Good morning, good afternoon, and good evening, everybody, and thank you for joining us here today at the Shell LNG Outlook 2023. My name is Cederic Cremers. I'm Shell's Executive Vice President for LNG, and I'm joined by Steve Hill, our Executive Vice President for Energy Marketing today. I think many of you will know Steve from previous versions of this Shell LNG Outlook, and maybe worth a reminder that a year ago, on February 21st, 2022, you know, when Steve did the LNG Outlook, it was actually that same day that the President of Russia had a speech during which he ordered the troops into Ukraine. In the hours and days after that, the war in Ukraine started.
In many ways, that's the key story of today, how LNG allowed Europe to meet its needs for gas in 2022, and then the impacts that that has both in the near and medium term. Before we go into the rest of the session, just a reminder that we'll be making forward-looking statements, I'd ask you to please take note of the cautionary note that is on this slide. Today's outlook will have three different sections. First, I'll be going through the story of 2022 and how Europe's replacement of Russian gas and the impact that it had on the LNG markets.
Steve will take you through some of the policy interventions that took place, and their impacts, as well as in the third section, giving you some of the expectations going forward and some of the structural shifts that we might see in the market in future. Maybe start with this picture. Here you see one of our chartered vessels, the Megara, which is unloading at a terminal in Milford Haven. In many ways, this is a picture that tells a 1,000 words. This is you know, one of the many vessels that came to this terminal during 2022, delivering much-needed LNG to Europe. Actually at Milford Haven, the amount of LNG coming in in 2022 was double that of 2021.
To give you a little bit of the summary story of Europe, to start with, on the left-hand side, you see the total European primary energy demand. You'll see that, whilst in total, this actually only reduced by about 3% in the year. The real story is between the red and the yellow that you see on these bars for both 2021 and 2022. The red contains the Russian pipeline gas supply, as well as other domestic and pipeline supply. You can see the large reduction in supply from Russia there during 2022.
The yellow represents LNG and how it stepped up to fill that gap that was left with a 60% year-on-year increase in LNG imports into Europe, which equates to a total of 45 million tons additional import into Europe, which you see on the right-hand side of this slide. Now, notable is that actually the total additional LNG supply in the market in 2022 was only 16 million tons. Not enough to meet that additional demand in Europe. It was actually the reduction of imports to other parts of the world that allowed that gap to be filled. Some of it was in South America, where there was higher hydro fill allowing requiring less LNG to go to South America, but primarily.
Maybe a little bit more on China, because as I mentioned earlier, one of the reasons why there was so much LNG available to come to Europe was also because of lower demand and lower pull from China. If you look on the left-hand side, you see kind of the comparison of GDP in China versus gas demand. You see that typically over the last few years, gas demand and then even more so LNG demand outstripped economic growth because, you know, China had invested in additional infrastructure and capacity to bring on domestic production as well as pipeline imports. They have done the same in terms of also in securing additional long-term contracts from LNG, which you can see on the right-hand side of this chart.
By having all of that in place and then having a lower than expected, growth in terms of the total economy, they were able to reduce towards, Europe. Where did that spot then primarily come from? A lot of it actually flowed from the U.S. to Europe. What you see here on the left-hand side is a comparison of Asian prices, JKM, versus European prices, TTF. What you see is if the purple bars are above the line, it basically means that prices in Asia are higher. If they're below the lines, the prices in 2022, that those European prices were higher, therefore pulling that volume away from Asia towards, Europe, and the affordability there.
This really allowed the U.S. To also operate at its full capacity throughout 2022, which you see in the middle chart. The black line represents the capacity of liquefaction in the U.S. Whilst if you go back, for example, to 2020, Europe are higher. We saw during the majority of when you see that the total production was quite a bit below the liquefaction capacity, which was driven by economic reasons. We see that in 2022, production was either always at capacity or at the times when it was below capacity, it wasn't for economic reasons, but it was due to operational reasons, such as the issues that were seen at Freeport in 2022.
Then perhaps best shown by the chart on the right where you see the black and the orange, which are, you know, the imports going into Europe, and you can see the massive increase in both of those bars in 2022. Perhaps the largest impact is felt in markets like South Asia. These are, you know, key emerging markets that invested a lot in additional infrastructure and being able to bring LNG into their economies in order to have a cleaner fuel, a cleaner energy alternative. What we really saw in 2022 that the LNG was no longer affordable in these markets.
You see that across these markets like Bangladesh, Pakistan and India, that the reduction in LNG import was between 11% and 16% across each of these countries. Not only was it just that the high international prices, but in addition, you can see in the middle chart, some of the exchange rate impacts and deflation of the local currencies versus the U.S. dollar. Meaning that in terms of local currency, the prices actually increased even more than what we saw in the local markets. Sorry, than what we saw in the international markets. This has led to a number of things, either switching to other sources of energy, like to coal or to liquids, or even in some cases, to power outages.
Think this is an example of the impact of sustained high prices, which I think is not only an issue for energy affordability obviously, but ultimately also for energy security and ensuring that we reduce the emissions footprint of the energy supply. Just two slides, giving a short summary perhaps of the story of 2022. First looking at the supply side and the breakdown by country. What you see here is the year-on-year change in exports per country in 2022 when compared to 2021. You can see that it's really a story about the U.S., and effectively all of the increase in terms of additional exports and capacity coming from the U.S.
Some of the other countries that you see there are actually primarily, supply restoring from operational issues that we're seeing in 2021. On the right-hand side, you see that really there's now the three large exporting countries between Australia, Qatar and the U.S., Being very close to each other and each representing just over 20% of the global market right now. The last slide, just a breakdown of the demand side as well, and the importing countries and the change in 2022 compared to the year before. I think two key things that we see here.
One is what is effectively a reversal of the trade flows compared to the year before , with the, with the volumes coming, um, to Europe from the , from Asia, sit very much in line with , with what I was sharing earlier. And then on the right-hand side, you really see the kind of what are currently the top LNG imported in 2022 . We represented Europe as one country here because , sometimes the , LNG will be imported in one country in Europe, where actually its destination will be somewhere else on the European continent, and therefore we really treated it as one market and one country.
Like, I guess the other notable thing here is just to see the magnitude of the increase, in the European imports in 2022, where that step up of 45 million tons is effectively the same as the import level of South Korea, in 2022. Its total imports being the fourth largest market in 2022. Now I'll hand over to Steve, for our second section and to say a little bit more about what policy interventions we saw and what their impacts were. Steve, over to you.
Thanks, Cedric, and good afternoon, everybody. Good morning, America. As Cedric mentioned, I'm gonna talk about how the world dealt with the energy crisis, how governments changed their thinking and their actions, and they started to think about security of supply and affordability much more in the near term, whilst also retaining their focus on emissions reductions over the longer term. Governments clearly faced a crisis. The affordability challenge for customers had impacts to the customers and the broader economies. Governments worked really hard to try to maintain reliable supplies of energy, particularly gas, and pricing at an affordable level. This slide shows many different examples of actions taken by governments very, very quickly to try to protect their economies, protect their energy systems. Some of these policy interventions were very effective.
This is a great example of one, how Europe speeded up the approval process for new floating LNG import terminals. Historically, this was quite a slow process, but we've seen new LNG floating import terminals start up recently in the Netherlands and in Germany, which basically took less than six months from initiation to start up, bringing, allowing more LNG to come into the core European markets and the markets to rebalance. The photo you see on the left is the Eemshaven terminal, which started up last year, about six months from the start of the Ukraine crisis, where Shell has taken about half of the capacity and now has another LNG import route into the Netherlands. While some policies were very effective, others we think may maybe be less effective or even create uncertainty or the potential for unexpected consequences.
The good policies that we see are the policies that are primarily driven by allowing supply and demand to rebalance. We also see policies which we think will be less effective or potentially have these unforeseen consequences, where the government has tried to take actions which affect the outcome of energy markets without actually addressing the supply and demand imbalance, which fundamentally drives the pricing levels. Another interesting observation we have is that over the last three months, we've seen a significant increase in the number of government interventions, and we have seen a significant reduction in the gas prices in Europe and globally. People may think there is a correlation between the two.
As Cedric has just explained, the price reduction we have seen over the last three months has been driven by the increase in LNG and gas in storage in Europe over the last summer, and then the mild winds that we've just been through. Talking of the consequences of actions, we'll focus here on Germany. Germany was in a situation before the Ukraine crisis where 60% of its gas came from Russia, and it had no LNG import facilities. As it lost Russian gas supply, it needed to preserve reliable power generation, and ultimately, the only option it had was to burn more coal. As you can see in the second and the third chart here, that caused a predictable increase in air pollution and a predictable increase in CO2 emissions.
As Cederic hasn't explained, this wasn't just a European crisis, this became a global crisis as LNG was pulled away from other markets in the world. China and India are the world's first and third-largest CO2 emitters. What we saw in 2022 was an increase of coal consumption in the power markets in both and predictably causing the amount of emissions to increase in both countries. This wasn't just a challenge we saw in the power sector. This slide talks about the industrial sector in Europe as another example of consequences. The first chart shows the 16% reduction in gas demand that we saw in the industrial sector in Europe in 2022, driven by price affordability challenges.
Companies chose to reduce their production or shut down their operations simply because of pricing, challenges and competitiveness challenges. Those competitiveness challenges are really highlighted on the right-hand chart to the factory gate prices, where you see very, very significant increases in Germany and Italy, two countries that were very dependent on cheap Russian gas. Significant, but not as big increases in France and the U.K., where you had, higher gas prices, but more mitigants, things like nuclear power in France, for example. In other countries, we still saw price increases in the global inflation environment, but nothing like the same order of magnitude. This is quite a, tough story we've been telling so far.
Actually, this slide is an example of something that was very positive we saw last year, and that's the increased commitment of LNG shipowners to LNG as a fuel to decarbonize their shipping business. The demand for LNG in the shipping sector did reduce slightly in 2022, but what was really impressive was the significant increase in the orders we saw for LNG-fueled new shipping. Today, about 30% of the large ships being built in the world are being built to use LNG as their fuel. That creates a LNG demand of about 8 million tons a year for the LNG-fueled ships in operation and under construction, driven primarily by the container sector, companies like CMA CGM, MSC, Hapag-Lloyd, but also very high penetration in the car carrier sector.
A lot of progress in the LNG as a fuel for shipping sector, driving down decarbonization. We're also starting to see lower emission pathways being developed for LNG into shipping with our successful trial of Bio-LNG last year. A lot of progress here. That's quite a small part of the solution. Ultimately, the gas industry needs to decarbonize. When you step back and think about the energy transition, it will be driven by electrification. It will be driven by electricity going from 20% to potentially 50% of the global energy mix driven by wind and solar. If 50% of the energy mix will be electricity, 50% will still need to be molecules. Over time, we will see an increased pressure and increased demand for those molecules to be lower carbon forms of gases.
The first chart here shows what we actually expect to see over the long term in the gas industry, which is a decline in gas demand, but also a transition from the current fossil fuel, natural gas, to decarbonized gases. There's many potential options for the future: hydrogen, synthetic options, biogas options. What we'd like to highlight in the second chart is the different situations you see in different regions around the world. Just as the gas industry today has different dynamics in different regions, the future decarbonized gas industry will have different dynamics in different regions. Take North America, for example. North America is very, very blessed. It has lots of sun, lots of wind, and importantly, lots of land, so it has available renewable power. That allows it to develop green electrons. It has plenty of gas supply.
It has plenty of underground storage potential, so it can develop blue hydrogen. The recent IRA tax incentives gives a further fiscal stimulus to develop this future biogas or decarbonized gas industry. The pathway to decarbonizing gases in the U.S. has started to become quite clear. We look at Asia, we see a very different situation. As the U.S. gas market is developed by domestic gas, Asia is dominated by LNG today. Asia doesn't have the same advantages for developing decarbonized gases within country and will need to rely on imports. There are potential sources of imports. The Middle East and Australia are logical sources where you could develop large volumes of decarbonized gas, but you do have the shipping challenges, the shipping cost of then shipping them to North Asia.
Asian buyers are also very keen on synthetic solutions, synthetic gas, e-methane, because while there will be a higher cost for those products, that will allow them to use the existing infrastructure to import, transport, and consume the gas rather than having to build a new downstream gas network. Our third and final section looks at the implications of all these changes we're seeing, this crisis on the actual LNG business and the LNG market. We'll start by looking to the near future. The first chart shows there will be more LNG production available next year. There will be more LNG supply in the market. The growth in the market isn't massive. It's about 15 million tons, the same as last year. A small portion of that will be coming from new projects.
Most of that growth will come from higher output from existing projects, most notably the Freeport project coming back to the market. 15 million tons is helpful, but it's not material. We saw Russian pipeline volumes into Europe reduced by about 50% last year, and that was the equivalent to about 60 million tons lost from the market. We still have to see the second half of the Russian gas disappear. The amount of Russian gas is still to disappear from Russia is a lot more than the growth in the LNG market. That will cause a tension between European markets and Asian markets.
Over the last year, we have benefited, as Cedric explained, that while Europe needed more LNG, it's benefited from mild weather, and it's benefited from a reduction in demand in China, driven by the COVID situation and the lockdown. China recovers, we expect to see stronger demand for China and potentially more competition, as I said, between the regions. If you compare the situation in the world today compared to a year ago and focusing on Europe is clearly seeing less Russian pipeline supply today, but it's seeing more LNG coming in, which is helpful. It's starting with higher inventories, which is helpful. It's seeing less demand, which is helpful. Over the next year, we may not see another mild winter. We may see a colder winter next year, or we may see more competition creating tighter market conditions.
European gas balance. Over this decade, gas demand in Europe is expected to reduce by about 20%. However, we're seeing much bigger reductions, particularly in Russian pipeline supply, but also in domestic production and pipeline supplies from other locations. Therefore, that creates a structural gap for about 140 million tons of LNG supply needed into Europe on an ongoing basis to balance the gas market. That's about 2 or 3 x the typical LNG levels of imports we were seeing into Europe before the crisis started. Europe has changed. We have a structural change that Europe now needs long LNG on an ongoing basis. That really has an impact on the global market.
We've been doing this presentation, I think, seven years now, and during that time, we've told the same story every year, the way the LNG market works. North Asia is the premium market. It needs LNG, it doesn't have alternative gas supplies, and it will pay the price it needs to pay to secure those volumes. South Asia, on the other hand, is a very price-sensitive market. It will buy LNG if it's available at the right price, and it will use other fuels or produce less energy if the price is too high. Europe is the balancing market, or has been the balancing market, absorbing the LNG that's available and not needed elsewhere, but being able to release the LNG.
The reason we say that is when we think about the characteristics that allowed Europe to be the balancing market over the last decade, the combination of domestic gas production, pipeline imports, LNG imports, LNG storage, gas storage, alternative fuels availability, Europe had the flexibility in its gas market that allowed it to be the balancing market for LNG. While all these characteristics, all these dynamics we've seen growing very rapidly in China over the last couple of years, and therefore China may be well-placed to carry out that role going forward. You can really see the change in the right-hand chart of what's happened before and after the start of the Ukraine crisis. Red is China, and until Ukraine, all you saw from China was strong growth, driving the growth of the overall LNG market.
Whereas for Europe, the blue line, what you saw is, demand increases, decreases or plateaus simply driven by balancing the market, absorbing more LNG when production came to the market and releasing it when it was needed in other regions. Since the Ukraine crisis started, we have seen the opposite pattern. Europe is seeing very strong growth in LNG imports, and China is actually reducing its imports to accommodate. We clearly need new supply. We need significant volumes of new supply. The LNG market was growing before the Ukraine crisis, and the loss of Russian gas into Europe is about the equivalent of 100 million tons of LNG a year. Very, very significant amount of lost gas supply that needs LNG to replace it.
We're in a world today where that supply will predominantly come from two new sources or from two sources, Qatar in the U.S. When we were having this conversation two, three years ago, we talked about the four production areas that would drive the growth of the market, the U.S. and Qatar, Mozambique and Russia. Mozambique and Russia have their specific challenges at the moment. We now see a world where over 80% of the new LNG supply that's due to come onto the market between now and the end of the decade will come from Qatar and the U.S. That creates quite an interesting dynamic for the market, quite a challenging set of decisions for buyers.
We've talked about the unusual dynamics of the LNG market before in this outlook where we've said about 70% of LNG volume is sold under long-term contracts and about 30% under spot contracts. What we have now is those long-term contracts being dominated by two producers, the U.S. and Qatar, which have very, very different dynamics, very, very different conditions. If you're a buyer today, you have the choice between buying from the U.S. on a Henry Hub index basis with typically quite a flexible product, or buying from Qatar on a more traditional oil index, or buying on the spot market. In the very volatile market conditions we're seeing today, the consequences of getting that decision wrong could be quite significant. Therefore, it's very prudent for buyers to think about their portfolio, think about their risk diversification.
How do you manage this world where your commodity has three different commercial structures that are very distinct? Going back to that volatility issue we've talked about a couple of times, this makes that decision even more important because the cost of using financial products to hedge these risks has increased and become, you know, quite unaffordable for some participants in the market. The U.S. has a very significant role to play in the future of the LNG industry. The U.S. exports are growing. The U.S. will become the biggest LNG producer over time, and it will grow from about 10% of the global LNG production to about 20% of the global production. Sorry, I got that wrong. It's about 20%.
The LNG offtake from the U.S. will grow from about 10% of the U.S. gas market to about 20% of the U.S. gas market. The U.S. gas market will be much more driven by LNG in the future than it has been in the past. You can see that in the right-hand chart, which shows the different forms of gas demand in the U.S. Historically, LNG was pretty small compared to power, compared to industry, compared to buildings. By the end of the decade, it will have caught up. Therefore, we will see a much greater interrelationship between the U.S. gas market and global LNG markets. We will see a particular concentration in the U.S. Gulf Coast in Texas and Louisiana, where most of that connectivity between the U.S. gas market and the global LNG market comes together.
We talked a little bit about new supply. We should also talk about demand and long-term contracts. The first chart here shows the, you know, not only the higher prices we've seen or the higher volatility, but the bigger price spreads we've seen between the spot market and the long-term market. The middle chart is actually quite interesting. While spot prices are higher for everybody and volatility is higher for everybody, it's hurt people, some people a lot more than others. If you're in Japan or in China, where most of your LNG is supplied under long-term contracts, you have been a lot more protected from the high spot prices we've seen over the last year than in Europe, for example, where there's a very small portion of the LNG sold under long-term contracts.
Therefore, you know, managing your risk is something that's very, very important, and the solution to do that is to sign long-term contracts. What you see on the right-hand side is all the long-term contracts that have been signed over the last two years by the type of buyer that's been signing them. On the supply side, what we saw was what you'd expect. Most of the growth is coming from the U.S. and Qatar, and therefore, most of the contracts have been signed by the U.S. and Qatar. On the demand side, what you see is a bit more complicated. The growth is really coming from four areas, China, Southeast Asia, South Asia, and Europe. China has been signing a large volume of long-term contracts, and therefore, preserving its current protection from the spot market pricing and volatility.
Those other regions haven't very much. Europe has signed a few, as you see in the last year, but a very small percentage of that structural demand we described. The markets that have long-term demand but aren't signing the long-term contracts, will continue to be exposed to the volatility and spot pricing. What you also see on this chart is the area in green, the long-term contracts that are being signed by portfolio players, companies like Shell. This is what makes the market work. Producers are still looking for long-term contracts to creditworthy buyers, whereas buyers are looking for a bigger range of outcomes. Some buyers are looking for long-term contracts, but some for medium or shorter-term contracts, different amounts of flexibility.
It's by the portfolio players stepping into the chain, giving the producers the offtake certainty they need and giving the buyers the supply characteristics they're able to sign up to that creates the opportunity for us to run our portfolio and create value. Also supply to actually match up with demand and the industry to continue to grow. This is one of the favorite charts we show in the outlook every year, or certainly the left-hand chart side of it is. This is the ultimate, the overall industry supply and demand balance. The area in red is the LNG production that's in operation today, which declines a little over time.
The significant area in yellow is the LNG production capacity that's under construction today, and the area in blue is the range of demand forecasts from the leading industry analysts and commentators. What you see is that for the next few years, we have a tight market. We have supply that touches the bottom end of the range of demand expectations, but not the top. Ultimately, you know, a clear supply-demand gap is opening up, which is actually starting earlier than the presentation we showed this time last year, driven by the consequences of the events in Russia. The world will continue to need more LNG and more projects coming on stream later this decade.
The right-hand side of the chart shows the left-hand side, forward-looking forecasts compared to some of the backward-looking demand scenarios by the IEA and others that are trying to get to a defined outcome. What you see there is more uncertainty over the demand, but a continued need for LNG for the coming period regardless. I'll talk a little bit more about decarbonizing the LNG business. I talked before about decarbonizing the overall gas industry, which will take some time, but it's important that we take steps and start that journey today. This slide focuses on two areas. The first area is on both reporting the emissions from LNG and then compensating for those emissions. We've talked about carbon-neutral cargoes in the past. That activity slowed down this year because of the high prices.
That made it much harder to charge a voluntary premium for an additional upside on the cargo. The industry worked hard to develop a common framework where it was clear how emissions were being measured consistently, what was included, and to make sure that the highest quality offsets were used in order to offset those emissions. The right-hand side of the chart talks about some of the technologies that we're not talking about for the future, but that are actually being deployed today to reduce the physical emissions from the LNG chain. To summarize, we have many, many messages today. They are brought together on this slide. I won't read through them all. I will let you peruse them now or later at your leisure.
What I would like to do is thank you for your interest, your attention, and, to open up the floor for any questions you may have on the materials. If we could get our first question, please, that would be great.
The first question is from Giacomo Romeo, from Jefferies International. Go ahead.
Hello, can you hear me?
Giacomo.
Hello?
Yeah, we hear you, Giacomo.
Okay, perfect. Sorry, it's, I've been having problems this morning. A couple of questions. First is, on your European gas balance slide, and apologies if I logged in slightly later and couldn't listen to the entire explanation of that slide. You have European gas demand continuing to fall in 2023 and 2024. Just wondering whether current level of prices you would expect to see some of that of demand that switched into alternative fuels to come back and whether you're indeed actually seeing that.
The, the other question I have, it's about the change in policies in Asia, whether the higher gas prices are concerned that higher gas prices could actually bring a down demand longer-term in Asia. We have seen headlines from Pakistan last week, and just wondering whether to what extent that is a concern and whether that longer-term demand growth to the second half of the decade could actually be impacted by that. Thank you.
Yeah. Thanks for the question, Giacomo. Yeah, on the first one, we are close to the level we expect to see the switching back from oil to gas. Not sure where that will happen first. It could be in Europe, as you say. It could be the industry has reoptimized over the last year to put as much oil into gas as possible rather than the more traditional gas into oil. It could happen through that way or fuel switching in Europe. It could happen by gas going to some of the infrastructure that exists in Asia that isn't being utilized today. It could be the example Cedric mentioned, like India and Bangladesh or Pakistan or other places like Vietnam or Bahrain that's built LNG import infrastructure that hasn't started it up yet.
We are getting quite close to the level where that gas to oil balance starts to equalize. You could, you know, we're getting to a level where the downside is probably more limited, whereas still there's clearly upside, particularly if you get the strong economic growth in China on prices. We are, yeah, clearly approaching that range. In terms of Asian gas policies, absolutely. You know, it's very unfortunate. We have seen some examples. I just mentioned a couple of developing economies that have invested money in infrastructure to import LNG or to burn gas. Pakistan is one example where they've said, "Well, actually, this isn't working for us.
You know, let's go back to coal." Again, you know, the Philippines is another great example where there's LNG import infrastructure almost ready to go, but it's very hard to see how LNG could work in that market today. That's definitely a risk and a, that we see out there. If we could get our next question, please.
The next question is from Christopher Kuplent from Bank of America. Please go ahead.
Thank you very much. Good afternoon. Thanks for the presentation. I'm gonna start with my usual question, Steve. Maybe you can give us an update on, you've got these slides in there, how contracting is evolving, demand for long-term contracts shifting. What you're sensing. I'm not expecting any numbers. How those conversations are going when the current Brent slope is so materially below any spot indices around the world. The second question goes back to page 28, where you say yourself, you know, the left-hand chart has tightened yet again compared to last year. You've got the right-hand chart as well. My question is, you've got exposure to both the red and the yellow, i.e. you've got a lot of liquefaction in operation, a few under construction.
Particularly when you look at the right-hand side of that chart, how keen are you in this environment to push for more FIDs? What is your takeaway from those two charts put together? Thank you.
Okay. Thanks, Christopher. I'll take the first one. Cedric, I'll get your thoughts on the second one.
Mm-hmm.
Okay, great. Yeah, long-term contracts are, you know, would clearly be attractive today if you could get them today. I think the challenge is that if you want a term contract starting in the very near term, then there is a very significant price to be paid for that. What we are starting to see is a healthy dynamic of quite a few long-term contracts that are being signed, but they don't start up for several years. That's very important because those are the contracts that enable the growth of the market. They enable new projects to be sanctioned. If you want a long-term contract starting up in the very near term, then you have to reflect the current high spot prices in that contract, and that makes that discussion much more complicated for buyers.
Yeah. Thanks, Steve. Thanks, Christopher. I think in terms of our, you know, forward investments from our supply portfolio, I'd say primarily we're still steering at the left-hand side of that chart, whilst also balancing against the various scenarios that you see on the right-hand side. I think particularly out to 2030, you'll see that there's quite a confidence in terms of that tightness still and looking to expand our supply portfolio there. Doing that through a number of things. I think primarily, first of all, in terms of ensuring that we fully utilize the infrastructure that we already have, in terms of working on additional gas supply and backfill into those across our different assets.
We're also building out, of course, with LNG Canada coming on stream in the middle of this decade, an additional train in Nigeria. Our participation in, you know, an invitation into the two new projects in Qatar. Recently had an agreement around extension of Oman LNG. All of these, including also, you know, through Steve's organization, looking to secure additional supply also from third parties, particularly in the U.S. Gulf Coast. I think that takes us, you know, well through the end of this decade and replenishing our supply portfolio there. I think at the same time, we do continue to develop projects, going out further than that.
For example, the second phase of LNG Canada or other projects. I think for all of those, it's just critical that we continue to ensure that they will be extremely competitive, you know, in terms of their, you know, the cost at which they will bring it to the market, as well as balancing, you know, having the lowest carbon footprint that we can for these future projects. Through that, I believe they will remain competitive in terms of being the projects that will secure that market, even if it declines, as you saw on the right-hand side of that chart.
Yeah. Just to build on the points on third-party supply. I think we're very well-positioned. You know, we showed in the presentation the two big areas of growth are expected to be Qatar, where we have our own participation in the projects, but the U.S. where, you know, we're a big off taker today. Our Venture Global supply will start up this year. We have our new Venture Global contracts. We have NextDecade, NLNG, you know, at the front of the queue to be sanctioned. A lot of potential supply to come from those sources without necessarily deploying our capital in them. I guess the big uncertainty in the industry is Mozambique. We have a contract there that if they are successful and move forward, we will also have supplies from that position.
A lot of uncertainty in long-term contracts, but the market is starting to contract again. Deals are getting done again, and we're well-positioned. Thank you, Christopher. If we could get the next question, please.
The next question is from Paul Cheng, from Scotiabank. Please go ahead.
Thank you. Good morning or good afternoon for you gentlemen. Two question, please. First, given your pretty bullish or tight supply market outlook, how does it impact on your longer term price contract strategy? I mean, historically that Shell would like to maybe take or pay long-term contract 80% plus before you sanction a new major LNG project. Does it change given your outlook? The second question is, Russia seems to be moving pretty aggressively to add pipeline capacity to the East, moving to China. How does that impact or build in into your outlook?
Okay. Thanks, Paul. Cederic, maybe you want to take the pipeline to China question-
Sure.
I'll take the pricing one.
Sounds good. Okay. I'll start with that one. Thanks, Paul, and good morning to you. Yeah, I think first of all, probably the one thing that's obvious to many on the call, but just to highlight is that, of course, if you look across the Russian system, not all of that gas supply is interconnected. Very much so the Western Siberian system that has been traditionally supplying Europe is not connected to the Eastern Siberian system, where we also have the Power of Siberia currently supplying to China. You are correct that, you know, they're working on potential options to connect those systems as well as maybe additional new routes out to supply, you know, pipeline gas supply to China.
I just think we need to realize that, one, those projects, you know, as we've seen with the Power of Siberia, for example, take quite a time to bring to fruition. That will take time to come to the market.
I think very much as Steve also showed in terms of the China picture, if we see kind of the return to expected growth in China, they will really need all three of these sources in order to help, you know, meet the demand that they have, coming both from domestic supply, from that increased pipeline, as well as continued LNG, you know, supply into that market as well to fulfill all that demand that we expect, certainly until the end of this decade.
Yeah, Paul, on our strategy, fundamentally it hasn't changed. You know, we value long-term contracts and price formulas, we also are very active participants in the spot market. It's the combination of the long-term contracts and the spot position and the scale and flexibility of our portfolio that creates the potential for the optimization value that we fortunately benefit from. Having the market continue to have long-term contracts and spot contracts, and importantly, different types of indexation under the long-term contracts, is something that meets our customer needs, but it also suits our business model very, very well.
Fundamentally, our IG business remains a production business where our returns are driven by the absolute price level, a marketing business which benefits from price spreads and arbitrage opportunities, which benefits from the level of those price spreads, and a trading business that benefits from price volatility. As you saw last year, we benefited overall because we saw high prices, high price spreads, and high volatility. Maintaining that business model is something that we'll continue to plan to do. If we could get the next question.
The next question will be from Kim Fustier from HSBC. Please go ahead.
Hi, good afternoon. Hopefully you can hear me. I have two questions, please. The first one is on European buyers, specifically end users of gas as opposed to portfolio players. I mean, European buyers have been quite slow at signing up new LNG long-term LNG contracts, particularly compared to Asian buyers. To what extent is this reluctance arising from structural factors, notably the EU's emission reduction pledges? Is there anything that you think could overcome this reluctance on their part? My second question is on U.S. supply. Given the increasing role of U.S. LNG exports in the future, should we have any concerns around the availability and cost of Henry Hub feeding into those U.S. LNG export plans? Do you think U.S. exporters or off-takers should be doing more to secure upstream supply and maybe become more vertically integrated?
As kind of a follow-on to that, I mean, there are so many U.S. projects, right now currently being considered. What do you think differentiates those projects from one another from the perspective of buyers? Thank you.
Yeah. Thanks, Kim. On European buyers, I agree that there's probably a couple of challenges. Again, it comes down to certainty. Probably the biggest uncertainty is the regulatory one. Clearly, governments in Europe are very supportive of LNG imports today, there isn't the confidence that will support will remain for the 20 years from the start date in two or three or four years' time, that when companies sign up for a long-term contract, the regulatory support they expect to see at the start of that contract will still be there at the end of the contract.
I think European companies are very nervous of having a situation that when Europe has moved through this energy crisis and the focus moves back onto emissions reduction, they will have LNG contracts which will be very difficult to manage in the European market. That's probably the biggest reason. The second challenge they have is, as we showed, most LNG contracts today are available on a Henry Hub indexation or a crude oil indexation. The European gas market is still driven by TTF pricing. What we've seen in the last year is the cost of hedging cross-commodity risk between different regional gas markets can be very, very expensive.
I think some of the cash flow challenges, some of the volatility challenges, some of the performance issues challenges the industry's seen over the last year is a secondary consideration why European companies have been a little bit nervous. In terms of the U.S., clearly, you know, the significant ramp-up of U.S. exports that we expect to see will, you know, have a bullish impact on Henry Hub prices. The cost curve for gas in the U.S. Is relatively flat. There is a lot of gas available in the U.S., and with a relatively flat cost curve, we don't expect necessarily the same level of price volatility in the U.S. As we're seeing in LNG recently. That was one of the first charts we showed you this year.
Going forward, there will clearly be, you know, a need for the U.S. upstream business to improve its methane and emissions performance. There'll be a need for new pipelines to be sanctioned. You still have that regulatory risk. In terms of Different projects in the U.S., I think the key differentiating factor is credibility and competitiveness. There's been a lot of projects that are proposed. We're now at a position where some projects have aggregated sufficient demand to be financiable. They're going to the lenders, and we're expecting to see projects approved. It's interesting that some projects have tried to differentiate themselves based on offering other commercial terms, but that proved to be quite challenging to be financiable.
The, you know, the most credible, lowest cost, Henry Hub plus constant, commercial structure seems to be the most successful model in the U.S. at the moment. Thanks for that, Kim. If we could take our next question, please.
Yep. Just a reminder to everyone, before we go on to the next question, if you'd like to join the question queue, just dial star one on your telephone. The next question will be coming from Anish Kapadia from Palissy Advisors. Please go ahead.
Hi, good afternoon. Just had a question on the LNG supply outlook. I just wanted to kind of get your views on what do you expect to be FID in terms of new LNG supply over the course of this year and next year? You know, there does seem to be a lot of gas out there globally to be developed. You know, you talked about the U.S. and the growth from Qatar, you know, also, you've got Canada. You've got other places that I think are riskier but have a lot of gas, like Tanzania, Senegal, Mauritania.
Just if you could talk through a little bit about your expectations on FIDs and, you know, where I suppose where you see that kind of range in terms of new supply kinda coming on stream four or five years out.
Yeah. Cederic, why don't we split that one, and you take the Middle East and East Africa, and then I'll do the rest of the world after you finish.
That's fine. I'm happy to take Canada as well.
You go for it.
Uh-
Why don't you go for our projects, and I'll do the others?
No, that probably makes sense. Yeah. Let me start with Canada perhaps. You know, we are working with the joint venture on-
Yeah
... you know, progressing this, the second stage, of that, and so an additional third and fourth train. I think the critical thing is getting it to, you know, the right level of competitiveness in terms of also the capital returns that we'll then achieve from that project, as well as finding the right balance in terms of its carbon footprint also with the local stakeholders and the government of BC and their requirements. It's something that we're working on hard right now. I don't think, Anish, that we will be seeing that come to an FID this year. Continuing to progress that. In terms of your specific question about this year, I think that will take a little bit longer than that. I think equally if you...
Of course, in Qatar, you know, we have the North Field East project, which has already taken FID. Also, QatarEnergy, along with its other partners, including us, is progressing, I think, rapidly on the North Field South. We are exploring other projects potentially in the Middle East, in the months ahead. Lastly, maybe on, you know, a specific question about Tanzania. I think we're still, you know, working on constructive discussions with the government there around what would be the requirements to have a competitive LNG project in the country. I think those are progressing well.
Need to not forget that we're still at a relatively early stage, so, you know, still ahead of what we would call the Decision Gate 2 kind of stage for that for that project. Still ahead of FEED and everything else in terms of its level of maturity. Steve, maybe you take the other projects outside.
Yeah.
Yeah.
You know, there's lots of what you describe as small bits and pieces, small projects and debottlenecks and things around the world. In terms of the material supply sources, it comes back then to the United States and potentially Mozambique. You know, Mozambique has the potential to be a very significant supply source. The gas is clearly there. They started the project. They put it on hold because of the security situation. If the security situation is resolved, then that's a significant basin that can start up relatively quickly because there's already, you know, a certain amount of work that was already done before the halt. In terms of the U.S., as Kim mentioned before, there's quite a few competing projects.
I think we would suggest the ones that are nearest to the front of the queue would be the NextDecade project and the Port Arthur project on the Gulf Coast and also the Mexico Pacific LNG project on the West Coast of Mexico. There's others behind it. There isn't necessarily a shortage of projects. I think the challenge that project sponsors will have today is making sure that they can remain competitive and secure financing in what is an inflationary environment for project costs. Hopefully that's helpful, Anish Kapadia. If we can take the next question, please.
The next question is from Irene Himona from Société Générale. Please go ahead.
Thank you. Good afternoon, both. My first question refers to slide 18, where you show this very material European industrial demand drop. How much do you estimate this will be a genuine demand destruction versus a price response? In other words, how much of that could come back at the current very low prices? Then secondly, short term, January, February, what are you actually seeing in China in terms of any uptick in their LNG inputs? Thank you.
Yeah. In Europe, industry has a real dilemma. It's, you know, Europe has a very gas-intensive industrial base that was built and underpinned by cheap Russian gas, and that cheap Russian gas doesn't exist anymore. Therefore, there is three options. You could switch to an alternative fuel supply, but that will probably take time to put in place unless it's coal, and then you've got all the environmental challenges we described before. You could find a replacement source of gas, but that will inevitably be more expensive than the Russian gas or certainly have a higher cost structure. Finally, you could allow, rather than bringing gas to the existing demand, you could move the demand to a location where the gas supply is cheaper.
I think Europe has been very focused on the first two of those options so far because of the jobs, the economic benefits of retaining industry rather than allowing demand to be exported to cheaper sources. You know, that's something that will have to be resolved as Europe rebalances on a structural long-term basis. In terms of China, we are seeing a lot of what you call leading indicators that the economic recovery in China is starting to happen, and therefore, there would be an expectation that LNG imports would grow significantly. We're also seeing government policies that are encouraging the Chinese buyers to hold on to their contracts or go out and secure more volumes in the market in a way that wasn't happening several months ago.
While we haven't seen the imports into China start to rebound yet, we're seeing signs that the economy will recover quickly, which will drive those imports, and signs that the Chinese buyers are taking action based on that assumption. If we could take our next question, please.
The next question is from Lydia Rainforth from Barclays. If you could go ahead, please. Thank you.
Thanks. Hello there. I've got actually a couple of questions, please. The first one was on that point you made earlier around China now becoming the balancing market, and I'm not sure I fully understood kind of what the implications are of that that you see. The second one was on utilization rates. 'Cause clearly there's been a lot of volatility, there's been outages, but there's certainly some mature assets that are declining. So if you can help us think about how we should see those long-run utilization rates for the industry. I'm sorry, I'm just gonna do one more if I can. The chart on slide 28, where you talk about the supply gap for 2030 onwards, that's very clear.
It looks like kind of we've got a supply gap to 2025, then a wave of projects where it's more, say that 2025-2030 period is more balanced, and then that supply gap emerges again. Is that a fair summary of that chart? Thank you.
Yeah. Thanks, Lydia. Cedric, why don't you start with the utilization rate one, and then I'll take the other two points.
Yeah. So Lydia, I'll also maybe focus specifically on our own assets. So this is something where we have seen out of, out of COVID, we've seen some of the challenges around, you know, what was happening in terms of, perhaps investment levels at the time with the lower prices, as well as some of the difficulties of doing, some of the maintenance, as well as upstream work in that period. We've seen some of that impact, particularly in 2021.
We've already seen an improvement in that in 2022. It's effectively the primary focus that we have going forward now around restoring not only the operational, you know, excellence in terms of plants, but very much also, as I mentioned earlier, ensuring that we work on gas supply into the plants and utilize them to the maximum extent, as in places like Nigeria, that is in... Also further in places like Trinidad and Tobago, Egypt, Brunei, et cetera, all where we're focusing on seeing how do we keep the plants as full as possible. Maybe touch on Nigeria for a minute.
I think that's one where if we look a little bit further back, as I said, also because of some of that period coming out of COVID where we actually had a reduction in the actual upstream gas production levels. That's really been restored now as we look through 2022 in terms of the well capacity and the production capacity is there. Currently, the issue is more of the pipelines in order to bring it to the plant. We've had challenges there in terms of many illegal connections into these pipelines, both liquids and some of the issues with gas pipelines even. We're very actively restoring that.
I expect in the months and in the period ahead that we will that we'll be increasing the gas supply there and bringing more product ultimately into the plant at NLNG in Nigeria and then into the market.
Okay. Thanks, Cedric. If I take your other two questions, I'll probably take them in reverse order.
Yeah.
Lydia. The sequence you talk about, you're quite correct. We have tight market conditions at the moment. The market doesn't feel that tight today because we've just come out of a very mild winter. You know, the market is less pressured than it was several months ago, but at historic, very, very high prices. The world has lost the equivalent of about 100 million tons of Russian pipe gas into Europe. LNG is filling a portion of that hole, therefore the LNG market is structurally tight, but it's not as tight today as it was a few months ago just because it's the end of a mild winter.
That tightness will continue, that structural tightness will continue for at least a couple of years because there is very little new projects coming on stream until 2025, 2026, 2027 when you get this big wave of new supply from Canada, from Qatar, from the U.S. That will definitely help rebalance, but it's still projects that were committed to and sanctioned before the Ukraine crisis actually happened. It was LNG that the world thought it needed and would be absorbed before this additional hole came on. You've definitely got a period now where the market will be tight. You've got a period where a lot of new supply will come on, and the market will be less tight.
When you get to 2029 2030, there's clearly a need for more projects to come on stream, and depending on what sanctions happen this year and next, we'll see whether that gets filled quickly or not. In terms of China as a balancing market. First of all, let me be clear, that's a good thing. The LNG market was developed with a quite an inflexible business model. The market was built on long-term contracts, one supply source, one market, ships just going backwards and forwards. Over the last decade or so, what we've actually seen is the LNG market becoming incredibly flexible to balance global gas markets around the world when we've seen various supply disruptions or demand disruptions or changes in the economy or all sorts of issues. You know, Fukushima was a previous incident where LNG basically quickly rebalanced energy markets.
For LNG to play that role, to bring flexibility and reliability and make global gas markets work, it needs flexibility in the system, and that flexibility needs to come from somewhere. For at least a decade, until recently, it's Europe that's provided that flexibility. Europe isn't offering flexibility to the global LNG market today. For it to continue to be a flexible market and to be able to respond to changes in supply and demand and customer needs, it needs a flexible outlet. What we're saying is China, you know, is starting to put together the characteristics that will allow it to play that role or play that role maybe in combination with Europe in some ways. It's good for the global LNG market. It's probably good for Chinese importers.
You know, we probably expect them to become tougher competitors. I think that was probably gonna happen anyway. I think we've covered your three questions. Let's move on to the next one. Thank you, Lydia.
We have no further questions in the queue.
Okay. Well, we'll wait 60 seconds just in case somebody's struggling with the technology. If we don't hear anything in that time, then we will thank you all for your attention, your interest, wish you very best and encouraging you to continue to watch this most fascinating market going through an unprecedented period. No more questions? Okay.
We have another question that's just come through just before you. We've got Kim Fustier from HSBC. Please go ahead.
Hi again. I had two follow-up questions, please. The first one was on the impact of the proposed, well, not proposed because it's been confirmed, but the EU price cap on TTF. How do you see that impacting the market, potentially, things like liquidity or trading flows moving from one place to another? The second one was on Europe's LNG import infrastructure. I mean, Europe has been very quick at rolling out LNG regas terminals. In a way, that was probably the easy bit. There's been less activity on new gas pipelines and storage capacity. Do you see this changing at all?
Yeah. Thanks, Kim. On the EU price cap, I think the answer is it hasn't had a big impact on the market yet because it was set at a level that was so far above the current market. I think to the extent we see a price rally and, there's a fear that it will come into play, then you will definitely see actions, where people try to take away that risk, that uncertainty.
Mm-hmm.
You know, clearly, ICE, the biggest financial market for gas in Europe, has stated that they don't believe they can operate a market effectively with a price cap. The way they would be able to do that is by significantly increasing initial margins. You know, the industry has already been challenged over the last year with the amount of money required for initial margins and to support hedging activity. That would be quite a difficult situation for the industry to manage and therefore, you know, switches to OTC markets to the U.K. rather than the Amsterdam market. You know, there's lots of situations where people are trying to understand what the alternatives will be in that scenario. Price caps, we don't think are something that are particularly helpful in solving the current challenges in the way that, you know, creating new infrastructure are.
You know, where price caps are playing a more significant role already is in Australia. You know, the high prices we've seen in Europe have transitioned quite quickly to high domestic gas prices in Australia. The Australian government has introduced price caps below the market level rather than above. That creates additional uncertainty. It creates uncertainty over will there be the future investment. It creates uncertainty over developing the import projects that Australia needs to meet its peak winter demand. Price caps, we believe is not part of the preferred regulatory intervention solution, which is doing something that actually helps rebalance supply and demand. In terms of infrastructure, you're right. You know, FSRUs have the benefit that they're available and they're quick to install.
Europe has a gas pipeline network, which is primarily been designed to move gas from east to west, whereas now most of the import capacity for new supply is on the west side of Europe. What we saw earlier this year was occasions where the import capacity wasn't full, but you couldn't bring more LNG in because of downstream constraints. You know, that will need to be debottlenecked. Putting the FSRUs in the right location will help do that. Ultimately, that gas infrastructure needs to be fixed, but that's something that won't be quite as quick as the FSRU solution, I think that need is understood. Okay, well, assuming we have no more questions. Could you just confirm?
I can confirm we've got no more questions at the moment.
Okay. Well, thank you, everybody, for joining us. I've already almost closed once, so I'll leave it here and wish you all the best. If you have any further questions, if you get to our IRA team. Thank you very much.
Thank you. Bye-bye.