Natural Gas: Necessary Transition Fuel or Potential Misadventure?
In the world of energy, the Asian Development Bank (ADB) has raised concerns about the reliability of LNG in the region due to price volatility. This issue has been further exacerbated by delayed gas-fired power plant completions, leading to power outages in cities like Hanoi, Vietnam.
The investor's focus, however, extends beyond the immediate challenges. They highlight the importance of future-proofing new gas power stations, ensuring they can be adapted for hydrogen and Carbon Capture and Storage (CCS) technologies.
Shell, a major player in the LNG market, has seen significant earnings growth in the first quarter of 2024, largely driven by LNG sales. However, the Institute for Energy Economics and Financial Analysis (IEEFA) questions Shell's reliance on rapid demand growth in China and other Asian countries, suggesting it may never materialize.
Adding to the controversy, the Australasian Centre for Corporate Responsibility (ACCR) has uncovered instances of what appears to be misrepresentation of data in Shell's LNG forecasts. This has led to concerns about the company's optimism for the future of fossil gas and the risk of over-investment in LNG infrastructure.
The ADB report also cites gas-to-power and LNG import projects delayed in Vietnam and the Philippines due to price volatility and supply unreliability. These delays have pushed many emerging markets, including Vietnam, out of the LNG market, as they were unable to compete with Europe's sudden demand spike following the Russia-Ukraine conflict.
In contrast, China has been a significant importer of LNG, with Pakistan importing the equivalent of 26% of its grid in solar modules from China over the last six months. However, LNG price and supply volatility have caused energy outages and economic crises for countries like Pakistan and Bangladesh, which heavily rely on LNG.
Nick Mazan, UK lead at the ACCR, argues that the massive upswing in LNG prices made it horrible for energy security in many Asian countries. He suggests that domestic stocks of renewable energy are a better way to provide energy security in the long-term.
Not all investors share the same sentiment. An Asian investor, while recognising the need to abate methane emissions associated with gas and LNG, supports LNG but emphasises the importance of a responsible phasing of gas and LNG in the energy transition.
Shell, undeterred, plans to expand its LNG capacity as part of its new energy transition strategy. However, this expansion has faced criticism from institutional investors such as AXA, Amundi, Brunel, London CIV, and Nest, who have publicly criticised the strategy and pushed for a vote against it.
Mazan's concerns about Shell's lobbying efforts in Asia, where energy demands are expected to double by 2050, are also noteworthy. By 2040, Shell forecasts LNG demand to reach about 680 MTPA, which is 30% higher than the IEA steps scenario.
As the world navigates the complexities of the energy transition, the future of LNG remains a contentious issue, with concerns about volatility, security, and the role of fossil fuels in a carbon-constrained world.
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