in deliveries that was expected. In effect, the U.K. wasn't required to operate as a balance in markets because of strong demand growth in other markets around the world. Then when I look at the left-hand side of the charts for the countries that didn't grow or declined imports, in Egypt, that was very much expected.
As domestic production started to ramp up again, LNG imports were no longer required at the same level. Spain benefited from higher volumes from its Algerian pipeline. The UAE also had higher pipeline imports and some renewables being added, but nothing that kind of creates any worries for the industry. If we move on to China, which was the big story. China became the world's largest gas importer in 2018. This time last year, we were telling the story of very rapid growth in China. The previous year, gas demand in China had grown at 15%, LNG imports had grown at over 40%, and the consensus in the industry was that was a one-off, it wasn't sustainable. Last year, we saw virtually the same thing again. The gas industry grew at 16%, LNG imports grew at over 40% again.
This tries to break down what's going on a little bit there. First of all, if you look at the first chart, the left-hand chart, you see actually that energy demand in China grew rapidly, and all of the major sources of energy supply grew. Gas grew the fastest. Gas accounted for over a third of the growth in energy supply to China, even though it only represents 7% of the overall energy mix. The second chart shows where that gas demand came from. Going back to my previous point, it wasn't from the power sector. Over 80% was from coal-to-gas switching in the industrial sector and the residential and commercial. Basically, the heating buildings demand. This is very sustainable gas demand. When industry or when buildings switch from coal boilers to being connected to the gas grid, that's sustainable demand.
It doesn't go back. Also, you haven't really seen the full effect of the switching that happens in 2018 yet. Coal-to-gas switching happens over the year, but a lot of the demand, which is driven by heating, only happens in the winter. Most of the effects of coal-to-gas switching in 2018 you won't see until early 2019. Finally, if you look at where that gas demand growth was supplied from, over 50% of the gas demand increase in China was supplied through LNG. Couple of reasons for that. First of all, this demand was not expected by the industry. If you have demand which has grown with short notice, then LNG is well-placed to provide that. Secondly, gas demand in China is quite seasonal. It's higher in the winter than the summer. China has very low amounts of gas storage.
It only has about 3% or 4% gas storage, compared to typically 15%-20% in Europe and the U.S. Therefore, because it doesn't have gas storage, it needs a gas supply with a lot of flexibility, and LNG provides that. China, we saw a very positive story, and we see these fundamentals continuing as China continues to address its air quality objectives and the government pushes to meet its targets for greater gas penetration in its energy mix. The other growth market that we talk about is India. It wasn't as spectacular as China, but it was still significant growth, with LNG imports increasing by 14% year-on-year. Again, all the gas demand growth that drove that came from the industrial sector and the residential and commercial sector. Effectively, LNG provided virtually all of the additional gas supply into India last year.
For the first time ever, LNG exceeded pipeline gas as the biggest supply source for gas into India. Something else that we think is significant that happened last year, even though the effects will take longer to play out, is a big increase in the number of gas distribution franchises awarded in India. Today, there's less than 50 operating. There's a similar number under construction. However, there are almost 100 new gas franchises awarded for India in 2018. Obviously, the biggest enabler of gas demand growth is providing the infrastructure to get the gas to the customers and the demand. Big markets. I've talked about the growth we're seeing in the road transport sector.
Shipping is also another sector where LNG can play a big role in heavy-duty, long-haul demand, and where we're seeing particular activity at the moment related to the change in specification for fuel for shipping that will come into effect in 2020 related to the IMO changes. Historically, LNG has struggled to compete with heavy fuel oil as a fuel for shipping. In the new world where that's not as credible an option and buyers will have choices between diesel and low sulfur fuel oil, then LNG becomes much more competitive. Therefore, we're starting to see an increase in LNG orders across virtually all sectors of the shipping industry. The right-hand side of this chart, I won't take you through, but it's just an example of the level of activity and the many different players that are now active in this space.
While the supply and demand picture in 2018 was quite similar to 2017, one very big difference was in contracting. A previous theme that we've talked about in these outlooks has been a tendency for LNG contracts to get recent years. We saw a step change in that in 2018. We saw the average length of a new LNG term contract double to 13 years. When we look at the right-hand side and we look at the total LNG volume contracted, so that's the amount that will be delivered under a contract in any one year multiplied by the length of the contract, so the total contractual commitment, we saw that more LNG was contracted in 2018 than in 2016 and 2017 put together. That's very significant.
The concern that we articulated last year was that without long-term contracts, it's very hard for projects to get the financing they need to enable the development and sanction of new projects. What we see now is that the long-term contracts are being committed to by buyers, therefore, you are creating the environment where new projects can get the financing they need. If we look at the total volume contracted, you see that we've split that between seller type. Last year, we had a similar chart that looked at buyer type. This time, it's seller type. The gray area is the long-term contracts being supplied by the actual production projects themselves. We see a big increase there. It's production projects securing long-term contracts that is the biggest enabler for FIDs in the industry.
Therefore, 2018 was very healthy in creating the circumstances required for the industry to grow. If we move on to prices are always a good indication of what's happening in markets. I won't spend a lot of time describing the left-hand chart. I'm sure you see charts like that frequently. Generally, prices increased for most of last year and then declined at the end of the year. What we tend to look at more is the right-hand chart, which shows the LNG price related as a proportion of the oil price or as a percentage of the oil price. That, we think, gives you a better indication of the strength of the spot LNG markets and therefore the strength of the trade. What we see is the red line had a pretty similar pattern to 2017.
Similar market conditions, maybe a little bit stronger. The average price in 2018 was 14% of oil, compared to 13% in 2017. Also the oil prices were a little bit higher on average in 2018. Looking at the market that way, what we actually see is a strengthening market, if anything. Certainly, it's more evidence that the strong supply growth that we saw coming into the market in 2018 was absorbed quite comfortably. When we look at the spot markets overall, we see that it's growing its share of an overall growing market. The spot market is becoming bigger and more transparent, more liquid as the overall market grows. What was a particular change last year is shown in the right-hand chart, which is the amount of futures trading done within the LNG business.
We see year- on- year, between 2017 and 2018, volumes tripling. In fact, if you compare 2016 to 2018, you've actually got a tenfold increase in traded volumes on futures contracts, which clearly demonstrates that the LNG futures contract is becoming a credible and liquid and traded market. However, just to put that in perspective, that volume in 2018 is still only about 1% of the NBP and TTF equivalent futures volumes traded, and about 0.1% of the Henry Hub futures volumes traded. It's growing rapidly, but it's still relatively small on a global scale. Just to close this section, we did see some trends starting to change towards the end of the year, and this chart shows two of the things that changed.
First of all, we have a chart on the left which compares the JKM price, the spot LNG market price in Asia, which is the black line, versus the LNG shipping charter rate, which is the red line. Typically, these two have quite a strong correlation. Typically, what happens when spot LNG demand goes up, prices go up. That pulls LNG from further afield to typically the North Asian markets that set the spot price. That causes an increase in shipping requirements for incremental voyages and therefore shipping charter rates go up. What we saw towards the end of the year was quite unusual in that LNG prices fell as we went into winter, which is unusual in its own right, but was driven by a broader oil price decline at the same time, but spot charter rates increasing.
This is a good example of some of the actions that go on behind the scenes in the LNG market. In 2017, China had a rapid growth of LNG demand into the winter due to the coal-to-gas switching, and struggled to meet all the gas demand requirements. There were a few publicized examples where there wasn't enough gas in China. This year, China didn't want to be underprepared again, and in some ways was overprepared. It started the winter with very high inventories and had contracted a lot of cargoes in advance. With a relatively mild start to the winter, China wasn't able to discharge all the cargoes that it had scheduled to bring in at the start of the winter. That caused some delays for ships discharging their cargoes.
Therefore, those ships weren't able to get to their next scheduled load port to lift the next cargoes. Producers had to go into the market at short notice to secure shipping at a time when ships were being delayed, at a time when there was an incentive to float cargoes on ships. It caused the shipping market to increase quite materially. This is just really an example of how the market is. People talk about it being commoditized, but there are still inefficiencies in the market and operation issues that people need to understand and manage. On the right-hand side, we show the growth in LNG supply by quarter and the markets which absorb it. As you see now, for 10 quarters in a row, Asia has pretty much absorbed the majority of the growth in LNG supply.
In Q4 last year, we saw a particular large growth in suppliers. New projects came on stream and quite a significant amount of LNG being delivered into the European market, which was absorbed quite comfortably by that market. We'll now move on to the final section, the forward-looking section of the presentation. This chart shows the current industry forecasts of how the market is planned to balance in 2018. This should be the last big year of rapid supply growth. The industry is pretty good at forecasting supply growth. These projects are very transparent and you know when the supply is coming and where it's coming from. We expect to see about 10 million tons of new supply from Australia, 15%- 20% from the U.S., a bit from Russia. Another year of 30 million tons or so of new LNG supply.
The current forecast is that some of that, maybe a third of that, will be delivered into Asia. Once again, a decent proportion of that, potentially two-thirds, over 20 million tons, will be delivered to Europe. Year-on-year, that would be quite a material increase in LNG deliveries to Europe. One of the questions that's facing the industry is whether Europe can absorb those volumes and what the impact will be on those volumes being delivered into Europe. When we look at Europe, we see a few things. Over the last few years, gas demand in Europe has been increasing. It's been growing quite healthily, and that's been driven by coal-to-gas switching predominantly in the U.K. If we look forward, we see demand projections being quite flat.
However, what is clear and what's been happening for some time is if you look at the bottom of this chart, the area in red, we see that the domestic production in Europe is in decline. Europe clearly needs more imports to balance its gas markets. The question is, how will that additional imports requirement be supplied between Russian pipeline gas and LNG? The right-hand chart shows the industry's current forecast for that balance. We have a tiny bit of demand growth between 2018 and 2019 projected. We have some decline projected in domestic production. The main mechanism that the industry is forecasting balancing will happen is through lower Russian deliveries from a record level in 2018, being replaced by higher LNG deliveries. That may or may not happen.
Clearly, Gazprom is not incentivized to destroy the European gas market, particularly as its long-term contracts are seeing an increased proportion of gas indexation and a lower proportion of oil indexation over time. Therefore, lower spot prices hurt it more than in the past. Ultimately, Gazprom has a lot of control over how much pipeline gas gets delivered into Europe. Therefore, we asked that question, well, if Russia doesn't want to turn down production and deliveries into Europe, can Europe still absorb that incremental LNG volumes? I think this chart is the analysis which shows that it can. The left-hand side of the chart shows that coal-fired power generation capacity in Europe is declining, and the utilization of the generation capacity that exists is also declining over time. The utilization of gas-fired generation capacity, the green line, is increasing, but is still only 40%.
The utilization of coal-fired generation capacity is over 50%. If there is an economic incentive, there is an incentive for Europe to burn more gas and less coal in its power generation. Therefore, it becomes a question of economics, which we look at on the right-hand side. This chart tries to show the coal-to-gas switching equation in Europe. The price that the Europe will pay for gas in its power sector is driven by the coal price, the black line, and the carbon price, which as we discussed earlier, has increased rapidly and is shown as the red line here. That creates a range, which is shown in gray. A range of prices where if gas is in that range of prices, then there is an economic rationale to switch from coal-fired generation to gas-fired generation.
At the end of last year, you saw that the gas price was at the top of that range. Gas prices are a bit lower today. Therefore, we are in that range. If Russia chooses to try to maintain its delivery volumes into Europe, we see a rationale how the LNG can come again as well through higher gas demand in Europe driven by coal-to-gas switching. That's one possible scenario. Another scenario that we see, though, is a demand response from Asia. We are at price levels for LNG where we have seen demand response in the past, particularly from India. Can Asia absorb more LNG at these price levels? In order to do that, it needs to have the capacity to import more LNG, and it has to have a mechanism to then use that LNG.
This chart, we believe, demonstrates that that can clearly happen. The first chart shows the utilization of LNG terminals across Asia. In three markets in China, India, and Taiwan, the terminal utilization is quite high. In most of the other markets in Asia, the terminal utilization is quite low and there's a lot of potential to import more LNG. In those Asian markets, once again, we see that gas-fired power generation is operating at a relatively low utilization, 40% maybe, so a lot of room to increase. Coal-fired generation at a much higher percentage, and therefore, room to decrease. While long-term gas demand growth, we think is primarily driven by the non-power sector, a demand response near-term solution is primarily comes from the power sector. Asia clearly has the ability at the current prices to absorb more LNG than forecast.
Two key markets I mentioned where the terminal utilization is already quite high are with China and India. In both of these markets, we have a lot of LNG import infrastructure either under construction or planned and announced. Both of these markets have quite credible plans to double their amount of LNG import infrastructure in the next five years. In China, there's 30 million tons of LNG import infrastructure under construction at the moment. China hasn't yet seen a large utilization of FSRUs, but that may happen as more importers come into the market, which could mean a lot more infrastructure in quite a short timeline. India has six new LNG terminals under construction today. As these key markets will increase their ability to import more LNG, there is the potential for LNG demand growth to continue to increase quite rapidly in both markets.
That brings us to our longer-term view of the market. The left-hand chart is a chart that may be familiar to you. It's the long-term supply and demand balance. The red is the LNG production capacity in operation today. It's grown quite a bit recently. It's forecast to decline over time as projects come to the end of their natural life or they run out of gas reserves or the gas is needed in the domestic market. The yellow is the LNG under construction. The gray is a range of forecasts for the future LNG demand growth. The range shows the highest and lowest of four different forecasts. To cast your eye towards the top of the range, because three out of those four are bunched together near the top, and there's one which is a bit of an outlier, which provides the bottom end of that range.
Even so, the forecast that we're seeing is materially higher than the same forecast from the same commentators this time last year, which is shown on the right-hand side of the left chart. Apologies for that. When we take that future demand and assume we need to supply it, that will require new projects to be FID'd. The chart on the right shows the amount of new LNG production capacity that has been sanctioned over the last decade. What you saw is after two years of very low projects being approved in 2016 and 2017, we got back to a more normal level in 2018. In fact, in 2018, the amount of new capacity sanctioned was three times the combined volume in 2016 or 2017. Quite a material change.
We need that level or higher to continue going forward over the next few years in order to meet the demand projections shown on the left-hand chart. Again, our message as with last year was that new projects are required to be sanctioned. The difference is that because long-term contracts are being signed again, we now see a market where those projects are being enabled. To conclude, three messages. The importance of LNG and gas in the energy transition to meeting the world's air quality and CO2 emission challenges we think are being recognized. We expect gas to account for 40% of the growth in energy supply by 2035.
I think there's lots of examples of policies that are supporting gas, but there's also lots of examples to show why that's appropriate, why gas works, and the one we highlight here is the Beijing example, as I said, where winter air quality is improved by 80%. In terms of 2018, the same again. Large forecast supply growth was absorbed by large unexpected Chinese demand growth. We are seeing the establishment of a more liquid, more transparent LNG futures trading market. Looking forward, we expect strong supply growth again this year. The industry's forecasting it will probably go to Europe, or the majority go to Europe. We think that could happen. We don't think the alternative of U.S. shut-ins is likely at all. However, we do see the potential for an Asian demand response.
Once again, a bigger portion of the supply growth going to Asia than many are forecasting. Finally, we have seen a resumption of long-term contracts and new project FIDs, which is very healthy for the development of the industry. I'll stop there. Thank you for your attention and welcome any questions.
Questions at all?
Maybe I'll start off.
Could you please press the button on the mic so that people online can hear your question?
Maybe just going to page six where you show the energy mix for 2018 and 2035. You said that China has a target to reach 15%. I believe it's by 2030, not 2035. When you compare it to the global average, which is more than 20%, why do you think the Chinese will stop at 15%?
I don't think I said I thought they would stop. I said that the forecasts that we use are forecasting it growing to 8%, but we think there's upside from that, and the Chinese Government has announced targets of 10% by 2020 and 15% by 2030, as you say. I think that I was announcing that as I was trying to describe an upside rather than the limits. I'm not really sure where to go with the question next.
Okay. The second question, I guess is, selling LNG to Japan has a different risk profile to selling LNG to Bangladesh, and a lot of the new demand comes from lower quality countries, or if you will, credit profiles. Is that reflected in the pricing terms you sign?
Yeah. I think that there's different ways to look at the attractiveness of a market. Obviously, Japan sounds like a very attractive market, and Bangladesh sounds like quite a I'm not sure what's the right word, but something on the different end of the scale. Japan is also a shrinking energy market, and Bangladesh is a very rapidly growing market. Bangladesh is a market that we like because when LNG markets are growing, you're either trying to grow a new market where you have a big infrastructure challenge. It's very hard to secure the financing required to put together a whole gas value chain, from importing terminals, to pipelines, to power generation, to other customer connections. To put the whole gas value chain in place at one time is very, very expensive.
For LNG to penetrate a new market, like it did when it first penetrated Japan, there is a very, very high capital hurdle required. Bangladesh benefits from all the infrastructure being there, the existing customers being there. As we saw with Pakistan, when it entered the market, it came into the market, and it grew very quickly because it didn't have the same infrastructure barrier. It was existing customers who liked buying gas, who needed to buy gas, who wanted to buy gas, needed LNG in order to keep the market balanced. There's different risks around different contracts, but buyer credit is just one of the risks that you have to take into account. When you negotiate a contract, you have to make sure you understand the buyer and the flexibility and make sure you've got the contractual framework that you're happy with.
Every market is different. I think one of the big changes we've seen over the LNG industry, which has caused a lot of the growth over recent years, is rather than trying to impose a single model on all the markets, the industry has now got much better at recognizing that different buyers in different markets have different needs. Even when we go back to some of the more traditional markets, they have changed in that historically you were selling to customers that had captive downstream markets. If they imported the LNG, they knew they could rely on their downstream market customers. As you have competition in the traditional markets, those customers have a different risk profile than they had in the past.
Just picking a country and comparing credit ratings tells you one of the things that you need to look at, but it's one of many factors in deciding what deals you want to do and how you structure them.
Okay. Maybe a final question from me. Actually, I forgot it. Sorry. We'll come back later.
Can you press the button, please? Lydia.
Thanks. I've got a couple of questions. The first one, you referenced the weather at the start of the presentation. I'm just wondering, how much of the weakness in prices do you think is down to that sort of seasonal or the unseasonably warm weather? The second one was just looking at the charts on the regasification capacity additions. You did talk about there possibly being a price response from some of the Asian countries. Do you think that in terms of if I think about China and India being the two markets where you've typically seen most of the response in the past, is there enough room in those markets? Or you have to rely on it being elsewhere?
In terms of the pricing, clearly weather is a massive factor in terms of gas demand. We have just come through a relatively warm winter in most major gas markets at a time when the growth has been quite high. It's hard to structure how much is near-term weather effects and what is driven by the overall supply and demand. When I look at the price trend we've seen over the last couple of years, what you see as you come out of the winter has been a floor price on the LNG spot prices around 10% oil. That's where we are today now. I don't know what today's prices are, but spot LNG is six something, and oil is 60 something. We're about 10%.
We've got there a little bit earlier than we did the last couple of years, but at the end of a mild winter, that strikes me as being something that you would expect and not a unprecedented relationship. What happens going forward, we remain to be seen, but the price level that we're seeing today is not something that would be particularly concerning or unexpected at the end of a mild winter with a big ramp up in supply. In terms of the demand response, India has historically been a particularly price-sensitive market. In a lot of markets, you tend to have the not such dramatic price effects if all commodities move up and down together. Whereas India seems to have a much bigger reaction to high absolute prices and low absolute prices as opposed to relative prices.
At the kind of prices in the $6 something in the past, we've typically seen a big response where new demand switches on as opposed to demand switching. The fertilizer sector in India just switching on or extra power generation switching on. India is certainly a place where you'd expect to see demand response come from. There might be others. Last year, as we showed, the import terminal utilization was quite high in India, but you have a expansion to Hazira coming on stream soon. You have the Mundra terminal starting up soon. You have the IOC's Ennore terminal starting up. While on a historic basis, the utilization is high, that's why we flagged the amount of new capacity starting up in the near term.
Thank you.
[Sasika]
Hi. The question on supply side, essentially, do you think the world has seen all the resources that are required to fund these FIDs that you talk about now? Or do you need more exploration in terms of getting the gas resources to start with? Also, I just wanted to understand how big could the Qatar phase 2 be, or the next phase of Qatar? How big can that be, and how quickly can that come on in the supply side?
I don't think there's any shortage of gas in the world. If you look at the most credible supply sources for new supply projects, Qatar, as you say, Mozambique, the U.S., Russia, Canada, they're all places with abundant amounts of uncontracted or unallocated natural gas supplies. There was a time in the past when people worried where the next projects would come from. Now it's quite easy to see the potential projects on the map and the gas supplies that will come from them. I think what's happening now is we're moving into a timeframe where projects are getting sanctioned. If we go back a year or two years, there wasn't really a massive momentum in the industry to make new projects happen. Buyers were quite comfortable not signing up to new long-term contracts.
First of all, the market was perceived to be very well-supplied or thought to be long. Prices were thought to be falling, the buyers didn't necessarily see a lot of risk by relying on the spot market at the time. As competition was being introduced into their markets, there was some nervousness about signing up on a long-term contract in case the buyers contracted at the wrong time or made the wrong indexation risk. Also on the seller side as well, we'd just come through the massive oil price decline, preserving cash was quite important to the industry at the time, rather than sanctioning projects which may have been seen as questionable. There wasn't an impetus two years ago. Now buyers are keen to develop new projects.
There is a concern that if you don't sign long-term contracts, you become very reliant on a spot market, which may become quite tight, and you may end up competing with China Inc. or something in a tight spot market. Buyers are much keener to enter into long-term contracts. Also, the perception is the prices for long-term contracts is going up, not down, so it's a good time to buy. Secondly, there's projects now which want to move forward. People want to invest and develop new projects. The two big projects that have been sanctioned recently, the LNG Canada project in Canada, obviously, where Shell are part of, and Golden Pass. They're both projects that have been sanctioned by sponsors that aren't really dependent on project financing. There's others that are coming and expected to go soon.
Things like the Venture Global Gulf Coast project or Mozambique, which would require project financing. Therefore, we think that this reemergence of long-term contracts is crucial for projects like those. We've seen both of those projects sign up lots of long-term contracts recently in order for them to move forward and for the industry to grow faster than just the Exxon and the Shell projects.
Hi there. Slide 32, which is the update from last year, which is very helpful. We're going through maybe in your view, one, maybe two years of absorption, then we move to a period where we maybe go tight. When broadly do you think that happens? Is there a risk that because we haven't sanctioned enough already, that there could be a few years while we're really quite tight and have to run high utilizations just to try and meet requirements?
Yeah. If you assume that a new project today will not come on stream until 2024, and you look at this chart in 2024, depending on whether you take the high demand or the low demand case, it's either we're pretty much where we've been for the last couple of years. We'll see that kind of level. It could be quite a bit tighter than that.
We can't do anything retroactively. All we can do is make sure there's enough LNG to meet the market in 2024. I think what's happened is that we've just been through this period of rapid supply growth, and the market has performed better than people expected. More LNG has been consumed in the non-balancing markets, the markets that really need to pull LNG. We want to preserve that demand and grow it. Some of the examples I've shown, they trigger demand growth, but also nearer term demand growth than people forecast or more demand growth than we forecast. We have some forecasts for transportation demand, for example, but if you look at the range of possibilities, there's clearly a lot more upside than downside.
The new projects that we see needed, they're clearly needed, but the good news are there are the credible projects that are being developed in order to meet that supply.
Yeah. Maybe just one follow-up if I can. I'm not asking you your price as Shell, but how should we imagine how you're going to price as an industry LNG bunkers?
It's still very early days. I think that as Shell, I can take that. I'll not talk about price levels, but we have the ability to price LNG in different ways to different LNG customers. There's no reason why we wouldn't want to do that in the brokering sector. If somebody wanted to lock in an oil-related price to lock in the economics of LNG versus the alternative, we would be prepared to do that. If somebody thinks that now the LNG market is going in a certain direction, and we want to play in LNG prices, then we'd be happy to do that.
It's too soon to have established a consensus of how the buyers will react yet.
Thank you.
As one of the world's largest portfolio players, and I think increasing the emphasis on the midstream parts when LNG Canada was FID'd without any upstream element to it, how do you see the increasing and likely further increases in the spot market globally? Is that an opportunity you're excited about, or are there certain things that you're worried about from that, considering Shell's role, which is quite a dominant role in terms of the portfolio approach?
I don't think we'd want to be considered as dominant. I think that would probably be an unhelpful label. I think we are fortunate to have many competitive advantages in the LNG business through our scale, but also the diversity of our business. There are some other big LNG producers, but we have supply points all around the world, and we have market access points around the world. We operate at all steps of the gas value chain. When you look at our business from a scale, from a global diversity, and from a value chain diversity, we have a very nice business, which creates a lot of ability for us to meet customer needs and also creates a lot of optionality for us to create value.
An increase in commoditization or an increase in spot volumes is something that we are quite comfortable with because we operate in more liquid markets in many other parts of our business, and we have a trading business that's very successful in those parts as well. We see a lot of new opportunities emerging from some of the changes in energy markets. Historically, we had a successful LNG business and successful gas businesses in Europe and North America. When we look at the growth in energy demand and gas demand, it's very much driven by Asia, South America, a little bit. Historically, it wasn't possible for us to play in those markets.
As markets open up for competition, we have the ability to take some of our gas trading skills and our customer products into new markets and then build longer value chains as we go further downstream into the key growth markets. That creates more abilities for us to capture more customers and have more optionality. The changes in the markets are, one, inevitable, but two, things that we're quite comfortable with because one of our competitive advantage in new markets is that we've seen markets evolve before, and we know what you need to do today to position yourself for the future. Does that get to your question?
Yeah.
John.
Jon Rigby from UBS. Can I ask two questions on the demand side? I take your point completely about we're all pretty good at forecasting the supply side, although I suspect we always get the start-up dates too early. On the demand side, two things. One is it looked to me across the last two or three years that one of the things that emerged was that there was demand out there that needed gas to supply it, right? That as soon as the gas molecules are made available, that gas became apparent. It wasn't a price effect, you just needed to make the gas available. I just wondered whether there's still that phenomenon sat out there that this new gas will just access and will just get taken in a fairly seamless fashion.
I guess related to that, the last couple of years, I suspect as a reaction to a concern we were moving into something of an oversupply, there was some talk about the major portfolio players, the major suppliers trying to seed markets, talking about FSRUs and so on, and trying to encourage new demand. Where do you sit with that at the moment? You're just happy to let the demand side effectively evolve because we are heading to a tight market anyway, and you don't really need to do very much on that? Are you still keen to actually build your own demand through your own efforts?
Very much the latter. I agree with you absolutely in terms of the latent demand that's been part of the growth, and it's very difficult for people to buy gas until they're connected to a gas pipeline. That's why I'm still very upbeat on the prospects for China, because as the pipeline connectivity increases, that's what will enable the fuel to gas switching. Until you're building or until your factory is connected to a gas pipeline, that will drive the timeline for when you can actually buy gas. Once you make that switch from coal to gas, then you're not likely to go back. In terms of the new markets being enabled by FSRUs, that's something that we are willing to do and keen to do.
I think when you actually look at the evidence that while the IOCs talk a good game on it, they're typically developed by the importing country's government or gas company in some way. It's clearly a big factor that enables the rapid growth of the industry, and we expect a lot more markets to develop based on that technology in the coming years. While it's not an FSRU, a good example of Shell's commitment in this space was our acquisition of Total's share of the Hazira LNG terminal at the end of last year. Historically, that terminal was operated under a joint venture model, which didn't allow Shell to operate a Shell-controlled value chain from our LNG business into the Indian gas market. That's a market where we see a lot of potential growth.
Now by having complete control of that terminal, we have no constraints on how we can grow our business and optimize that position. It's an area of space in which we'd be keen to play more. We've recently won an opportunity in the Bahamas where we will be the LNG supplier, the LNG import terminal developer, and the gas-fired power plant developer. Those integrated opportunities are talked about quite a bit. They don't happen in practice very much, but if they are available, and it's a market position that we like. The Bahamas we like because it has benefits on for the LNG bunkering business as well. It's a really nice fit with our growth aspirations. We have a question online. Let's take that one first, and then we'll come back to the room.
We'll go to Irene Himona at Société Générale.
Thank you. Good afternoon. Apologies if the question may have been asked. It concerns your slide 19, Steve, where you mentioned or referred to very low gas storage capacity in China. In the oil market over the last 10- 15 years, about half of the very strong oil demand has been to fill Chinese new oil storage facilities. I wonder if you have some data or evidence that this may be happening in gas, and clearly that would provide an additional positive surprise potentially to LNG imports. Thank you.
Thanks. I guess gas storage is more...s orry, the requirements of building gas storage are more related to local conditions than for oil storage. In oil, you build a tank, and an oil tank's pretty much the same everywhere. Gas storage depends very much on the conditions that are available. China isn't necessarily the country in the world that has the most potential for developing gas storage at the market end of the pipeline, in the coastal provinces where most of the demand is. I think there is a recognition that China needs more storage and will try to develop more storage and will probably impose some sort of government policies in order to make that happen.
I suspect quite a bit of it will be gas storage in the form of LNG storage in the same way as Korea has addressed the similar challenges by building LNG storage. That is quite an expensive way to store natural gas. It's probably going to be something that will become increasingly significant in China, but not necessarily to the same extent as in the oil market. I don't have specific data to prove that. That's just my feel on the subject.
Peter?
Hi, thanks. One follow-up on slide 32. You show there that there needs to be at least 32 million tons of new capacity sanctioned this year to meet future demand. There's currently significantly more than that penciled in for FID. What's your view on how much of that actually moves ahead this year? The second one was just on IMO. You've mentioned the positive of increased LNG use in marine bunkering. There's also a view that, at least in the short term, some of that fuel oil that had been used in shipping could find its way into the power market as a clearing mechanism. Do you see that happening, and what could be the impact of that on gas prices?
Okay. On slide 32, the 32 million tons on slide 32 is I hadn't caught that before, is a forecast. Typically, when projects happen, you might say, well, this project has been sanctioned with 15 million tons of new capacity. That 15 million tons doesn't normally come on overnight. It tends to come on over a period. Even in a world where Golden Pass and Mozambique and a Russian project and another U.S. Gulf Coast project all get sanctioned or a cut of train gets sanctioned, you might end up with more than 32 million tons being sanctioned this year, but there's not necessarily 32 million tons that will come on over a period. If the number was 40 or 50, it doesn't mean the volumes wouldn't be able to be absorbed. The demand growth may be a bit higher.
If the number was 40 or 50 at the end of the year, we wouldn't be sitting here in January next year forecasting an oversupply in 2025. I think you can't forecast quite that accurately. In terms of the IMO changes, you are right. There will be changes in the world's refining system as a result of the spec changes. The amount of heavy fuel oil you would expect to be produced is likely to go down over time. If it's not going to be used for ships, it has to be used somewhere else. Some of that could be in power generation. Probably not in markets where LNG is supplied.
You're probably looking at more developing countries and countries that haven't really got to the affordability of being able to pay for gas as a source of power generation as opposed to whatever is just the cheapest fuel.
Hi. Shell is already the biggest player in LNG by market volume. I know you are showing LNG demand is growing 4% per year CAGR. Just wondering what's Shell's ambition in relation to that. Is there a market share you're kind of aiming at? What's the, in terms of portfolio mix, the liquefaction volume versus third-party volume, within your portfolio? The second question is the slide you showed regarding the charter rates for LNG tankers. Obviously, I think you have about 90 boats globally. Just wondering, what's your volatility in charter rates, both in the short term and necessarily longer term, please?
Yeah. In terms of charter rates, we have very limited exposure to those high charter rates. We have a fleet for our own trading business of about 70 ships at the moment. It's constantly changing, as ships are coming in and out of service, but most of those ships are tied up on long-term contracts, typically around five years. We have quite limited exposure to short-term charter spike rates. In fact, that was an opportunity for us. We have import capacity in Europe, so when you had that very high charter rate, we were able to deliver cargoes from the Atlantic into our terminals in the U.K. and the Netherlands and cover in Asia and release shipping to the market and actually monetize it rather than be impacted from it. In terms of our business, we are driven by value rather than specific volume targets.
We expect our business to grow. We delivered about 71 million tons of LNG last year. Some of it was our share of our joint venture sales to third parties, but most of it was by the Shell portfolio. Of that, about 60 million tons was long-term sales, and about 10 million tons was just additional trading volumes that we use to trade and optimize the business. We have new supplies coming on stream over time. First of all, we have Prelude and Elba that are expected to start up this year. We've sanctioned Canada. We don't announce most of our third-party deals, but sometimes our counterparties do. Anadarko announced the Shell purchase from Mozambique LNG a couple of weeks ago. You expect to see growth in the Shell portfolio, but we don't have a specific volume target or a specific market share target.
Just in terms of pipeline you have, I just wonder whether you're going to see a more weighting towards third-party volume in that case, given LNG Canada is not coming on stream until 2023 and Prelude started already.
Our expectation is that we will grow both over time.
Okay, thanks.
Thank you for taking my question. You had quite a few contract expiries between now and 2030.
Yeah.
My numbers, they might be wrong, about 30 million-35 million tons. If you're selling 71, you're basically shrinking by half by 2030. I guess there are three ways to deal with that. One is extension of existing contracts, either equity or third party. Secondly is new brownfields or greenfields equity. Thirdly, of course, is new third-party contracts like the one with Anadarko and Venture Global. You've also mentioned kind of 60 million tons is sold in the form of long-term contracts. How should I think about, as these contracts are renewed, the share of long-term contract in Shell's portfolio?
Again, we don't have specific targets.
The market
between all three, but we expect to do all three of the scenarios that you explained. We do have contracts expiring. We've been in the business for a while, so you get a natural timeline where these contracts come to an end. A lot of our contracts come from projects where we have a seat at the table at both sides. Nigeria, Trinidad, it doesn't necessarily mean they automatically get extended, but we have a good success in off-taking from our own projects. We will look to extend the off-take from our own existing projects. We will develop new projects, and we will continue to buy from the market. The combination of the three, we expect to cause the business to grow over time, but we don't have specific targets for each of those categories. Therefore, there's not really any specific guidance I can give you.
If you take all three points into account, the share of long-term contracts in your portfolios, will that change? As the market is changing, right?
Well, the 60 million tons I was talking about was contracted in, not contracted out.
Okay.
The amount of spot on top of that may change depending on the market conditions. There may be sets of market conditions where we can make a lot of money churning and trading volume. The volume will go up. There may be conditions where we'll make money by buying spot volumes. There may be a set of conditions where we can't. The total volume has some noise in it depending on the spot market conditions, but that 60 million tons of structural supply that we have give us a very competitive position to meet our customer needs and to continue to optimize around that. We will look to have a lot of supply contracted into the business. How we then sell that volume. There's actually three ways that we can sell it.
We can sell it term, we can sell it spot, or we could import it into our own downstream market positions. I think over time, we'd probably like the latter one of those three to grow as we build downstream gas businesses in new, fast-growing markets. We don't have specific targets on what the mix will be.
Okay. One last question.
Lydia
Hi, thanks. Just building on the idea of the spot price, you haven't talked very much about some of the arbitrage opportunities that exist with the size of the fleet that Shell has. Can you just give us some of the examples that might have come up over the last 12 months? Is it much more difficult in the market than it is now to be able to capture some of those optimization benefits?
I think the optimization benefits change over time. They depend on the market conditions. As new countries are coming into the market, as new supply points are coming into the market, as new demand points come into the market, you always get different opportunities. I think the fact that we have the combination of scale and flexibility allows us to respond very effectively to opportunities in that if somebody wants a cargo at short notice, then we're probably the first people they call because we can typically get a cargo anywhere in the world quicker than anybody else, just because we have the combination of more cargoes around the world and more abilities to then replace where that cargo would've gone and mitigate through shuffling the whole series of other cargoes behind.
Often when you do an optimization, it's not just the can you supply the initial opportunity, it's can you manage all the consequential changes that you need to do after that. The scale of our portfolio allows us to do that. In terms of what makes a trading business successful, there's nothing different about LNG than any other trading business. It's developing new strategies, understanding the market, having views on the market and strategies that allow you to make money depending on changing market conditions and your understanding of the market conditions.
Okay. Thank you all, those joining in the room and also those who dialed in. Thank you very much. Let's close the
Thanks.