Shell, which plans to reduce refineries down to five “parks” with integrated renewables and chemical production, has been successfully using trading to offer LNG and other products in global markets and turn volatility into profit as it makes efforts to help finance its path to reach its net zero emissions vision.

Image courtesy of Lorenzo Cafaro, Pixabay

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Cheniere Energy, the U.S. biggest LNG exporter, takes a different approach and relies on long-term contracts for 90% of its cargoes, which have been compromised and have an average outstanding remaining life of 17 years. This strategy proved solid in 2020 when many customers paid penalties to reject cargoes.

“Trading plays an integrated part in our results always,” Shell´s CFO Sinead Gorman said.

Shell has announced plans to become a net zero emissions company by 2050 or sooner.

Shell´s trading and renewables

“Fundamentally, you will continue to see our trading business stay very close to the assets, continue to drive some of the results that we see,” Gorman said, according to a transcript of the call by Motley Fool.

“The hard reality is that renewable generation on its own will not give you double-digit returns. And so our fundamental belief is that you can get some of those double-digit returns through both the trading and ultimately through being able to package that with other forms of energy,” added Wael Sawan, head of integrated gas and renewables at Shell.

Shell was able to outdo energy provider competitors and profit more than rivals in times of high volatility, according to analyst comments during the first quarter earnings call.

Shell generated more free cash flow this quarter (first quarter 2022) than “its two U.S. competitors combined,” said Biraj Borkhataria, analyst from RBC Capital Markets, as part of a question during the earnings discussion.

“And the two times it happened before was this quarter and then second quarter of 2020, where you had significant volatility in both periods and you seemed to be able to benefit a lot more than your peers from that volatility,” Borkhataria said, according to the Motley Fool´s transcript.

Shell´s first quarter results helped slash net debt to under $49 billion from over $71 billion last year. Shell also has a share buyback program for $8.5-billion to be completed by mid-year. Company shareholders also saw a 4% dividend increase.

Shell´s adjusted $19 billion first quarter EBITDA compared with $16 billion for October-December.  

Cheniere favors long-term contracts

Since the U.S. officially allowed the start of LNG exports and Cheniere´s first shipment left Louisiana in February 2016, Cheniere has become not just the biggest LNG exporter in North America but also the largest natural gas consumer in the U.S. on a daily basis.

The company, where 86-year-old, New York-entrepreneur Carl Icahn is the biggest individual shareholder with about 9% participation, is majority owned by institutional shareholders.

More than 90% of Cheniere´s volume coming from nine-train liquefaction platforms is under long-term contracts with an average remaining life of 17 years. 

Cheniere plans to add more than 10 million tonnes per year of capacity, already in early construction.

The company is adding capacity as it projects there will be 206 million tonnes per year of “incremental LNG supply needed by 2040.”

LNG cargoes to Latin America decline

So far, over 2,100 cargoes have been exported by Cheniere to Asia, Europe as well as to Argentina, Brazil, Colombia, and Chile in the Americas.

During the first quarter of 2022 by far all exports went to Europe, with Asia a distant second and Latin America barely showing. Cheniere´s exports to Latin America in the third quarter of 2021 had been similar in volume to those to Europe, both lower than the volume to Asia.

Europe continued “its strong call on U.S. LNG, which represented nearly 50% of total imports in Q1,” Cheniere Energy said.

LNG accounted for nearly a third of Europe’s total gas supply in the first quarter of 2022, compared with about one fifth seen a year ago, Cheniere estimated.

Re-gasification in Panama, El Salvador

Liquefied gas is kept under cryogenic conditions during shipping because it is compressed about 600 times its size. Re-gasification plants are needed to expand back the LNG after arrival.

China is by far the leading country building re-gasification plants followed by a distant second India, and then by Brazil, Cheniere said. In the Americas, Panama and El Salvador also have re-gasification plants under construction.

Cheniere anticipates 26 markets developing additional re-gasification capacity for a total 230,000 tonnes per year of demand by 2025.

Given the energy price surges that resulted from the Russia-Ukraine war, Cheniere had to change its guidance twice since the fourth quarter. The projection for distributable cash flow in 2022 doubled from as low as $3 billion back in November to the current $6 billion. Besides Cheniere and Shell, other major LNG producers are QatarGas, Chevron, China National Petroleum Corp, and Exxon Mobil.

Shell sources LNG from several areas, including Nigeria, Peru, Trinidad, Brunei and offshore Australia. Cheniere in 2020 collected penalties for rejected LNG cargoes.

Shell announced its plan to reduce the number of refineries to five in November 2020 during a Reuters Events conference.

By Renzo Pipoli