Shell plc (SHEL) Earnings Call Transcript & Summary

Hi, everybody, and thank you for joining our Shell LNG Outlook 2026, which is actually our 10th anniversary LNG Outlook. My name is Cederic Cremers. I'm the President of Integrated Gas at Shell, and I'm joined by Tom Summers, who is our Executive Vice President for LNG Marketing and Trading. Before we get started, I just wanted to touch on this cautionary note for a minute, which reflects the fact that we, of course, have forward-looking statements as part of this and just to recognize that they are inherently subject to uncertainty. I also want to recognize that the information that you see here was based on third-party data from consultants to which we have added Shell analysis. And also to reflect that this is an outlook on the LNG industry and market as a whole, not a specific outlook for our Shell's own LNG business. Now, I want to acknowledge the consequences that many of you are feeling as a result of the crisis in the Middle East, whether you are in the Middle East itself or whether you have family or loved ones in the Middle East or the many customers around the world that we see are impacted by the disruptions in the Strait of Hormuz and knowing how this is disrupting the energy that you need to fuel your daily lives. So before we dive in, maybe just to summarize briefly that we'll be going through 3 different sections. First of all, we want to look back a little bit at the last 10 years since this is our 10th anniversary outlook. Tom will then take you through a little bit more what is happening in the market today and what do we see developing over the coming year. And then I'll come back and look a little bit more at the long-term trends. And so what are some of the factors that we see influencing both supply and demand over the next few decades. So with that, as I promised, let's look a little bit back at the last 10 years. And I think we can certainly say that this has been a decade of LNG growth. We've seen 60% increase in the demand for LNG and now surpassing more than 400 million tonnes per annum. We've also seen some key developments. We've seen the U.S. emerge as the largest exporter of LNG in this time period. And on the flip side, we've seen China actually emerge as the largest importer. We've also seen Europe, in particular, increase its share of LNG in the gas market and it's been replacing Russian pipeline imports by LNG during that decade. And perhaps the most notable development in terms of magnitude that you also see on this slide has been the increase in LNG fuel ships that we see in the market. Actually, a tenfold increase over this decade from just about 80 vessels to now more than 800. What you see in the bottom of this slide is something that I think has also been very notable over the last decade is that we've actually had 3 large shocks, whether it was COVID first, then the start of the war in the Ukraine and now the crisis in the Middle East that have all tested the resilience of the global LNG market. But I think it's also shown the strength of the LNG market in terms of how it has responded to those. And I think also you will see later from Tom how the market has actually learned from some of these crises and increased its resilience as it's moved forward. Lastly, I think if you look over on the right-hand side of this slide, you'll see the prediction that we made about 10 years ago on the basis of that industry data of where the market might be in 2025. And despite these large shocks, you see that those long-term trends still proved to be true in terms of where the market was moving from an overall macro perspective. So a little bit more. Also, if you look at the last decade and think about the role that LNG plays, we see that over the last decade that gas has certainly grown faster than oil and coal. And then within gas, we've seen that, in particular, LNG has been the fastest-growing factor. In this LNG outlook, for the first time, we've taken out the view all the way to 2050. And we see that those same trends still hold. If you then look at where, in particular, do we see that increase in gas and LNG demand, from a geographic perspective, it's going to be primarily in South and Southeast Asia. And then in terms of the sectors where we see, of course, in power, but also importantly, as we've shown in previous outlooks in the industry demand as well as that for transport, whether that be marine or road. Altogether, if you take the middle of the range of the scenarios of demand outlook that we see, we expect about a 65% increase in LNG demand between now and 2050, taking the market to around 700 million tonnes per annum. So this is really a story of Asia growth plus energy security driving the growth of the LNG market in the years ahead. With that, we now want to go to the second section. And Tom, I'll hand over to you to look a little bit more at what's happening in the market today.

Thanks very much, Cederic, and great to be joining you here today. We'll start with taking a deeper look at the impact of the Middle East crisis. And firstly, we'll look at the breadth and depth of the impact here far beyond just that of energy. We've seen this being the most substantive and material crisis in terms of energy supply disruptions when we compare against historical shocks that you'll see on the left-hand side of this chart. But it's also gone far wider than that. And on the right-hand side here, you'll see the impact on global trade across many, many different segments of our economy from metals and technology, fertilizer, petrochemicals and, of course, into core energies. The percentages that you see in the bars here are representing the share of seaborne trade that moves through the Strait of Hormuz relative to others. And so we've had things like diesel around 10%, but up to close to 50% with products such as sulfur and of course, some compounding effect with many of these together on economies around the world. I'll dive in here and now look a little bit at what that's meant for LNG. So we'll start with looking at 2026 LNG supply expectations and how these have been reset by the crisis in the Middle East. We started the year in January and February with strong year-on-year growth compared to 2025, with much of that coming from the U.S. and from Canada in terms of driving new volumes into the market. But as the crisis took place through March and beyond, you can see there a net deficit in the year-on-year change of supplies coming into the market in 2026. Now that change has not come unanswered, and we've seen many supplier responses through these last few months. We've seen North American exports grow and maximizing their outputs from existing facilities. We've seen the same across many legacy assets in the world, where there's been strong focus on reliability and full use of capacity. Moving volumes from the Atlantic Basin to the Pacific Basin has been a key theme we've observed so far during the crisis, and I'll talk a bit more about that later. But just as importantly has been a deferral of maintenance during this period with suppliers taking the signals from the market in terms of making available volumes today when they're most needed. Now when we think about what we had anticipated in 2026, pre-crisis, we thought we'd see an increase in global LNG supply of just shy of 10% year-on-year. So far, that reduction in supply from the Middle East will mean that we're likely to leave this year around balanced to 2025 if we saw an early resumption in the third quarter of this year. And the right-hand side of the chart you can see there is, should this continue out through to the end of the year, then this could be a year of contraction of supply in the market. Many factors are known and ones we need to continue to monitor closely. Now here, we'll look at the demand side and the diversity that has allowed for a resilient rebalancing in the market. Again, in January and February, we saw strong imports in Asia and Europe relative to the prior year. But since March, Asia has borne the brunt of the reductions that we've seen from the crisis in the Middle East. Europe also has been flat compared to last year, which is going to mean it's -- we'll have to draw on more supplies during the summer to meet its storage targets as it approaches winter later in the year. Demand side responses have included drawdowns on storage, not just in Europe, but also in China, Korea and Japan. We've seen fuel switching in some markets where we've been moving into other liquids into coal and more into power, but of course, also demand curtailment in terms of drawing back on energy consumption during times of elevated prices. And finally, where buyers have had to bring more LNG to replace those supplies lost, we have seen a continued spot buying from the market. But it's important with the spot pricing to put it in context for the LNG market, which you can see from the right-hand side. Spot makes up about 25% to 30% of the overall pricing exposure for the industry. Almost half of the market's LNG continues to be priced against oil. And whilst that has stepped up due to the Middle East crisis as well, the impact has not yet been as significant as we've seen in previous periods. And then the remainder of the LNG is linked to North American gas pricing. And we've seen the continued growth in U.S. LNG exports with LNG linked to Henry Hub prices in the U.S. So whilst LNG spot prices have increased, you can see that red line on the chart, the impact on the overall segment for LNG has not been as extreme. So we talked a bit about supply and the demand side, and we'll look here at the logistics chain in the middle, which is our freight. So during the ramp-up in diversions of LNG from the Atlantic Basin to the Pacific Basin, we've seen historical changes compared to the last 5 years. But what's been different this time compared to that of Russia-Ukraine crisis is that the price response on freight rates has been more muted than we had previously experienced. And there's been a couple of reasons for this. First, there's been some vessels available on the short term to participants in the market because the Middle East suppliers have not been moving the cargoes. But I think more importantly, we've seen a continued growth in the newbuild deliveries to market, as you can see from the right-hand side, reaching historical records this year. And so far, over 40 vessels delivered, but we expect it to be close to 120 new ships coming to the market by the end of this year. And this availability and resilience in the freight market has helped support the flexibility that LNG has needed to move cargoes between the basins to our customers in Asia. Now we'll take a quick look a bit closer at those spot prices, and this is a look back over the period since 2020. And you will have heard Cederic talk about the 3 market shocks we have experienced during this period and that the industry has learned much from each of those events in terms of how it has responded for the ones that follow. So first of all, in the early 2020s, we saw the COVID pandemic. And during this time, we observed the market using the supply side corrections for U.S. exports to be curtailed. Into the Russia-Ukraine war, we have experienced a significant price shock as the European market sought to rebalance the flows that were moved from pipeline and bringing LNG instead. We saw the need for a very rapid build-out of LNG import infrastructure, particularly in Northwest Europe. And that has set Europe well to work its way through this crisis we've now been experiencing. In particular, a very rapid build-out of FSRU vessels to import LNG into Northern Europe has enabled the market to adapt and become more resilient than it has in the past. The other thing of note during this period, of course, has been the continued supply growth that we have experienced. And the market has more LNG available today than it had in the '22, '23 period. And finally, our customers and suppliers and all market participants have actively built more flexibility in their portfolios, being able to respond and adapt as they work their way through their responses to the market conditions that they faced. So if we look at the changes in the market in 2025 on the left and then the changes year-to-date in 2026, you can see some of the key messages that have been shared earlier. Firstly, that growth in supplies from North America, the U.S., Canada and then in third is the UAE exports. And that's been the key driving factor during '25 as well as into 2026. On the import side, in '25, we saw North Europe and Southern Europe stepping up to import more LNG than in the prior year as well as Egypt, which is responding to ever-growing demand requirements in the country. I'll talk in a bit about the responses that we've seen from China. But you can see there more than 10 million tonnes down year-on-year as China is responding and balancing in different ways. Now year-to-date 2026, of course, big drops in changes from Qatar as well as in the UAE as the market continues to expand in North America. From an imports perspective, we are so far through the year relatively balanced with trade flows, but we've seen a slight uptick in Egypt with Europe remaining relatively flat and China down slightly compared to last year. Now let's spend a bit of time to look at what's happened in Europe. You can see changes from 2024 to 2025. And here, LNG has stepped up to reach record levels of around 125 million tonnes of imports, which has been replacing lost Russian pipeline gas as the contracts have expired or flows through Ukraine, ending a relationship that's lasted since the early 1970s. Now Europe was well positioned for gas inventories during 2025, but there's been a sharper drawdown on inventories during the prior winter. And as you can see from the dotted blue line, the trend for this year is running towards the bottom of the 5-year range. That's going to be an important factor for the market to continue to watch as it rebuilds through the summer period. And as Cederic mentioned earlier, one of the key themes we've seen over the last 10 years has been the growth in U.S. LNG exports. You can see from the red line here that share and percentage of European market for U.S. LNG increasing to around 25% this year. If we put that the other way around, about 70% of U.S. exports have found their way to European markets, marking a really important trade route for LNG that has evolved over the last few years. Now I mentioned China. And here, you can see the Chinese gas balances year-on-year from 2024 to '25, and the theme has continued into the beginning of this year. We've seen China's market step up in domestic production as well as pipeline imports. Power of Siberia 1 has been reaching its 5-year plateau and domestic production has taken the lion's share of increases. These 2 have squeezed out LNG slightly over the last year, but it's important to remember the trajectory over the last 5 years and LNG now being one of the largest markets into China, as Cederic mentioned. Now China's market has grown substantially and over 100 bcm of gas has made its way into the growth funnel for China over this last 5 years. That's equivalent to the markets of Germany and Spain put together. And on the right-hand side there, you can see that change over time for domestic production, pipeline imports and LNG imports. And one of the things we've observed so far this year is that there has been a course correction in terms of the year-to-date for China compared to what we had expected this year. And that's largely driven by China's growing role as a balancer for the global markets as it pulls more on domestic and pipeline in terms of reducing LNG reliance. Now finally here, we'll have a quick look at how the geopolitical crisis has delayed the forecasts of record supply growth. And you can see through the chart here how we forecast in February compared to the current range of changes in supply and what that's meant for anticipated changes in demand. And as you'd expect, that drop in Middle Eastern production from February to the current has been the largest driver in the supply changes this year. But also important to note that the changes in demand have been seen predominantly in Asia, but also there in Europe as we adjust our views on how European storages will fill through the remainder of this year. We've talked about these uncertainties in the market in last year's LNG outlook, and these remain key for this year. Geopolitical and shipping security are key. Demand response and affordability stress remains important. And as we look into the next few years ahead, LNG project start-up timing will continue to be an important factor for the industry to watch. And with this, I'll hand back to Cederic, who will take us through looking at the market ahead. Cederic?

Thanks, Tom. And after Tom has just taken us through effectively what we see happening in the market today, particularly with one of the largest crisis we've ever seen in the energy industry. But I think importantly, the takeaway from Tom's message as well is effectively how the resilience that has been built into the LNG market and the flexibility there as well to respond to these kind of crisis. So now we want to draw you back a little bit to some of the more longer-term kind of structural drivers that we see. And as I mentioned, kind of looking out over the next 2 decades about what are those key drivers, both looking at the supply as well as the demand side of the industry. So first of all, let's have a little bit of a look at supply. And this is the next 10-year look in terms of the supply growth. And what you see on the left-hand side is that, of course, coming out of 2025, we've seen a record number of FIDs in the LNG supply side, particularly dominated by the U.S., and we see that trend already continuing into 2026. On the right-hand side of this chart, you see basically where we expect the supply to be, and that stacked up against the range of demand outlooks that we see in the next 10 years. Now you see that, that has shifted a little bit to the right because of some of the damage that we've seen from the current crisis in the Middle East. And as Tom said, there's still some uncertainty around that as far as future projects start-up and ramp-up goes. But I do want to draw your eye to the kind of the hashed section that you see there. That's those -- when the supply from new projects is going to come on. And you'd see that, that has increased and it's actually going to be around 200 million tonnes per annum as we get to the start of the next decade. And also importantly to note that, that is actually 70 million tonnes more than what it was last year, which is represented by the dash line that you see across there. So certainly, I do expect that as we get towards the end of this decade or early next decade, that we are going to have periods of time when supply is going to outpace demand. But as you'll see later in this pack, I also think that this additional supply is absolutely critical for the health of the market and provides an important signal of confidence to customers in terms of the commitment and investment that they make in for LNG as well. So just to zoom in a little bit more into North America and the U.S., where the supply has really become a major force into the market. And the key thing I want to take you away here is not just the size, but it's actually the flexibility that the market provides. It's already the #1 market, as I mentioned earlier, but also the fastest growing in the years ahead. You see there, for example, the number of cargoes and how that will increase in the years ahead. But more than the number, even more important is that actually these cargoes are destination flexible. So they can be going to different places around the world. You then see the number of offtakers, which has grown -- is expected to grow even more in the years ahead as well to represent those different places that are going to be looking for U.S. LNG and where the product would go. Maybe more specifically to that, we do expect as we move into the 2030s that the total supply of U.S. LNG will actually be more than the demand of the Atlantic Basin. So what does that mean? That means that these cargoes will have to be moving further east in order to find markets and to find the customers that need the LNG, which will also have an impact in the years ahead of the amount of shipping that happens in our industry. And then lastly, something to call out is that we -- what you see at the bottom of this slide is the share of the U.S. gas -- feed gas that goes into LNG and a share of the total North American gas market, which does mean that I think we will see a stronger relationship perhaps in future between global LNG prices and gas prices in North America. So as we go to demand, let's have a little bit of a look at that in terms of what that means and also the certainty and the confidence that it gives to buyers, as I mentioned earlier. If we look back in the last few years, you see that the additional supply that has been coming on has been mainly going to Europe, replacing Russian pipeline supply, as Tom talked about earlier. This means that prices have gone up there and then they've pulled away the LNG that perhaps otherwise would have been going to Asia. Now what we see in the years ahead, you see that increase in supply that is going to be coming and really the market confidence that, that gives. I think what we see happening here is that Asia is going to be coming back into the market on top of that investment confidence that it provides the additional supply as well as the improved affordability, but on top of that, some of the structural drivers for demand growth that we see in Asia as well. First of all, of course, economic growth that we see driven on population growth as well as increasing in kind of urbanization and wealth growth in Asia, but also some of the emerging sectors such as data centers and still marine that we see looking for more LNG. And lastly, also a key driver that we see, which is the call for energy security and particularly diversification of energy supply as a key factor driving energy security. Let's dive a little bit more into some of these key factors, both by geography and then segments for LNG demand growth over the next few decades. I want to touch here first on South and Southeast Asia. So these are countries such as Bangladesh, Thailand, Vietnam, Indonesia and the Philippines. And what we see in all of these countries that they are predicted to have strong economic growth in the years ahead, more than 5% in the cases. What you see on top of that economic growth is that we see an increase in urbanization. So basically more people moving to cities and cities in Asia that tend to be more densely populated than those in, for example, Europe or North America. We also see more people moving into the middle class, which means an increase in demand for power or for cooking or even for cooling, which are all key trends also driving the increase in gas demand in these countries. Now critical also here is what you see in the middle of the slide. So you see the line showing the increase in gas demand in these markets in the head. But also what you see when you look at the bars at the bottom is that while some of these markets have traditionally relied on domestic gas production for their gas needs, you see that those are going to be declining in the years ahead as we see natural decline from the fields. And so what we really see is that, that supply gap in between is actually growing from both sides there and that LNG will be playing the critical role of meeting that supply -- that demand gap there. Lastly, over on the right-hand side, you see the kind of the infrastructure that's going to be needed to import this LNG in those Asian markets. And whilst you see that there is enough capacity up to 2030, you see that there will be more capacity needed to satisfy that demand growth in the years ahead. And so an important signal, I think, as well that the supply and the improved affordability will be able to catalyze that growth in regas infrastructure as well, also recognizing, of course, that the time lines from an investment decision to starting a regas project are often shorter than those of supply projects. We've talked a little bit about some of these key growth markets, but I also want to touch on the role that we still see that LNG will play a critical role actually in some of the transitioning markets. And I want to touch briefly on Europe and on Japan. What you see on the left-hand side here is the progressive updates year-on-year on European gas demand. And what you see is that actually each year has been revised upwards or to the right, as you can see here in this chart and also that up to 2030 or possibly beyond, we expect gas demand to now in Europe to remain roughly flat. That update and increase in gas demand has come from what we see across Europe, which is a slower pace of energy transition than perhaps expected. And whilst great gains and faster gains perhaps are being made in solar, we see vectors such as wind, hydrogen, CCS and heat pumps actually falling short of the ambitions that the continent originally had. And then on the right-hand side, you see why LNG is going to still play a critical role. If you look at the left-hand side, total demand growth -- sorry, demand decrease for gas, you might think that, that means less of a market for LNG. But actually, we see that over the decades ahead, that LNG will continue to play a critical role in satisfying Europe's demand, primarily because we see that drop in domestic demand in Europe continuing to decrease as we move forward in the next few years and in the next decades, actually, in fact. Let's also have a brief look at Japan, where METI has recently come out with its seventh strategic energy plan. And they've looked at multiple scenarios about how energy demand may develop in the decades ahead. But actually, interestingly, what we see is that in each of these scenarios, it calls for more LNG demand in the years ahead. It's really driven by what you see in the middle of this slide, which is that they're now predicting an increase in power demand in Japan, driven on the back of increased demand from data centers in particular. Now the outlook for nuclear is remaining roughly stable compared to previous energy plans. But in particular, this increase in power demand, they don't expect that it can be met with an increase in renewables only, and therefore, that gas and in particular, LNG will have to step in to fill that gap and continue to provide energy security to customers in Japan. And then on the right-hand side of this chart, you see that key buyers in Japan are already responding to this with a large increase in the number of long-term contracts that are being signed, certainly when we compare it to some of the recent years. So I just talked a little bit about data centers and use Japan as an example, but I also want to come back and touch a little bit on the marine sector, which we still see as one of the critical growth sectors for the years ahead. As you see here, we already have 900 operational LNG fuel vessels on the water today and over 700 LNG fueled vessels in the orderbook. If you add that all together, that's actually an increase of 200 compared to what we had expected a year ago. We see that increase actually across all the different sectors of vessels, but probably most critical in the container vessels and in vehicle carriers. And then over on the right-hand side, you see what that translates to in terms of increase in LNG demand. And even if we only take a year like 2035, we see that it would result in a sixfold increase in LNG going to LNG vessels, which is by 2035 means that this market would be roughly the same size as the total LNG import to India today. So lastly, I want to talk a little bit around how we continue to improve the sustainability of the LNG industry. Today, LNG is already providing a lower-carbon alternative to customers, certainly when compared to alternatives like oil or coal. In addition, LNG and gas is helping as a complement to build out the penetration of renewables in many markets around the world. But it's important that as an industry, we continue to also develop ways to reduce the carbon intensity of the whole value chain, whether that's through reducing methane intensity or other ways to reduce the carbon intensity such as CCS. And we're even seeing already the first technologies being deployed towards seeing how we can also reduce methane slippage from the transport sector of the value chain. And lastly, also providing the pathways to also incorporate in future low-carbon -- lower-carbon feedstocks as well. And in this case, in particular, how LNG can provide a drop-in alternative of bio-LNG, something where we already see the green shoots today in the transport sector, whether that be in trucking or in marine. So with that, Tom, let me hand back over to you and maybe take us through in a summary of how this all comes together for our LNG outlook.

Thanks, Cederic. So before we end the presentation, we'll come back to our chart comparing the market today and out to 2050. What you heard from Cederic earlier is that we have a significant amount of supply coming to the market under construction today, around 200 million tonnes that will be delivered by the middle of next decade. Now out to 2050 compared to today, we see a growth of around 65%, and that will take us to a median of around 700 million tonnes by 2050. Now the range does widen as we get further out, and you can see some different projections for different demand assumptions on the chart. But what we'll see on top of that 200 million tonnes of supply already under construction is we need about another 200 million tonnes of investment to start to meet that gap between the supply and the demand ranges you see on the chart. That's also to manage the offsets that we'll get from existing facilities that will have natural decline over the same period. So on the right-hand chart there, you can see the growth from '25 to '50 and the supply gap that sits in the middle there where we will need that further investment to meet the difference. Now when we think about this all together and what the industry has experienced over the last 10 years, it has been a period of turbulence and the market has adapted incredibly well, showing resilience in the system to continue to supply energy to where it's needed most. We've seen growing supply diversification, increases in supply expansion, both in the U.S. and other supply points around the world. We've also seen a changing in the market balancing mechanisms, China emerging as one of the key global market balances between its domestic production, its pipeline imports and its LNG imports. But Europe continues that role as well in terms of being both a source of base demand for LNG and flexibility to flex up and down depending on the signals for demand and the available supply dynamics. So those 2, combined with that supply side flexibility that we're now seeing emerging from the U.S. continue to provide that market with the flexibility that it needs. And our customers and other market participants are building their own portfolio flexibility, offering pathways to optimize their energy flows, not just within LNG, but more broadly across the energy complex. This supply expansion is providing competitiveness for the future. And whilst we navigate some extreme events over the last 5 or 6 years, the affordability of LNG continues to be an incredibly important factor for buyers to maintain their confidence in growing their market infrastructure and their reliance on LNG imports. We see emerging segments that Cederic talked about in transportation, both on the road and at sea, as this broadens the use of LNG globally and continues to impress year-on-year with the growth compared to what we've seen in prior outlooks. But as important through this is making sure that we enable and encourage the balanced transition that the market needs, lowering the intensity of the products that we produce and ensuring that we continue to deliver an economic viable proposition to our customers. So hopefully, you've seen through this period some really interesting facts and changes from the LNG outlook over the last 10 years. We continue to be well focused on the market ahead as well as navigating some of the challenges that we've experienced over the last few years. With that, I'll thank you for joining us today, and we'll close out here. Thanks very much.

Thank you. Bye-bye.