LNG In A Fragmented Future World
New supply and demand models released by oil and gas firms show that the LNG trade could become increasingly important over the next two decades as countries shift focus to energy security over emissions management.
A study last month by think-thank the European Council on Foreign Relations (ECFR) concluded that the world order is becoming increasingly fragmented, with every new conflict representing an opportunity for nations to reset trade and security alliances.
What does this mean for energy markets? Primarily that nations are starting to prioritize energy security as the most important branch of the ‘energy trilemma.’
This shift has led Shell plc to revise its scenarios — models developed to help the firm think about how to plan for the energy future — for the first time since 2021.
The firm has developed a new ‘Archipelagos’ scenario, which envisages an increasingly isolationist U.S. foreign policy and weakened international institutions such as the World Trade Organization (WTO) and the United Nations (UN).
“Rather than working together to save the planet, groups of nations now scramble to secure energy supplies and focus on building energy resilience to withstand future shocks,” says Shell’s Archipelagos scenario outline.
Under Archipelagos, emissions management fades as a short-term priority for countries such as Australia, Canada and the U.S., and they begin to join gas producing countries in the Middle East in meeting third-party demand for energy security. Meanwhile, emerging economies on the Indian subcontinent and in Africa continue to put climate at a lower priority than energy access and energy security. The EU sticks to its climate targets, but still looks to import LNG in the short-term.
At the same time, Shell has developed a new ‘Sky’ scenario that reverse engineers an energy landscape from a world that has achieved net-zero emissions by 2050 and kept global warming below 1.5 C by the end of the century.
Implications for gas markets
Under Archipelagos, global gas demand peaks in around 2035 at about 150 tcf annually, up from just under 144 tcf in 2022.
A reluctance to invest in new pipeline projects, which are expensive and typically take a decade to build, means additional demand for natural gas is largely met by LNG. Consequently, LNG supply does not peak at the same time as overall gas demand. In fact, it increases dramatically all the way out to 2040, reaching over 675 million tonnes annually by 2040 from today’s levels of 397 tonnes per year.
Under the Sky scenario global LNG supply has fallen by 2040, but only marginally, to around 375 tonnes per year.
BP plc’s energy outlook, published earlier this year, also considers the effects of the Russian-Ukraine war. Although it sees emissions falling across all scenarios compared with last year’s publication (driven by the war’s drag effect on global GDP and trade), the increasing focus on energy security still supports the LNG trade.
Its ‘New Momentum’ scenario — broadly equivalent to Shell’s Archipelagos in terms of emissions reductions — predicts over 700 million tonnes of LNG trade in 2040.
Like Archipelagos, New Momentum is designed to capture the broad trajectory the global energy system is currently travelling rather than targeting net zero and working backwards.
LNG players will be looking at these scenarios (see chart below) and thinking they are more likely to occur than the 1.5 C path or achieving net-zero targets in the current global context.
Only the most ambitious climate reduction scenarios see a fall in LNG trade out to 2040.
“We still believe gas is part of the transition and we continue to be aggressive in LNG,” said TotalEnergies SE chief executive officer Patrick Pouyanne at the firm’s Sustainability and Climate investor conference in late March.
By 2028, TotalEnergies will add 3.5 million tonnes of annual LNG production to its existing portfolio of over 40 million tonnes. And for the first time this year the firm started releasing data on how much its LNG trade had reduced emissions by displacing coal and fuel oil for electricity generation — a figure it put at 70 million tonnes in 2022, showing how it is attempting to position LNG as an enabler to the transition.
Implications for climate
Shell says its Archipelagos and Sky scenarios can be seen as the bookends for the span of possible outcomes in 2100. Where Sky will keep global warming to 1.5 C, Archipelagos results in 2.2 C of warming over the century, according to an independent assessment of the scenario.
There is still scope for closer adherence to the Sky scenario, but rising geopolitical tensions over Taiwan, North Korea, or a regional conflict in the Gulf will only serve to steer the world further onto an Archipelagos / New Momentum pathway.