External environment creating more opportunities for gas and LNG

Multiple levels of policy support gas and LNG demand

Gas supports renewable power generation and provides cleaner non-power energy supply

Strong LNG fundamentals exceeded expectations in 2017

11% increase in LNG imports led by Asia

Physical and �nancial liquidity increases as the market evolves

Supply investment required to meet long-term demand growth

natural gas-�red power plants also emit less than one tenth of the pollutants.It is one of the few energy sources that can be used to generate power, provide heat for both homes and essential industrial processes and fuel the transport of people and goods.

Natural gas – both piped and LNG – also supports the integration of variable renewable power generation because it can quickly compensate for dips in solar or wind power supply and rapidly respond to sudden increases in demand. The rapid growth of LNG is helping increase energy supply, security, diversity and �exibility.

change catalysed the global drive to cut greenhouse gas emissions and improve air quality, while providing energy to everyone.

To do this, a transformation of the global energy system is required across power generation, industry, transport, and the heating and cooling of buildings.

Natural gas is helping to provide more and cleaner energy around the world. Gas emits between 45% and 55% lower greenhouse gas emissions than coal when used to generate electricity. Compared to coal plants, modern

OVERVIEW

Powering progress

More and cleaner energy

Meeting increasing global energy demand while reducing impact on the planet and the air people breathe is one of the greatest challenges of the 21st century.

Even assuming signi�cant future gains in ef�ciency, the world’s demand for energy is expected to grow by 30% between 2015 and 2040. This will be driven by an increasing global population, economic growth, and more people moving to cities. Rising demand is expected to be concentrated in China, India, Africa, the Middle East and South-East Asia.

Today’s energy mix is responsible for two-thirds of global greenhouse gas emissions, and has a signi�cant impact on air quality, particularly in densely populated urban areas.

The UN’s sustainable development goals and the Paris Agreement on climate

EXTERNAL ENVIRONMENT CREATING MORE OPPORTUNITIES FOR GAS AND LNG

Shell LNGOutlook 2018

economies in Asia – will come from sectors that are more dif�cult to electrify, such as the production of steel and cement.

Domestic natural gas production is expected to continue being the dominant source of gas supply – especially in North America and parts of Europe where well-connected pipelines are already in place. In regions such as Asia and the Middle East, where cross-border pipelines are limited, LNG is expected to play a more signi�cant role.

Floating storage and regasi�cation units (FSRUs) continue to enable fast, �exible and economically competitive options for countries looking to import LNG. These vessels can be docked in a port to re-gasify LNG and feed gas into a transmission or distribution network.

In 2016, natural gas overtook coal as the single largest source of power generation in the OECD. A combination of factors led to this continued rise in demand for gas, including the implementation of robust government policies that place a cost on carbon emissions and the US shale gas revolution.

Between now and 2035, natural gas demand is expected to grow at an average of 2% per year; twice the rate of total global energy demand. Demand for LNG is set to increase at an average of 4% per year.

Gas is expected to make up over 40% of energy demand growth over the next two decades. While gas will continue to be used to generate power, the bulk of future demand growth – led by rapidly growing

going into the year. That is nearly as much as the total volume that Indonesia, the world’s �fth largest exporter, produced in 2017.

There was also signi�cant demand from Southern Europe, which imported an additional 10 million tonnes, which was double the forecasts. There was a decline in the number of LNG deliveries to North West Europe, a sign that LNG volumes were “pulled” into other countries with higher netbacks for suppliers.

Japan remains the world’s largest LNG importer, followed by China, which eclipsed South Korea for the �rst time.

tonnes with 45% of planned capacity expansion completed.

Signi�cant LNG exports came from new supplies in the USA and Australia, with increased output from existing LNG supply facilities in Africa. In 2017, demand for LNG was strong with a clear “pull” from countries instead of a “push” of volumes seeking a home. This was similar to 2016, but during 2017 the demand pull was from legacy gas and LNG importers in Asia and Southern Europe; whereas 2016 was characterized by a pull from new areas of demand. Asian demand grew by more than 17 million tonnes, beating industry predictions

The number of countries supplying LNG stands at 19, up from 12 at the start of the century. This rapid growth has strengthened the �exibility and security for countries importing LNG. Last year, China alone imported gas – both piped and LNG – from more than 20 countries.

Over the same period, the number of countries importing LNG has quadrupled, with LNG trade increasing from 100 million tonnes in 2000 to nearly 300 million tonnes in 2017. That is enough to power 575 million homes.

By the end of 2017, the global LNG market size had grown by 29 million

Gas set to make up over 40% energy demand growth

In Europe, more than ten countries announced coal-phase out ambitions.

In addition to regional and country-wide policies, measures were also taken in many cities around the world to curb local pollution. Mayors from nine major European cities demanded tougher air pollution rules for vehicles; and in Berlin, local coal plants were closed to improve air quality.

In 2017, government policies focusing on climate change and air pollution had a positive impact on gas demand.

In China, the 13th Five Year Plan targeted 350-380 billion cubic metres of gas demand by 2020. In South Korea, the 8th Basic Plan for Energy prioritises renewables and gas, while not sanctioning new nuclear and coal.

Impact of policies

Supply and demand trends

2

The total length of the world’s natural

gas pipelines would stretch

to the moon and back eight times

8x

G20 endorses the role of natural gas in energy transition

STRONG LNG FUNDAMENTALS EXCEEDED EXPECTATIONS IN 2017

3

SUPPLY INVESTMENT REQUIRED TO MEET LONG-TERM DEMAND GROWTH

A mismatch in requirements between buyers and suppliers has emerged that needs to be resolved to enable project developers to make �nal investment decisions needed to ensure enough future supply of this cleaner-burning fuel. Most suppliers are still seeking long-term LNG sales to secure �nancing. But LNG buyers increasingly want shorter, smaller and more �exible contracts to remain competitive in the downstream power and gas markets in which they operate.

introduces greater uncertainty around demand for individual buyers. It has resulted in the buyers �nding it increasingly dif�cult to buy LNG volumes on a traditional long-term, �xed volume basis.

With regards to LNG contracts, buyers continue to sign shorter and smaller contracts. 2017 average contract length was less than 7 years Some new LNG buyers have more challenging credit ratings than is the case with traditional buyers.

Following the wave of investment from 2011 to 2015, �nal investment decisions on LNG projects have nearly stopped. As LNG projects generally take more than four years to start production, new supply will not be ready until well into the next decade.

Meanwhile, the underlying market drivers and even the buyers are changing. This is due to increasing levels of deregulation and competition in the downstream gas and power markets. Typically, this

re�ects demand from the industry for price risk management. Traders’ activities also increased in 2017, with a focus on

intermediary services to the industry from price risk management to spot liquidity, credit services and infrastructure development.

Rise in spot cargoes

Last year, for the �rst time, the number of LNG spot cargoes reached more than 1,100, around three cargoes a day.

Historically, about half of all spot cargoes are supplied to North East Asia, where one cargo a day is traded. With LNG demand outpacing contracted supply, there was an increase of spot cargoes into China.

While the number of spot cargoes in the region has been around 400 in recent years, the use of the Japan Korea Marker (JKM) LNG benchmark price assessment has increased. Exponential growth of JKM futures contracts in 2017

1100 Spot cargoesdelivered

17% increase overlast year

Gas demand grew by 31 billion cubic metres – up 15% from 2016.

Total demand for LNG reached 38 million tonnes, making China the world’s second largest importer.

Although contracted LNG supply doubled between 2014 and 2017, spot LNG buying occurred during winter to help

meet strong demand.

Growth in demand for piped gas and LNG is the result of policies to reduce air pollution through coal to gas switching

and continued economic expansion.

Gas demand also increased in the industrial sector and in transport, with LNG being used to fuel trucks. In 2017, over

70,000 new LNG fueled trucks were added.

IN FOCUS: CHINA IN 2017

Continued strong growth in demand for LNG

LNG trade reached 293 million tonnes – Enough to power 575 million homes

LNG imports grew by 29 million tonnes - 30% more than expected

China overtook South Korea to become second largest LNG importer

Australia, US and Africa dominated increase in LNG exports

1100 Spot cargoes delivered - 17 % increase over last year

2017 FACTS

Natural gas is expected to grow at an average of 2% per year over the next couple of decades; twice the rate of

total global energy demand. Demand for LNG is set to increase at an average of 4% per year

Gas is expected to account for over 40% of total energy demand growth over the next two decades

Final investment decisions on new LNG supply projects are required soon to avoid a supply shortage in the 2020’s

FUTURE TRENDS

4

www.shell.com/lngoutlook

575million homes

Enough to power

293million tonnes

LNG trade reached