Shell plc (SHEL) Earnings Call Transcript

Good morning, good afternoon and good evening, everybody, and thank you for joining us here today at the Shell LNG Outlook 2023. My name is Cederic Cremers. I'm Shell's Executive Vice President for LNG, and I'm joined by Steve Hill, our Executive Vice President for Energy Marketing today. I think many of you will know Steve from previous versions of this Shell LNG Outlook. And maybe worth a reminder that a year ago, on February 21, 2022, when Steve did the LNG Outlook was actually that same day that the President of Russia had a speech during which he ordered the troops into Ukraine. And then in the hours and days after that, the war in Ukraine started. And in many ways, that's the key story of today, how LNG allowed Europe to meet its needs for gas in 2022 and then the impacts that, that has both in the near and medium term. Before we go into the rest of the session, just a reminder that we'll be making forward-looking statements, and so I'd ask you to please take note of the cautionary note that is on this slide. So today's Outlook will have 3 different sections. First, I'll be going through the story of 2022 and how Europe's replacement of Russian gas and the impact that it had on the LNG markets. And then Steve will take you through some of the policy interventions that took place and their impacts as well as in the third section, giving you some of the expectations going forward, and some of the structural shifts that we might see in the market in future. So let me start with this picture. And here, you see one of our chartered vessels, the Megara, which is unloading at a terminal in Milford Haven. And in many ways, this is a picture that tells a thousand words. This is one of the many vessels that came to this terminal during 2022, delivering much-needed LNG to Europe. And actually at Milford Haven, the amount of LNG coming in, in 2022 was double that of 2021. So to give you a little bit of the summary story of Europe to start with. On the left-hand side, you see the total European primary energy demand. And you'll see that whilst in total, this actually only reduced by about 3% in the year. But the real story is between the red and the yellow that you see on these bars for both '21 and '22. The red, it contains the Russian pipeline gas supply as well as other domestic and pipeline supply. And you can see the large reduction in supply from Russia there during 2022. And the yellow represents LNG and how it stepped up to fill that gap that was left with a 60% year-on-year increase in LNG imports into Europe, which equates to a total of 45 million tonnes additional import into Europe, which you see on the right-hand side of this slide. Now notable, this is that actually the total additional LNG supply in the market in 2022 was only 16 million tonnes. So not enough to meet that additional demand in Europe. And it was actually the reduction of imports to other parts of the world that allow that gap to be filled. Some of it was in South America, where there was higher hydro fill allowing -- requiring less LNG to go to South America, but primarily. So maybe a little bit more on China because, as I mentioned earlier, one of the reasons why there was so much LNG available to come to Europe was also because of lower demand and lower pool from China. If you look on the left-hand side, you see kind of the comparison of GDP in China versus gas demand. And you see that typically over the last few years, gas demand and then even more so LNG demand outstripped economic growth because China had invested in additional infrastructure and capacity to bring on domestic production as well as pipeline imports, and they have done the same in terms of also in securing additional long-term contracts from LNG, which you can see on the right-hand side of this chart. By having all of that in place and then having a lower-than-expected growth in terms of the total economy, they were able to redo towards Europe. Where did that spot then primarily come from? A lot of it actually flowed from the U.S. to Europe. What you see here on the left-hand side is the comparison of Asian prices, JKM versus European prices TTF. You see if the purple bars are above the line, it basically means that prices in Asia are higher. And if they're below the line, the prices in 2022, that the European prices were higher, therefore, pulling that volume away from Asia towards Europe and the affordability there. This really allowed the U.S. to also operate at its full capacity throughout 2022, which you see in the middle chart. The black line represents the capacity of liquefaction in the U.S. And whilst, if you go back, for example, to 2020, Europe are higher. So we saw during the majority of -- when you see that the total production was quite a bit below the liquefaction capacity, which was driven by economic reasons. We see that in 2022, production was either always at capacity or at the times when it was below capacity, it wasn't for economic reasons, but it was due to operational reasons, such as the issues that we're seeing at Freeport in 2022. And then perhaps best shown by the chart on the right, where you see the black and the orange, which are the imports going into Europe, and you can see the massive increase in both of those bars in 2022. So perhaps the largest impact is felt in markets like South Asia. These are key emerging markets, had invested a lot in additional infrastructure and being able to bring LNG into their economies in order to have a cleaner fuel -- cleaner energy alternative. But what we really saw in 2022 that the LNG was no longer affordable in these markets. And you see that across these markets like Bangladesh, Pakistan and India, that the reduction in LNG import was between 11% and 16% across each of these countries. And not only was it just the high international prices, but in addition, you can see in the middle chart, some of the exchange rate impacts and deflation of the local currencies versus the U.S. dollar. Meaning in terms of local currency, the prices actually increased even more than what we saw in the local markets -- sorry, than what we saw in the international markets. So this has led to a number of things, either switching to other sources of energy like to coal or to liquids or even in some cases, to power outages. I think this is an example of the impact of sustained high prices, which I think is not only an issue for energy affordability, obviously, but ultimately also for energy security and ensuring that we reduce the emissions footprint of the energy supply. So just 2 slides giving a short summary perhaps of the story in 2022. First, looking at the supply side and the breakdown by country. What you see here is the year-on-year change in exports per country in 2022 when compared to 2021. And you can see that it's really a story about the U.S. And effectively, all of the increase in terms of additional exports and capacity coming from the U.S. Some of the other countries that you see there are actually primarily supply restoring from operational issues that we're seeing in 2021. And on the right-hand side, you see that really, there's now the 3 large exporting countries between Australia, Qatar and the U.S. being very close to each other and each representing just over 20% of the global market right now. And then the last slide, just a breakdown of the demand side as well and the importing countries and the change in 2022 compared to the year before. And I think 2 key things that we see here. One is what is effectively a reversal of the trade flows compared to the year before with the volumes coming to Europe from Asia, very much in line with what I was sharing earlier. And then on the right-hand side, you really see the kind of what are currently the top LNG importers in 2022. We represented Europe as one country here because sometimes the LNG will be imported in one country in Europe where actually its destination will be somewhere else in -- on the European continent, and therefore, we really treated it as one market and one country. And I guess the other notable thing here is just to see the magnitude of the increase in the European imports in 2022, well that step-up of 45 million tonnes is effectively the same as the import level of South Korea in 2022, its total imports being the fourth largest market in 2022. So now I'll hand over to Steve for our second section and to say a little bit more about what policy interventions we saw and what their impacts were. Steve, over to you.

Thanks, Cederic, and good afternoon, everybody. Good morning, America. As Cederic mentioned, I'm going to talk about how the world dealt with the energy crisis. How governments change their thinking and their actions and they started to think about security of supply and affordability much more in the near term whilst also retaining their focus on energy -- sorry, emissions reductions over the longer term. Governments clearly faced a crisis. The affordability challenge for customers had impacts the customers and the broader economies. And governments worked really hard to try to maintain reliable supplies of energy, particularly gas and pricing at an affordable level. And this slide shows many different examples of actions taken by governments very, very quickly to try to protect their economies, protect their energy systems. And some of these policy interventions were very effective. This is a great example of one. How Europe speeded up the approval process for new floating LNG import terminals. So historically, this is quite a slow process, but we've seen new LNG floating import terminals start up recently in the Netherlands and in Germany, which basically took less than 6 months from initiation to start bringing -- allowing more LNG to come into the core European markets and the markets to rebalance. So the photo you see on the left is the [ Eems ] carbon terminal, which started up last year, about 6 months from the start of the Ukraine crisis where Shell has taken about half of the capacity and now has another LNG import route into the Netherlands. But while some policies were very effective, others we think maybe be less effective or even create an uncertainty or the potential for unexpected consequences. The good policies that we see are the policies that are primarily driven by allowing supply and demand to rebalance. We also see policies which we think will be less effective or potentially have these unforeseen consequences where the government has tried to take actions, which affect the outcome of energy markets without actually addressing the supply and demand imbalance, which fundamentally drives the pricing levels. And another interesting observation we have is that over the last 3 months, we've seen a significant increase in the number of government interventions. And we have seen a significant reduction in the gas prices in Europe and globally. And people may think there is a correlation between the two. However, as Cederic has just explained, the price reduction we have seen over the last 3 months has been driven by the increase in LNG and gas in storage in Europe over the last summer and then the mild winter that we've just been through. So talking of the consequences of actions, and we'll focus here on Germany. Germany was in a situation before the Ukraine crisis, where 60% of its gas came from Russia, and it had no LNG import facilities. As it lost Russian gas supply, it needed to preserve reliable power generation, and ultimately, the only option it had was to burn more coal. And as you can see in the second and the third chart here, that caused a predictable increase in air pollution and a predictable increase in CO2 emissions. And also, as Cederic has explained, this wasn't just a European crisis, this became a global crisis as LNG was pulled away from other markets in the world. China and India are the world's first and third largest CO2 emitters. And what we saw in 2022 was an increase of coal consumption in the power markets in both, and predictably causing the amount of emissions to increase in both countries. And this wasn't just a challenge we saw in the power sector. This slide talks about the industrial sector in Europe as another example of consequences. And the first chart shows the 16% reduction in gas demand that we saw in the industrial sector in Europe in '22, driven by price affordability challenges. Companies chose to reduce their production or shut down their operations simply because of pricing challenges and competitiveness challenges. And those competitiveness challenges are really highlighted on the right-hand chart of the factory gate prices, where you see very, very significant increases in Germany and Italy, 2 countries that were very dependent on cheap Russian gas. Significant but not as big increases in France and the U.K., where you had higher gas prices, but more mitigants, things like nuclear power in France, for example. And then in other countries, we still saw price increases in the global inflation environment, but nothing like the same order of magnitude. This is quite a tough story we've been telling so far. Actually, this slide is an example of something that was very positive we saw last year. And that's the increased commitment of LNG ship owners to LNG as a fuel to decarbonize their shipping business. The demand for LNG in the shipping sector did reduce slightly in 2022. But what was really impressive was the significant increase in the orders we saw for LNG-fueled new shipping. So today about 30% of the large ships being built in the world are being built to use LNG as their fuel. And that creates an LNG demand of about 8 million tons a year for the LNG fuel chips in operation and under construction, driven primarily by the container sector, companies like CMA, CGM, MSL, Hapag-Lloyd, but also a very high penetration in the car carrier sector. So a lot of progress in the LNG as a fuel for shipping sector, driving down decarbonization. And we're also starting to see lower-emission pathways being developed for LNG into shipping with our successful trial of bio-LNG last year. So a lot of progress here. But that's quite a small part of the solution. Ultimately, the gas industry needs to decarbonize. When you step back and think about the energy transition, it will be driven by electrification. It will be driven by electricity going from 20% to potentially 50% of the global energy mix, driven by wind and solar. But if 50% of the energy mix will be electricity, 50% will still need to be molecules. And over time, we will see an increased pressure and increased demand for those molecules to be lower carbon forms of gases. So the first chart here shows what we actually expect to see over the long term in the gas industry which is a decline in gas demand, but also a transition from the current fossil fuel, natural gas to decarbonize gases. And there's many potential options for the future hydrogen, synthetic options, biogas options. But what we'd like to highlight in the second chart is the different situations you see in different regions around the world. Just as the gas industry today has different dynamics in different regions, the future decarbonized gas industry will have different dynamics in different regions. Take North America, for example. North America is very, very blessed. It has lots of sun, lots of wind and importantly, lots of land, so it has available renewable power. That allows it to develop green electrons. It has plenty of gas supply. It has plenty of underground storage potential. So it can develop blue hydrogen. The recent IRA tax incentives gives a further fiscal and stimulus to develop this future biogas or decarbonized gas industry. So the pathway to decarbonizing gasses in the U.S. has started to become quite clear. When we look at Asia, we see a very different situation. just as the U.S. gas market is developed by domestic gas, Asia is dominated by LNG today. Asia doesn't have the same advantages for developing decarbonized gases within country and will need to rely on imports. And there are potential sources of imports. The Middle East and Australia are logical sources where you could develop large volumes of decarbonized gas but you do have the shipping challenges, the shipping cost of them shipping them to North Asia. Asian buyers are also very keen on synthetic solutions, synthetic gas, e-methane, because while there will be a higher cost for those products, that will allow them to use the existing infrastructure to import, transport and consume the gas rather than having to build a new downstream gas network. So our third and final section looks at the implications of all these changes we're seeing this crisis on the actual LNG business in the LNG market. And we'll start by looking to the near future. The first chart shows there will be more LNG production available next year. There will be more LNG supply in the market. But the growth in the market isn't massive. It's about 15 million tonnes, the same as last year. And a small portion of that will be coming from new projects. Most of that growth will come from higher output from existing projects, most notably the Freeport project coming back to the market. So 15 million tonnes is helpful, but it's not material. We saw Russian pipeline volumes into Europe reduced by about 50% last year, and that was the equivalent of about 60 million tonnes lost from the market. And we still have to see the second half of the Russian gas disappear. So the amount of Russian gas is still to disappear from Russia is a lot more than the growth in the LNG market. And that will cause a tension between European markets and Asian markets. Over the last year, we have benefited, as Cederic explained, while Europe needed more LNG, it's benefited from mild weather and it's benefited from a reduction in demand in China driven by the COVID situation and the lockdown. As China recovers, we expect to see stronger demand for China and potentially more competition, as I said, between the regions. If you compare the situation in the world today compared to a year ago and focusing on Europe, Europe is clearly seeing less Russian pipeline supply today. But it's seeing more LNG coming in, which is helpful. It's starting with higher inventories, which is helpful. It's seeing less demand, which is helpful. But over the next year, we may not see another mild winter. We may see a colder winter next year or we may see more competition creating tighter market conditions, creating gas balance. And over this decade, gas demand in Europe is expected to reduce by about 20%. However, we're seeing much bigger reductions particularly in Russian pipeline supply, but also in domestic production and pipeline supplies from other locations. And therefore, that creates a structural gap for about 140 million tonnes of LNG supply needed into Europe on an ongoing basis to balance the gas market. That's about 2 or 3x the typical LNG levels of imports we were seeing into Europe before the crisis started. So Europe has changed. We have a structural change that Europe now needs, long LNG on an ongoing basis. And that really has an impact on the global market. We've been doing this presentation, I think, 7 years now. And during that time, we've told the same story every year, the way the LNG market works. North Asia is the premium market. It needs LNG. It doesn't have alternative gas supplies and it will pay the price it needs to pay to secure those volumes. South Asia, on the other hand, is a very price-sensitive market. It will buy LNG if it's available at the right price, and it will use other fuels or produce less energy if the price is too high. And then Europe is the balancing market or has been the balancing market, absorbing the LNG that's available and not needed elsewhere but being able to release the LNG. The reason we say that is when we think about the characteristics that allowed Europe to be the balancing market over the last decade, the combination of domestic gas production, pipeline imports, LNG imports, LNG storage, gas storage, alternative fuels availability. Europe had the flexibility in its gas market that allowed it to be the balancing market for LNG. All these characteristics, all these dynamics we've seen growing very rapidly in China over the last couple of years. And therefore, China may be well placed to carry out that role going forward. And you could really see the change in the right-hand chart of what's happened before and after the start of Ukraine crisis. Red is China. And until Ukraine, all you saw from China was strong growth, driving the growth of the overall LNG market. Whereas for Europe, the blue line, what you saw is demand increases, decreases or plateaus simply driven by balancing the market, absorbing more LNG when production came to the market and releasing it when it was needed in other regions. But since the Ukraine crisis started, we have seen the opposite pattern. Europe is seeing very strong growth in LNG imports and China is actually reducing its imports to accommodate. So we clearly need new supply. We need significant volumes of new supply. The LNG market was growing before the Ukraine crisis and the loss of Russian gas into Europe is about the equivalent of 100 million tonnes of LNG, yes. Very, very significant amounts of lost gas supply that needs LNG to replace it. And we're in a world today where that supply will predominantly come from 2 new sources or from 2 sources cutter in the U.S. When we were having this conversation 2, 3 years ago, we talked about the 4 production areas that would drive the growth of the market. The U.S. and Qatar, Mozambique and Russia. Mozambique and Russia have their specific challenges at the moment. So we now see a world where over 80% of the new LNG supply that's due to come on to the market between now and the end of the decade will come from Qatar in the U.S. And that creates quite an interesting dynamic for the market, quite a challenging set of decisions for buyers. We've talked about the unusual dynamics of the LNG market before in this outlook, where we've said about 70% of LNG volume is sold under long-term contracts and about 30% in the spot contracts. What we have now is those long-term contracts being dominated by 2 producers, the U.S. and Qatar, which have very, very different dynamics, very, very different conditions. So if you're a buyer today, you have the choice between buying from the U.S. on a Henry Hub index basis with typically quite a flexible product or buying from Qatar on a more traditional oil index or buying on the spot market. And in the very volatile market conditions we're seeing today, the consequences of getting that decision wrong could be quite significant. And therefore, it's very prudent for buyers to think about their portfolio, think about their risk diversification. How do you manage this world where your commodity has 3 different commercial structures that are very, very distinct. And going back to that volatility issue we've talked about a couple of times, this makes that decision even more important because the cost of using financial products to hedge these risks has increased and become quite unaffordable for some participants in the market. So the U.S. has a very significant role to play in the future of the LNG industry. U.S. exports are growing. U.S. will become the biggest LNG producer over time. And it will grow from about 10% of the global LNG production to about 20% of the global production. Sorry, I got that wrong. It's about 20%. The LNG offtake from the U.S. will grow from about 10% of the U.S. gas market to about 20% of the U.S. gas market. So the U.S. gas market will be much more driven by LNG in the future than it has been in the past. And you can see that in the right-hand chart, which shows the different forms of gas demand in the U.S. Historically, LNG was pretty small compared to power, compared to industry, compared to buildings. But by the end of the decade, it will have caught up. And therefore, we will see a much greater interrelationship between the U.S. gas markets and global LNG markets. And we will see a particular concentration in the U.S. Gulf Coast in Texas and Louisiana, where most of that connectivity between the U.S. gas market and the global LNG market comes together. So we talked a little bit about new supply. We should also talk about demand and long-term contracts. The first chart here shows the not only the higher prices we've seen on the higher volatility, but the bigger price spreads we've seen between the spot market and the long-term market. But the middle chart is actually quite interesting. While spot prices are higher for everybody and volatility is higher for everybody, it's hurt people -- some people a lot more than others. If you're in Japan or in China, where most of your LNG is supplied into long-term contracts, you have been a lot more protected from the high spot prices we've seen over the last year than in Europe, for example, where there's a very small portion of the LNG sold under long-term contracts. And therefore, managing your risk is something that's very, very important and the solution to do that is to sign long-term contracts. And what you see on the right-hand side is all the long term contracts that have been signed over the last 2 years by the type of buyer that's been signing them. And on the supply side, what we saw is what you'd expect. Most of the growth is coming from the U.S. and Qatar. And therefore, most of the contracts have been signed by the U.S. and Qatar. On the demand side, what you see is a bit more complicated. The growth is really coming from 4 areas: China, Southeast Asia, South Asia and Europe. And China has been signed in a large volume of long-term contracts, and therefore, preserving its current protection from the spot market pricing and volatility. But those other regions haven't very much. Europe has signed a few, as you see in the last year, but a very small percentage of that structural demand we described. So the markets that have long-term demand but aren't signing the long-term contracts, will continue to be exposed to the volatility and spot pricing. What you also see on this chart is the area in green, the long-term contracts that are being signed by portfolio players, companies like Shell. And this is what makes the market work. Producers are still looking for long-term contracts to creditworthy buyers, whereas, buyers are looking for a bigger range of outcomes. Some buyers looking for long-term contracts, but some for medium or shorter-term contracts, different amounts of flexibility. And it's by the portfolio players stepping into the chain, giving the producers the offtake certainty they need and giving the buyers, the supply characteristics they're able to sign up to that creates the opportunity for us to run our portfolio and create value, but also supply to actually match up the demand and the industry to continue to grow. So this is one of the favorite charts we show in the outlook every year or certainly the left-hand chart side of it is. And this is the ultimate -- the overall industry supply and demand balance. The area in red is the LNG production that's in operation today, which declines a little over time. The significant area in yellow is the LNG production capacity that's under construction today. And the area in blue is the range of demand forecasts from the leading industry analysts and commentators. And what you see is that for the next few years, we have a tight market. We have supply that touches the bottom end of the range of demand expectations, but not the top. And then ultimately, a clear supply-demand gap is opening up, which is actually starting earlier than the presentation we showed this time last year, driven by the consequences of the events in Russia. So the world will continue to need more LNG and more projects coming on stream later this decade. The right-hand side of the chart shows -- the left-hand side -- forward-looking forecasts compared to some of the backward-looking demand scenarios by the IEA and others that are trying to get to a defined outcome. And what you see there is more uncertainty over the demand, but a continued need for LNG for the coming period regardless. And I'll talk a little bit more about decarbonizing the LNG business. I talked before about decarbonizing the overall gas industry, which will take some time, but it's important that we take steps and start that journey today. And this slide focuses on 2 areas. The first area is on both reporting the emissions from LNG and then compensating for those emissions. We've talked about carbon-neutral cargoes in the past, that activity slowed down this year because of the high prices that made it much harder to charge a voluntary premium for an additional upside on the cargo. However, the industry works hard to develop a common framework where it was clear -- how emissions were being measured consistently, what was included and to make sure that the highest quality offsets were used in order to offset those emissions. The right-hand side of the chart talks about some of the technologies that we're not talking about for the future, but they are actually being deployed today to reduce the physical emissions from the LNG chain. So to summarize, we have many, many messages today. They are brought together on this slide. I won't read through them all. I will let you peruse them now or later at your leisure. But what I would like to do is thank you for your interest, your attention. And to open up the floor for any questions you may have on the materials. So if we could get our first question, please, that would be great.

So the first question is from Giacomo Romeo from Jefferies International.

Can you hear me?

Yes, we hear you, Giacomo.

Okay. Perfect. Sorry. I've been having problems this morning. So couple of questions. First is on your European gas balance slide. And apologies, if I logged in slightly later and couldn't listen to the entire explanation of that slide. But you have European gas demand continuing to fall in '23 and '24. Just wondering where the current level of prices you would expect to see some of that -- of demand that switched into alternative fuels to come back? And whether you're indeed, you're actually seeing that? The other question I have -- it's about the change in policies in Asia, whether the higher gas prices are concerned and higher gas prices could actually bring down demand longer term in Asia? We have seen headlines from Pakistan last week. And just wondering whether to what extent that is a concern? And whether that longer-term demand growth in the second half of the decade could actually be impacted by that?

Yes. Thanks for the question, Giacomo. Yes. On the first one, we are close to the level we expect to see the switching back from oil to gas. I'm not sure where that will happen first. It could be in Europe, as you say, it could be -- the industry has reoptimized over the last year to put as much oil into gas as possible rather than the more additional gas into oil. So that -- it could happen through that way of fuel switching in Europe. Or it could happen by gas going to some of the infrastructure that exists in Asia that isn't being utilized today. It could be the example Cederic mentioned, like India or Bangladesh or Pakistan. Or other places like Vietnam or Bahrain that's built LNG import infrastructure that hasn't started it up yet. So we are getting quite close to the level where that gas to oil balance starts to equalize. So you could say that we're getting to a level where the downside is probably more limited, whereas, still there's clearly upside, particularly if you get the strong economic growth in China on prices, but we are clearly approaching that range. In terms of Asian gas policies, absolutely. It's very unfortunate. We have seen some examples I just mentioned, a couple of developing economies that have invested money in infrastructure to import LNG or to burn gas. And Pakistan is one example where they've said, well, actually, this isn't working for us. Let's go back to coal. But again, the Philippines is another great example where there's LNG imports infrastructure, almost ready to go, but it's very hard to see how LNG could work in that market today. So that's definitely what a risk that we see out there.

The next question is from Christopher Kuplent from Bank of America.

I'm going to start with my usual question, Steve. Maybe you can give us an update on -- you've got the slides in there. How contracting is evolving, demand for long-term contracts shifting? What's your sensing? I'm not expecting any numbers. How those conversations are going when the current Brent slope is so materially below any spot indices around the world? And the second question goes back to Page 28, where you say yourself, the left-hand chart is tightened yet again compared to last year. But then again, you've got the right-hand chart as well. So my question is, you've got exposure to both the red and the yellow, i.e., you've got a lot of liquefaction in operation, a few under construction. How keen -- particularly, when you look at the right-hand side of that chart, how keen are you in this environment to push for more FIDs? What is your takeaway from those 2 charts put together?

Okay. Thanks, Christopher. I'll take the first one. Cederic, I'll let your thoughts on the second one, it will be great. . So yes, long-term contracts are -- would clearly be attractive today if you could get them today. I think the challenge is that, if you want a term contract starting in the very near term, then there is a very significant price to be paid for that. So what we are starting to see is a healthy dynamic of quite a few long-term contracts that are being signed, but they don't start up for several years. And that's very important because those are the contracts that enable the growth of the market, they enable new projects to be sanctioned. But if you want a long-term contract starting up in the very near term, then you have to reflect the current high spot prices in that contract, and that makes that discussion much more complicated for buyers.

Yes. Thanks, Steve. Thanks, Christopher. I think in terms of our forward investments from our supply portfolio, I'd say primarily, we're still steering up the left-hand side of that chart, whilst also balancing against the various scenarios that you see on the right-hand side. But I think particularly out to 2030, you'll see that there's quite a confidence in terms of that tightness still and looking to expand our supply portfolio there. Doing that through a number of things. I think primarily, first of all, in terms of ensuring that we fully utilize the infrastructure that we already have in terms of working on additional gas supply and backfill into those across our different assets. We're also building out, of course, with LNG Canada coming on stream in the middle of this decade, an additional train in Nigeria. Our participation in 2 -- an invitation into the 2 new projects in Qatar. Recently had an agreement around extension of Oman LNG. So all of these and including also through Steve's organization, looking to secure additional supply also from third parties, particularly in the U.S. Gulf Coast. So I think that takes us well through the end of this decade and replenishing our supply portfolio there. I think at the same time, we do continue to develop projects going out further than that. For example, the second phase of LNG Canada or other projects. But I think for all of those, it's just critical that we continue to ensure that they will be extremely competitive in terms of their -- the cost at which they will bring it to the market as well as balancing, having the lowest carbon footprint that we can for the future projects. And through that, I believe they will remain competitive in terms of being the projects that will secure that market, even if it declines, as you saw on the right-hand side chart -- of that chart.

Yes. Just to build on the points on third-party supply, I think we're very well positioned. We showed in the presentation the -- the 2 big areas of growth expect to be Qatar where we have our own participation in the projects, but the U.S. where -- we're a big offtaker today. Our venture global supply will start up this year. We have our new venture global contracts. We have NextDecade, and [ P LNG ] at the front there key to be sanctioned. So a lot of potential suppliers come from most sources without necessarily deploying our capital in them. And then I guess the big uncertainty in the industry is Mozambique. And again, we have a contract there that if they are successful and move forward, we will also have supplies from that position. So a lot of uncertainty in long-term contracts, but the market is starting to contract again, deals are getting good again, and we are well positioned.

The next question is from Paul Cheng from Scotiabank.

Two questions, please. First, given your pretty bullish or tight supply market outlook, how does this impact on your longer-term price contract strategy? I mean historically that Shell would like to maybe take or pay long-term contract, 80% plus before it signs on a new major LNG project. Does it change given your outlook? The second question is what strategy seems to be moving pretty aggressively to add pipeline capacity to the East, moving to China. How does that impact or building into your outlook?

Okay. Thanks, Paul. Cederic, maybe you want to take the pipeline to China question and I'll take the pricing one.

Sounds good. Okay. I'll start with that one. Thanks, Paul. Yes, I think, first of all, probably the one thing that's obviously many on the call, but just to highlight is that, of course, if you look across the Russian system, not all of that gas supply is interconnected and very much so that the Western Siberian system that has been traditionally supplying Europe is not connected to the Eastern Siberian system where we also have the Power of Siberia currently supplying to China. You are correct that they're working on potential options to connect those systems as well as maybe additional new routes out to supply pipeline gas supply to China. I just think we need to realize that one, those projects, as we've seen with the Power of Siberia, for example, take quite a time to bring to fruition. So that we'll take time to come to the market. And I think very much as Steve also showed in terms of the China picture, if we see kind of the return to expected growth in China, they will really need all 3 of these sources in order to help meet the demand that they have coming both from domestic supply from that increased pipeline as well as continued LNG supply into that market as well to fulfill all that demand that we expect certainly until the end of this decade.

Yes, Paul, on our strategy, fundamentally, it hasn't changed. We value long-term contracts and price formulas, and we also are very active participants in the spot markets. And it's the combination of the long-term contracts and the spot position and the scale and flexibility of our portfolio that creates the potential for the optimization value that we fortunately benefit from. So having the market continue to have long-term contracts and spot contracts and importantly, different types of indexation under the long-term contracts is something that meets our customer needs, but it also suits our business model very, very well. Fundamentally, our IG business remains a production business where our returns are driven by the absolute price level. A marketing business, which benefits from price spreads and arbitrage opportunities, which benefits from the level of those price spreads and a trading business that benefits from price volatility. And as you saw last year, we benefited overall because we saw high prices -- high price spreads and high volatility and maintaining that business model is something that we'll continue to plan to do.

The next question will be from Kim Fustier from HSBC.

Hopefully you can hear me. I have 2 questions, please. The first one is on European buyers, specifically, end users of gas as opposed to portfolio players. I mean European buyers have been quite slow at signing up new LNG -- long-term LNG contracts, particularly compared to Asian buyers. To what extent is this reluctance arising from structural factors, notably the EU's emission reduction pledges? And is there anything that you think could overcome this reluctance on their part? My second question is on U.S. supply. Given the increasing role of U.S. LNG exports in the future should we have any concerns around the availability and cost of Henry Hub feeding into those U.S. LNG export plants? Do you think U.S. exporters or offtakers should be doing more to secure upstream supply and maybe become more vertically integrated? And as kind of a follow-on to that, I mean there are so many U.S. projects right now currently being considered. What do you think differentiates those projects from one another from the perspective of buyers?

Yes. Thanks, Kim. On European buyers, I agree that there's probably a couple of challenges. And again, it comes down to certainty. Probably the biggest uncertainty is the regulatory one. Clearly, governments in Europe are very supportive of LNG imports today. But there isn't the confidence that will support -- will remain for the 20 years from the start date in 2 or 3 or 4 years' time, that when companies sign up for a long-term contract, the regulatory support they expect to see at the start of that contract will still be there at the end of the contract. And I think European companies are very nervous of having a situation that, when Europe has moved through this energy crisis and the focus moves back on to emissions reduction, they will have LNG contracts, which will be very difficult to manage in the European market. So that's probably the biggest reason. The second challenge they have is, as we showed, most LNG contracts today are available on a Henry Hub indexation or a crude oil indexation, but the European gas market is still driven by TTF pricing. And what we've seen in the last year is the cost of hedging cross-commodity risk between different regional gas markets can be very, very expensive. So I think some of the cash flow challenges, some of the volatility challenges, some of the performance issues challenges the industry has seen over the last year is a secondary consideration why European companies have been a little bit nervous. In terms of the U.S., clearly, the significant ramp-up of U.S. exports that we expect to see will have a bullish impact on Henry Hub prices. The cost curve for gas in the U.S. is relatively flat. There is a lot of gas available in the U.S. and with a relatively flat cost curve, we don't expect necessarily the same level of price volatility in the U.S. as we're seeing in LNG recently. And that was one of the first charts we showed you this year. But going forward, there will clearly be a need for the U.S. upstream business to improve its methane and emissions performance. There'll be a need for new pipelines to be sanctioned. So you still have that regulatory risk. In terms of the different projects in the U.S., I think the key differentiating factor is, credibility and competitiveness. There's been a lot of projects that are proposed. We're now at a position where some projects have aggregated sufficient demand to be financeable. They're going to the lenders, and we're expected to see projects approved. It's interesting that some projects have tried to differentiate themselves based on offering the other commercial terms, but that proved to be quite challenging to be financeable. So the most credible, lowest cost Henry Hub plus constant commercial structure seems to be the most successful model in the U.S. at the moment.

[Operator Instructions] The next question will be coming from Anish Kapadia from Palissy Advisors.

Just had a question on the LNG supply outlook. I just wanted to kind of get your views on what do you expect to be FID in terms of new LNG supply over the course of this year and next year because there does seem to be a lot of gas out there globally to be developed. You talked about the U.S. and the growth from Qatar also, you've got Canada, you've got other places that I think are riskier, but have a lot of gas like Tanzania, Senegal, Mauritania. So just if you could talk through a little bit about your expectations on FIDs. And what -- I suppose, where you see that kind of range in terms of new supply kind of coming on stream 4, 5 years out?