Steve Hill is responsible for Shell Energy, which is the face to the market for Shell's Integrated Gas business. Shell Energy trades and markets LNG, gas, power and emissions products, and manages market development and gas advocacy efforts to drive increased demand for LNG and gas. Steve is a member of Shell's Integrated Gas and Trading & Supply Leadership Teams.
Prior to Shell's purchase of BG Group, Steve was a member of BG Group's Corporate Executive Team. Since joining the company in 2002, Steve has been involved in various roles in building and optimising BG's LNG business in the UK, USA and Singapore. Prior to joining BG Group, Steve worked for Mobil and subsequently Exxon Mobil, in business development and trading roles in the UK, USA, Singapore, and Qatar. Steve graduated from Durham University in the UK with a degree in Engineering and Management.
Following are selected excerpts from BR Research's recent sit-down with Steve in Islamabad:
BR Research: Tell us about the dynamics of the global LNG market.
Steve Hill: Let me start with natural gas because ultimately LNG is gas and the market is gas market. We are very positive about the outlook for gas for a number of reasons.
One, people want cleaner and more reliable power. While renewable energy sources are becoming increasingly competitive in certain locations, they cannot be the whole solution as you still need power sources when it's not windy, or sunny, or raining. We think that natural gas is by far the best fuel to solve the intermittency issue with renewable energy. Gas-fired power plants are cheap to build and quick to switch on and off; gas is also abundant; so it will be effective to fill the holes. And we are seeing evidence around the world where a combination of renewable and gas is a compelling choice.
Two, in areas where energy demand is difficult to electrify - such as long-haul transportation through heavy-duty trucks and ships, cement factories, chemical plants, and industrial machineries - we again see pressure for the world to go to cleaner sources of energy. Even there, natural gas is a cheap and effective solution.
And lastly, the global population is growing; countries are getting wealthier; there is more energy demand despite higher energy efficiency; and the demand for gas is growing faster than overall energy demand because of its cleaner benefits.
So, our outlook for LNG is strong, because our outlook for natural gas is strong. In fact, LNG demand is growing faster than natural gas demand because of i) the former's potential for marine transportation, ii) Asia's dominance in the overall gas market, and iii) the potential for LNG transportation anywhere there is a demand-supply mismatch.
BRR: How dominant is Asia in the natural gas market?
SH: Currently, Asia is only about 20 percent of natural gas demand. But over the next 50 years, over half of global growth in gas demand will come from Asia. And that's particularly good for LNG because of geography. In North America, the gas demand and supply are pretty much in the same place. In Europe, the demand and supply are a bit further apart but they are close enough to be connected by pipelines. In Asia, the gas supply and demand are even further apart and therefore it is a natural market for LNG.
BRR: What is the current global LNG capacity? And how is it keeping pace with demand growth?
SH: So the LNG supply is growing quite rapidly at the moment, driven primarily by new projects coming up in locations like the United States and Australia. Last year, the total global LNG demand was about 265 million tons; this year it will be about 290 million tons. This growth is material.
By definition, LNG demand equals LNG supply. LNG is quite different from crude oil, as there is not much storage in the system. The LNG chain is producing the gas, turning it into LNG, putting it into the ship, moving it into the market, turning it back into gas, and delivering to customers. So the industry basically runs flat out. What's produced is always consumed.
BRR: Does that mean LNG sales are more long-term contracts instead of spot sales?
SH: The LNG that was sold on the spot last year was estimated at about 25 percent of the demand. The historical model for LNG was that it was underpinned by long-term contracts. Over the last decade or so, the industry has become more flexible to the needs of different customers in different regions. That has resulted in growth in the spot market. Both spot and long-term contracts currently co-exist.
BRR: So the rapid growth in capacity buildup isn't a concern?
SH: Between 2015 and 2020, total LNG supply is expected to grow by 50 percent, driven by projects costing in double-digits of billions of dollars. Any commodity growing 50 percent in five years is a massive shock to the market.
But the reality is, the market isn't LNG, the market is natural gas. LNG is only between 10-15 percent in terms of total gas demand. What's happened is that demand growth has kept pace with supply growth quite easily. This year, LNG demand is growing thanks to traditional importing markets like China and Korea.
LNG is very competitive today. It's a strong market with demand and supply growth. It's a flexible market that can be responsive to the buyer's needs. It is a market that is, by default, balanced as there is no storage. A lot of people think that it is a buyer's market today, but actually what we see is both supply and demand growing at a healthy pace.
BRR: What types of innovations have made the supply-side more responsive to demand?
SH: LNG has been around for over 50 years. There have been technical innovations and business model innovations. In terms of the latter, costs are coming down to provide competitive, cleaner fuel to the customers. If you take LNG ships, most ships are now being built about 170,000 cubic meters to carry a bigger volume. Ship engines have changed. The industry has better installation methods, so you lose less of the cargo during the transit.
In terms of commercial structure now, if you are a customer and you need a cargo of LNG for whatever term and on whichever pricing index, you can get it. The LNG industry has become much more flexible and commoditized. The industry also has an unrivaled safety record.
BRR: Let's talk a bit about LNG pricing. How is the indexation process evolving?
SH: The LNG that is sold under long-term contracts is predominantly under a formula that is linked to crude oil. But not necessarily, as some LNG is sold on a formula that is based on US Henry Hub prices or European gas prices or maybe some North Asian prices. There are different indexes. A lot of contracts have price-review mechanisms to reset in order to keep the contract in market.
Spot market is different in that it is negotiated based on supply and demand at the time. So sometimes, spot prices would be higher and at other occasions long-term contracts would have higher prices. Currently, spot prices are higher, and that is natural because of the winter as gas is predominantly a heating fuel. So the spot price has seasonality in LNG, which doesn't exist in the case of crude oil.
Each buyer has their own preference in terms of what mix between term and spot they want in the contract and what indexations they want for their term contracts.
BRR: Let's pivot to Shell Energy. How big is Shell's presence in global LNG market?
SH: Out of the 265 million tons sold last year, we at Shell sold about 60 million tons. Most of this is joint ventures that Shell has with upstream partners. You can measure LNG in a number of different ways, eg number of cargoes, liquefaction capacity, etc. Among the International Oil Companies, Shell has the largest presence in the LNG business.
We have a lot of history since commercial LNG came online. In terms of our upstream presence, we are in Australia, Brunei, Malaysia, Qatar, Russia, Oman, Nigeria, and Trinidad. We have a material but diverse position. Besides having a presence in those upstream projects, we also operate over 50 LNG ships in our portfolio. We also have import positions ourselves in the US, Mexico, UK, India, and Singapore. And we are at the forefront of turning LNG into transportation fuel.
BRR: How do you see the LNG market taking root in Pakistan?
SH: Pakistan is becoming a very important LNG market. It has grown very quickly. It has been very successful in this current stage of development. There have been a few failed attempts previously to import LNG into Pakistan, but the current plans are going very well. And having a prime minister who understands the market is very good for the LNG business.
In many ways, Pakistan is a great market for LNG because, unlike other markets, it has an existing, strong gas industry. So, Pakistan doesn't have to switch from other fuels to gas or invest in building the pipelines, the import terminals and other gas infrastructure. So once you bring the LNG in, the infrastructure is there and the customers are there. That clearly helps in enabling LNG supply to Pakistan.
BRR: How can Shell help Pakistan in further developing its LNG market?
SH: Shell has so far delivered 28 LNG cargoes to Pakistan. We have been looking at a potential participation in a project here. We haven't finalized that plan yet. But Pakistan is a growing market for LNG. It's also good that this market is not underpinned by government subsidies and uncertainties. The market is actually growing based on the fundamentals of the market itself, by real customers and real gas demand. It's a market we like and look at favourably. And we are working hard to understand our options here.
Clearly, one part of our engagement was delivering cargoes into Pakistan. We have been working with our local partners to look at developing the first private terminal. There are a number of other consortiums that are looking at it.
We are quite far progressed along the way. We hope to come to a positive conclusion on that and be able to take a positive investment decision. But we still have a number of things to put in place before we are in that position.
I am sure that Pakistan will have a private terminal relatively soon, because there are a lot of local and international companies looking at developing the additional infrastructure that Pakistan really needs.