By Avi Salzman

Shell is betting big on natural gas as the best-positioned fossil fuel for the transition to cleaner energy sources. The problem is that some analysts say the market for liquefied natural gas may be oversupplied as soon as next year, so prices could fall sharply.

That actually could be a positive for Shell, one of the world's biggest suppliers of LNG, CEO Wael Sawan said in an interview with Barron's on Wednesday.

"A period of lower LNG prices is a good thing," he said. "It means that we are able to continue to shift some of the coal demand that's out there to lower-carbon gas."

Sawan said that Shell has noticed a "swell of demand" from China and India -- both markets have big potential for growth in LNG use -- when prices dip below $9 to $10 per million British thermal units. Today, LNG prices in Asian markets are around $13, which has made coal more attractive than LNG for power generation in those places.

But the futures market shows that investors expect prices to fall below $10 by March 2027 and below $9 by April 2028. At those prices, natural gas use could surge by displacing coal.

"Those are the attractive opportunities to continue to build more markets," he said. "My job is not to worry just about the short-term, but fundamentally to build a business that is resilient for the decades ahead."

LNG capacity could soar 40% between 2025 and 2028 because of a slew of projects that were planned after natural-gas prices rose in 2022, according to Bank of America. The market could be oversupplied starting in 2026, the bank says.

Sawan says the company is somewhat insulated from price swings through its long-term contracts. It makes money off the spread between the price of the LNG it produces itself or buys at export terminals, and the price that international buyers are willing to pay. Shell's contracts have several structures, but the most common one allows Shell to sell LNG at a percentage of the price of Brent crude oil instead of at the market rate for the gas. That means Shell doesn't get hit as hard by fluctuations in LNG pricing, which has been more volatile than oil in recent years.

Investors seem to like Shell's emphasis on investments in LNG over oil, in part because LNG consumption is likely to grow for much longer.

"I think most people would agree that peak oil is sometime in the 2030s, peak gas is probably sometime in the 2040s," said Paul Gooden, a portfolio manager at London-based investment manager Ninety One, which owns Shell stock. "So I think it's quite a compelling story."

A few years ago, LNG was considered a "bridge fuel" that would be useful for a decade or so until renewable power took over. Lately, that view has shifted. Renewables are indeed growing quickly, but overall electricity demand is rising too, because of factors such as power-hungry artificial-intelligence data centers.

So far, renewables have been additive to the power mix, but they aren't really displacing fossil fuels. LNG in particular is attractive because it is cleaner than coal, which most countries are phasing out for environmental reasons.

By 2040, Sawan sees a 60% increase in global LNG demand. The company says its LNG revenue can rise 4% to 5% a year through the end of the decade, a period when its oil production is expected to remain flat.

One other big risk to the LNG story is political. Russia supplied about 40% of Europe's natural gas before it invaded Ukraine. Since then, Europe has mostly moved away from Russian fossil fuels. But an end to the war could result in Russian gas being welcomed once again on the continent, displacing LNG from companies like Shell.

Sawan says that European policymakers appear reticent to follow that path at the moment. He has noticed "an aversion to going back to what was essentially a dependence" on Russia, he said.

Some Shell shareholders agree. TVR Murti, a portfolio manager at Pzena Investment Management, said in an interview that much of Russia's natural gas infrastructure was damaged in the war, so it would be very difficult for it to resume shipments at anywhere near the level seen before 2022. That means demand for LNG from other sources should stay strong, he said.

With so much uncertainty over gas supplies, and trade conflicts spreading around the world, Sawan said the best thing Shell can do is to diversify both its supply and demand. Few companies have their hands in as many markets. Shell is a major player in LNG projects in the U.S., Qatar, and Australia, the three biggest global suppliers. It can shift deliveries from Europe to Asia and back as needed.

The company recognizes "there will be more and more discontinuities in a world that is in some cases fragmenting, and other cases trade policies are impacting trade flows," Sawan said. "The best thing we can do is to make sure that we have all those diversified points to be able to supply our customers."

Write to Avi Salzman at avi.salzman@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

March 26, 2025 16:31 ET (20:31 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.