Sector Update: Energy

TotalEnergies and its partners Equinor and Shell approved an investment of 7.5 billion Norwegian kroner ($715.1 million) for the second phase of the Northern Lights carbon capture and storage project in Norway.

The expansion is expected to boost carbon dioxide storage capacity to 5 million tons annually by 2028 from 1.5 million, TotalEnergies said Thursday in a statement.

The first phase of the project is complete and will launch this summer, starting with CO2 transport from Heidelberg Materials' Brevik, Norway, plant to be stored 2,600 meters beneath the seabed off western Norway, TotalEnergies said.

Phase 2 follows a 15-year agreement with Stockholm Exergi to store 900,000 tons of biogenic CO2 starting in 2028.

Northern Lights is in advanced discussions with several large European industrial customers for the remaining storage capacity, TotalEnergies said.

Shares of TotalEnergies rose 0.9%, Shell gained 0.8% and Equinor advanced 1.2%.

Equinor , Shell and TotalEnergies made a final investment decision on the second phase of the Northern Lights development, according to Thursday statements.

The total investment is worth 7.5 billion Norwegian kroner. The second phase aims to boost the carbon capture and storage project's overall annual injection capacity to at least 5 million tonnes of carbon dioxide from 1.5 million tonnes by the second half of 2028.

The decision follows a 15-year commercial agreement with Stockholm Exergi for the transportation and storage of 900,000 tonnes of biogenic carbon emissions per year.

Norwegian energy company Equinor will continue to oversee the project's development, construction and operations as the joint venture's technical service provider.

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.

European equities traded in the US as American depositary receipts were modestly lower late Wednesday morning, declining 0.31% to 1,424.06 on the S&P Europe Select ADR Index.

From continental Europe, the gainers were led by furniture manufacturer Natuzzi and biotech firm Evaxion Biotech E, which rose 6.1% and 4.5% respectively. They were followed by biopharmaceutical company Genfit and oil and gas company TotalEnergies , which were up 3.5% and 2.8% respectively.

The decliners from continental Europe were led by software firm SAP and medical device maker EDAP TMS , which fell 2.7% and 1.4% respectively. They were followed by biopharmaceutical company argenx and internet browser company Opera , which lost 2.5% and 1% respectively.

From the UK and Ireland, the gainers were led by oil and gas company Shell and biopharmaceutical company Biodexa Pharmaceuticals B, which increased 1.9% and 0.3% respectively. They were followed by oil and gas company BP and medical device maker Smith & Nephew , which rose 1% and 0.8% respectively.

The decliners from the UK and Ireland were led by biopharmaceutical companies Adaptimmune Therapeutics and Mereo BioPharma Group , which dropped 5.8% and 3.2% respectively. They were followed by biotech firm Trinity Biotech and biopharmaceutical company NuCana , which were down 2.7% and 1.9% respectively.