Shell plc came into 2022 at a gallop, with the No. 1 liquefied natural gas (LNG) trading and optimization portfolio righting itself and set for a big year ahead lifted by strong global commodity prices and improving demand.

Shell gas map

CEO Ben van Beurden and CFO Jessica Uhl discussed the quarter and full-year results with investors during a conference call Thursday. The balance sheet rocked, with solid results across the board, most notably in the Integrated Gas segment.

“I think recovery of oil and gas demand…is very much in evidence,” van Beurden said. Demand for gas in the Asia-Pacific region “is booming,” with a “12% rise in gas demand in China.” There’s also a “tremendous pull” for LNG in the region.

“Of course, many of these things have to do with the tail end of the pandemic,” van Beurden said. The “drive for decarbonization” also is becoming a bigger part of the gas growth conversation “as coal-fired power is converted to gas-fired power.” Gas consumption growth also is coming from “industrial and residential heating, not just LNG or gas for power generation. Two-thirds is actually from nonpower generation…”

‘Quite A Few Constraints’

Growing economic activity is contributing to “significant” growth in gas and oil. However, “we see quite a few constraints. And if you look at the overall liquids demand, you will see that it is largely to restore to where it was before the pandemic. 

“I think the big point…is not so much the demand recovery, it is actually how supply is lagging,” said van Beurden. The industry is remaining disciplined in its spending. “As a result, we actually see a significant struggle for supply to keep up with demand. And I think that is going to be with us for some time to come.”

The turnaround in the Integrated Gas segment from poor results in 3Q2021 resulted from not only higher prices, but “significantly higher trading and optimization margins,” Uhl told investors.

Shell was able to take advantage by “overcoming supply issues and capturing unique optimization opportunities generated through the large scale and scope of our LNG trading portfolio in a high LNG spot price environment.”  

During 3Q2021, Shell was burned by its hedging strategy, which limited exposure to the spot gas market. Short on supply as demand jumped, Shell also was forced to secure gas for some customers at high prices.

All of that turned around in the fourth quarter, Uhl told investors. 

Liquefaction volumes totaled 7.94 million metric tons (mmt) in 4Q2021, off from year-ago volumes of 8.21 but up sequentially from 7.39. The decline year/year was attributed to “feed gas constraints and higher maintenance activities.” 

LNG sales also were down year/year at 16.72 mmt from 17.17, but they increased from sequential volumes of 15.18.

Where Are The Natural Gas Supply Issues?

“Indeed, it was an absolute standout quarter for our LNG business in the fourth quarter,” Uhl said. “It’s really great to see what that business, the portfolio and the capabilities of our trading and optimization team can deliver in these circumstances.

“It is relatively unprecedented, both in terms of the absolute level that prices have achieved, but importantly, also the duration in which these high levels of prices have been maintained, in the industry.”

While the high prices are “unprecedented,…there is reason to believe that some of those dynamics could continue…” Uhl echoed van Beurden noting “genuine supply issues that are being felt across the energy system.”

The high demand has “put pressure on gas prices,” Uhl said. “We’re certainly seeing that in Europe and in LNG specifically. That could continue for some time…into the first and second quarter.”

Integrated Gas earnings almost doubled sequentially in the final quarter of the year to almost $4 billion. It wasn’t all about LNG trading, though, Uhl explained.

The profits in part “came through the asset side of the business, and the other piece was from the trading and optimization side of our business. So it’s not just an entirely trading story that you’re seeing in those earnings. It’s also the positive effect of the macro environment on our assets as well…”

Optimizing trading is “a bit harder to predict,” as it’s “very dependent on the circumstances in the market and the timing of cargoes etc…” Uhl said she was optimistic, though that the Integrated Gas business could continue to perform well through the first quarter – mostly.

“We still do have some supply challenges that we’re continuing to manage,” she said. “I think most of those will be behind us by the end of the second quarter. 

“I think there are favorable conditions for the first quarter, certainly for our asset perspective on the trading side…” 

Two issues are playing out through the first quarter, Uhl noted. For one thing, Shell has maintenance activities underway at the massive Pearl gas-to-liquids project in Qatar. In addition, the Shell-led Prelude LNG project in Australia is coming back online following power issues late last year.

2021 Not As Expected

“A little over a year ago, I hoped that 2021 would be a much calmer year than 2020,” van Beurden said. “Well, it was not. Covid continued to have a major impact, cost of living went up, supplies across the world were disrupted, all affecting our everyday lives and work. 

“This was challenging, but I also saw great resilience last year, in and outside Shell. Extraordinary times call for extraordinary measures. And we made 2021 a momentous year for Shell – from launching our Powering Progress strategy, to simplifying our organization and share structure. We have strengthened our balance sheet, provided significant shareholder distributions, and invested in the energy transition.”

Shell has streamlined and simplified the business structure. The brand has been changed from a dual Anglo-Dutch structure, with corporate headquarters now in London. The changes are leading to more efficiencies and fewer employees.

“We are on track to reduce around 7,800 jobs and save some $2 billion annually by the end of 2022, compared with 2019,” said the CEO. “We strengthened our positions in core regions, like Brazil and the Gulf of Mexico, while also selling several assets, including the Permian in the United States…

“And we are growing our Renewables and Energy Solutions business by securing access to electrons and expanding our customer-facing businesses. Supporting our customers on their decarbonization journey will require interdependent offerings across our businesses – offerings that Shell is uniquely positioned to provide…thanks to the integrated nature of our business.”

Total production available for sale fell in 4Q2021 from a year earlier to 3.142 billion boe/ from 3.37 billion boe/d.

For the Integrated Gas segment, Shell fetched an average realized natural gas price of $9.80/Mcf in 4Q2021, compared to $8.36 in 3Q2021. In the Production segment, average realized gas prices were $8.88 in 4Q2021 versus $6.09 sequentially. 

Shell’s current cost of supplies, or CCS, which is comparable to U.S. net income/loss, totaled $11.08 billion ($1.49/share) in 4Q2021, compared with a year-ago loss of $4.48 billion (minus 52 cents). For 2021, CCS profits jumped to $20.01 billion ($2.59/share) from 2020’s loss of $21.68 billion (minus $2.78).

The board expects to pay an interim dividend of 25 cents/share in 1Q2022, an increase of 4% sequentially. Share buybacks of $8.5 billion for the first half of 2022 were also announced Thursday, including $5.5 billion of Permian Basin divestment proceeds.