Shell says cargo cancellation issue is over-stated and that Russia has important long-term role in LNG

Tuesday, 30 June 2020
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Royal Dutch Shell’s head of Russian operations said the company was open to taking part in new liquefied natural gas projects in Russia with natural gas company Novatek and units of Gazprom, its partner in the Sakhalin LNG project.

Shell outlined its Russian strategy in a wide-ranging interview given by Shell Russia’s Chairman Cederic Cremers to the Russian news agency Tass.

Cremers said the Anglo-Dutch company had suffered LNG cargo cancellations because of the oil price plunge and Covid-19 but pointed out that the LNG business was a long-term one with joint venture liquefaction plants enjoying a lifespan of 25 years or more.

“Yes, we had some of our LNG customers who had some deferments of specific cargoes just in the short term and it was due to full storage tanks or full inventories,” he stated.

“However, the overall number of such cargoes is relatively small, very manageable for us operationally and within the normal bandwidths,” explained the Shell executive.

Shell, whose annual LNG sales amount to around 75 million tonnes,  had not been forced to reduce production because of any of the current challenges in the energy market.

“We can remarket these cargoes relatively effectively in the market,” said Cremers, whose company is a joint venture partner with Gazprom and two Japanese trading houses in the Russian Far East Sakhalin II LNG plant.

“Sakhalin-II has a very privileged position in the Asia-Pacific market being very close to the key markets: Japan, Korea, China, Taiwan,” said Cremers, who is on the supervisory board of the plant’s operating company Sakhalin Energy.

“In addition, it has always been a very strong and reliable partner for its customers. It has a very strong reputation in the market. We continue to be effectively placing many of the cargoes that we produce, including additional spot cargoes, into the market,” said the Shell executive.

“We have seen that the economic slowdown reduced both gas and LNG demand across the globe. This is a large drop compared with the projections that we had just a few months ago,” he explained.

“What is probably important is that it will take a little bit of time for the demand to come back to the previous projections that we had in terms of demand, but we do see continued growth,” he said.

“This is not about fundamental demand destruction, but rather it is about a slower pace of growth in the near term,” added Cremers.

Nevertheless, he said that Shell believed that fundamentals of the LNG market had not changed.

“We do believe that over the next 10 to 20 years an annual average growth rate of 4 percent per year is realistic,” he stated.

“It will remain the fastest growing sector in the hydrocarbon space. That means that if you look at this annual rate between now and 2040 the market will double in LNG,” said Cremers.

He noted that Shell also believed that in the broader scheme of things and including the energy transition, natural gas would be replacing the current sources of coal or diesel that are used to generate power in many places around the world.

As regards operations at Sakhalin-II, Cremers told Tass that Shell and the other partners, Gazprom, Mitsui & Co and Mitsubishi Corp. were confident going forward.

“It is standard in our industry that long-term contracts always include some volume flexibility for buyers, which they exercise from time to time, as the market conditions change,” he said.

Cremers added that Shell was confident that an expansion of Sakhalin II was a logical way forward for an established industrial site in the Far East.

“The reality is that these projects have lifetimes of decades, more over than 20-25 years. They tend to be less dependent on short-term cycles and economic impact, but more on the longer-term trend including what I have mentioned earlier in terms of what is our long-term outlook is for the LNG market,” he explained.

Cremers stated that he believed in the future Russia would be one of most competitive supply sources for LNG demand growth and the Russian share as a supplier to global markets would continue to grow compared with the past.

He emphasized that Shell was open to taking part in different opportunities in Russia whether with existing partnerships or with new partners.

“Of all the energy companies working in Russia today, Shell actually has the most diversified portfolio,” said Cremers.

“We are active not only in LNG and in upstream oil business, but we are also very strong in downstream. We are proud that the Shell logo is present everywhere from Saint Petersburg to Sakhalin Island, if you look across Russia,” he stated.

“On the downstream side, we are striving to become the number one customer choice both in premium lubricants and in fuels,” said the Shell executive.

“On natural gas and LNG, we remain very keen to see how we could grow together with Russia whether it is in the expansion of Sakhalin-II or new projects and partnerships,” he added.

“With oil we are primarily focusing on the larger Western Siberian basin, starting from Salym and then right up through the North into the Gydan Peninsula,” said Cremers.

 

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