The LNG market faces big decisions over the next few years.

Shell plc’s latest LNG outlook sees demand reaching 650 to 700 million tonnes per year by 2040. The firm said clearly that more investment in liquefaction projects is needed to avoid a supply-demand gap it expects to emerge by the late 2020s.

Some LNG supply is under construction but only enough to get the world to just under 500 million tonnes per year by 2040, leaving a gap of 150-200 million tonnes, according to Shell projections.

This view conflicts starkly with the pronouncements of organizations such as the International Energy Agency (IEA), which say that no new fossil fuel assets can be developed if the world is to achieve net zero by 2050 — the headline goals of the Paris agreement.

Under the IEA’s net zero scenario, LNG demand falls to under 200 million tonnes annually by 2040. Even under the announced pledges scenario (APS), which reflects nations’ pledges to the Paris climate deal that still fall short of cumulatively amounting to the headline target, less than 400 million tonnes annually of LNG will be needed by 2040.

So, what is going on? Why the diversity of scenarios? Put simply, Shell’s demand forecasts do not see the world cutting its dependence on gas to the extent required by the Paris Agreement.

This could be unwelcome news for the climate, but it might not be wrong.

China — one of the chief buyers in the global LNG market alongside the EU and Japan — has nothing in its nationally determined contribution (NDC) to the Paris deal on phasing out LNG imports.

That NDC target is rated as ‘highly insufficient’ and equates to around 3 C of warming rather than the 1.5 C upper ambition target set by the Paris deal, according to Climate Action Tracker (CAT), an organization which tracks national climate contributions, meaning China is prioritizing economic growth and energy security over Paris-aligned emissions cuts.

Scenarios from Shell and the IEA show vastly different demand projections

Dilemma days

This presents a dilemma for upstream and midstream gas developers. If they look to meet this demand, they will be accused of locking-in fossil fuel infrastructure. They may even have their credit ratings re-evaluated based on potential stranded assets.

Should the APS be achieved and all LNG supply under construction completed, that would already lead to nearly 100 million tonnes annually of LNG liquefaction capacity becoming stranded assets — and even the APS would not achieve the goals of the Paris Agreement.

But maybe these assets won’t get stranded. Already the EU majors have started to switch their attention back to oil and gas as the political reality of energy demand has cemented the idea that nations will prioritize energy security as the most important of the three pillars of the much-discussed energy trilemma.

If demand curves stick closer to those projected by Shell than those required by the APS, where does the upstream investment come from?

One answer is Canada and the U.S. American firms are showing a willingness to keep on investing, as discussed in last week’s update. Another answer is China itself. China’s shale production is expected to reach 20 bcf/d by some estimates, which would make it the world’s second-largest producer after the United States.

Should upstream investment decisions not be taken and simultaneously demand is not abated, long lead times will cause a tight gas market and high prices. Of course, that will lead to some demand destruction — especially in China, which as Shell notes is increasingly taking over from the EU in providing global gas markets with demand flexibility — but it is likely to be messy and costly for the global economy. As often noted, a phased approach is the most pain-free way for the global economy to transition away from fossil fuels.

Third way

Is there a third way? Optimists point to the world’s first carbon-neutral LNG cargo delivered last year. The method to achieve this involves reducing operational emissions as much as possible and then using offsets. The pilot cargo was delivered by Shell Eastern LNG from the Gorgon project in Australia to Taiwan’s state-owned CPC Corporation.

Sound too good to be true? It just might be. The technology to reduce operational emissions is expensive and doesn’t always work. Chevron Corporation’s $54-billion Gorgon gas export plant was supposed to inject at least 80 per cent of the CO₂ it emitted — but so far has injected just a third.

Meanwhile the carbon offset industry has also come in for widespread criticism for the varying quality of its credits. In its state of Carbon Credits 2022 report released last year, carbon credits rating firm Sylvera found that only 31 per cent of offsets projects rated were producing high quality credits.

Others point to making LNG infrastructure ‘hydrogen ready,’ meaning that it can be built now for LNG and then used for low-carbon hydrogen later in the century. Recently announced EU import projects are using this strategy.

But hydrogen is very different from methane, with very different infrastructure requirements. And while the demand-side infrastructure can avoid tough questions with the term ‘hydrogen-ready,’ the supply side most certainly cannot.