Shell’s Integrated Natural Gas Business Delivers as LNG Sales Climb

Natural gas trading delivered blow-out results for Shell plc in the final quarter of 2022, fueled by stronger LNG sales.

CEO Wael Sawan, helming his first conference call since taking over, joined CFO Sinead Gorman on Thursday from London, as they dissected fourth quarter and 2022 results. Sawan formerly led the Integrated Gas unit. He took the reins earlier this year from CEO Ben van Beurden, who has retired.

The Integrated Gas results for 4Q2022 were exceptional, but Gorman cautioned that one quarter does not a year make.

[2023 Natural Gas Price Outlook: How will the energy industry continue to evolve in 2023? NGI’s special report “Reshuffling the Deck: High Stakes for Natural Gas & The World is All-In” offers trusted insight and data-backed forecasts on U.S. natural gas and the global LNG markets. Download now.]

“When you look at it across the 12 months, our Integrated Gas, as an entire use of both the physical assets, and the trading and optimization part, have had a great year,” she said. “When you look at that, of course, trading optimization has played a key role…But I wouldn’t look at it from quarter-to-quarter…It’s much, much better to look at it across 12 months.”

During 4Q2022, Shell’s Integrated Gas production declined sequentially to 917,000 boe/d in 4Q2022 from 924,000 boe/d in 3Q2022. Downtime in Australia at the Prelude liquefied natural gas facility and Queensland Curtis LNG reduced sequential output.

With the decrease in LNG equity supply, overall liquefaction volumes declined sequentially to 6.78 million tons (MT) from 7.24 MT. However, LNG sales volumes jumped 7% in 4Q2022 to 16.82 MT from 15.66 MT in 3Q2022.

Notably, Shell in 2022 overall delivered 194 LNG cargoes to the European Union countries and the UK. That’s about five times more than in a typical year for the company, Sawan said.

“What’s important,” said Sawan, “is that we typically have a portfolio that is geared toward the Northern Hemisphere winter, so we try to go longer” from October through March.

“And the way we do that typically is through supplementing our equity production with third-party volumes. The best way to look at some of the underlying performance is just look at the volumes we provided over the last two years. What you will see are some differences quarter-to-quarter in terms of that volume.”

Equity And Third-Party Gas Volumes

Shell’s Upstream gas supply rose in 4Q2022 to 3.067 Bcf/d from 3Q2022’s 2.995 Bcf/d.

The company uses a number of ways to create value in the Integrated Gas business, the CEO explained.

“Of course, there is the asset side, and you can see how much equity production we’re selling. We then create a significant amount of value” within the trading and optimization side of the business. “And then there’s a small piece that is also opportunistic as we play it.”

Shell hedges, he said, to “manage our exposure such that we look at it over an entire year, and not simply quarter-by-quarter. We don’t manage on a quarterly basis. And that’s why you can see sometimes the disruptions on a quarterly basis as you did in 3Q2022. It doesn’t mean the fundamental business is not strong. It simply means that you have to look at it in a broader perspective.”

As Western Europe continues to increase gas storage options, and China’s economy expands as Covid restrictions are lifted, gas is front and center. Russia’s invasion of Ukraine last year has redrawn the global gas markets – and expanded Shell’s opportunities, Sawan said during an interview Thursday with Bloomberg TV.

“Our natural gas business continues to grow in a world that is desperately in need of natural gas at the moment, and I think for a long time to come,” Sawan reportedly said. In addition, gas “has a critical role to play in the transition” to low-carbon resources.

To make up for the lost Russian gas pipeline exports into Europe, “the amount of rewiring of energy flows over the past year has been huge, and we expect to see that continue,” Sawan told Bloomberg TV. “This is going to be a journey of years. And I would caution anyone who looks ahead and assumes that the worst is over.”

‘Play It As it Goes’

For Shell’s gas trading arm, ensuring there is enough equity production and third-party volumes is key, Sawan said during the conference call.

Prelude LNG once again is “up and running and performing well at the moment,” following a fire in December. And Shell still has “quite a bit in storage” from global production too.

“Of course, it’s mild at the moment in terms of the winter; warmer if you want to put it that way. So we’ll have to play it as it goes through as well.”

Equity upstream production, though, has declined, with only a meager portfolio of oil and gas assets in Europe. Shell has fairly large positions in Italy, the North Sea and Norway. Global opportunities also are in Brunei, Kazakhstan, Malaysia and Oman.

The biggest chunk of Shell’s equity production, though, is from the United States and Brazil, Sawan said.

“It is fair to say that there are a couple of considerations around Europe,” he said. Rather than producing oil and gas though, “we see Europe much more going forward as an energy transition play. We see a lot more in terms of the incentives that play into Europe.

“We see our ability to be able to leverage our German and Dutch position in a way, as well as our marketing positions in Europe, in aviation, in commercial road transport and passenger transport.

“Those lend themselves very well to be able to play in the energy transition, and it is in line with where Europe wants to go,” Sawan said. “So I see a strong part of our focus…with the investments we’re making, for example, with offshore wind in the Netherlands, green hydrogen in the Netherlands…opportunities to continue to decarbonize customers in Germany and Italy and so on and so forth…

“While we continue to be committed to our oil and gas businesses in other parts of the world…I think the disproportionate share of capital that’s going into Europe is an energy transition theme.”

He admitted that the Russian war “did not reinforce that confidence” in 2022 regarding the transition to lower-carbon fuels.

“We have seen ad hoc intervention, interventions in windfall taxes, in price gaps in some areas, nationalization and the like. Of course, these are extreme conditions. I fully understand that. But anytime you start to move from trying to manage risks to trying to manage price creates all sorts of concerns in a company like ours that’s investing for the long term.”

However, Sawan reaffirmed that low-carbon projects are but one small – albeit growing – part of the business.

“Let me be…categorical in this. We will drive for strong returns in any business we go into. We cannot justify going for a low return. Our shareholders deserve to see us going after strong returns.

“If we cannot achieve the double-digit returns in a business, we need to question very hard whether we should continue in that business, absolutely. We want to continue to go for lower and lower and lower carbon, but it has to be profitable.”

Different Risks For Transition

Sawan noted to investors that the Upstream business has not always had 20% returns, and energy transition-related efforts have a different risk profile.

“On a commodity basis, you find that the risk typically plays between…10-to-15%. We need to be able to see those sorts of returns on an integrated value chain basis in renewables, as well, and that’s what we’re focused on…It is important to say we will continue to focus on value and returns.”

Last year, he noted, “energy security was front and center. The world mobilized. We saw policy progress…in Europe and the introduction of the Inflation Reduction Act in the U.S. This is evidence of moving from ambition into action…

“The world requires a secure supply of affordable energy, and at the same time, needs this energy to be increasingly low-carbon to make the transition to a net-zero emissions energy system. In short, the world needs a balanced energy transition.

Shell plans to “go after the most attractive projects that come our way,” Sawan said. “We don’t have a specific restriction where…Clearly, we think we have more gas opportunities at the moment because we’re able to add a lot of value.”

However, “We continue to believe that oil has a role to play. A big part of what we announced a few years ago was how are we going to be able to actually prune the portfolio to high grade what we have as an upstream business. I think we have done a lot of that. And therefore, what you see right now is a lot more strength and stability in that business…I’d like to extend that strength and stability into the coming years.”

Net profits climbed in 4Q2022 to $10.41 billion ($1.47/share) from year-earlier earnings of $11.46 billion ($1.49). In 2022, net income was $42.3 billion ($5.76/share), versus $20.1 billion ($2.59) in 2021.