Questions grow on LNG’s carbon footprint, despite demand increase

At a time when US LNG exports are reaching record levels, the carbon footprint caused by the production and use of LNG is becoming a political issue, blunting some of the long-term potential of the commodity.

US LNG exports reached 9.4 billion cubic feet per day (Bcf/d) in November 2020, according to the US Energy Information Administration (EIA), breaking the record set in January 2020 during winter peak demand and before the coronavirus pandemic savaged consumption and shipments.

LNG is seen as both a viable and greener substitute for coal and a potent source of greenhouse gases. However, methane, which is the chief component of natural gas, is 84 times more potent as a greenhouse gas than carbon dioxide, making it a major target of climate change programs in Europe and globally.

"Methane emissions harm the credibility of gas today as a transition fuel towards a decarbonized energy system and puts in jeopardy the potential of renewable and decarbonized gases in the longer term as gas infrastructure may be abandoned as a consequence," the European Commission (EC) declared in March. The EC followed it up with a strategy that could potentially lead to tighter regulations for methane, and thereby costs for LNG importers.

Rising demand for LNG

Data show demand for LNG imports has not been quenched by the pandemic, and shipments have risen recently due to cold weather in Japan and China. The EIA reports US LNG exports have been recovering from a low point in the summer, bolstered by higher natural gas and LNG prices in Asia and Europe as well as unplanned downtime at LNG plants in rival exporters. With 2.7 Bcf/d of new capacity coming online in the US in 2020, its exporters are poised to meet any new demand over the next several years.

Globally too, LNG production was on track for a record year in 2020, despite the pandemic-induced economic downturn.

IHS Markit forecast 2020 global LNG supply would be 361.4 million metric tons (MMt), up from 356.8 MMt in 2019. While a marginal year-over-year increase, IHS Markit said LNG supplies totaled 318.1 MMt in 2018, marking a 13.6% hike in the past two years.

Warning signs from Europe

Announced in October, the EC Methane Strategy, which takes effect in 2024 across multiple industrial sectors including energy, is designed to improve measurement and reporting, with an eye to setting more stringent standards under the Green Deal announced in December 2019. The strategy asserts that non-EU imported pipeline natural gas and LNG contribute three to eight times the emissions of those products when they are produced inside the EU.

The strategy would allow the EC to set its own "default value" for the methane emissions of those gas imports for any country that doesn't abide by the reporting framework. It also proposes coordination with countries outside the EU to standardize methane tracking and reporting.

"The strategy contains a very clear threat to exporting countries to implement required measures or risk having their exports to the EU deemed in excess of a future default emissions value to be established by the [EC]," Jonathan Stern, distinguished research fellow at the Oxford Institute for Energy Studies, observed in a November 2020 paper. "This is a clear attempt to impose extra-territorial regulation on non-EU countries."

Also, the strategy suggests the imposition of a "border tax" to reflect the carbon content of European imports, a move that would make LNG more costly relative to renewable energy.

But the EC strategy is not the only threat LNG exporters face. Individual European nations are taking action now that is blunting some LNG imports. In October, France's Engie decided not to go ahead with a $7-billion, 20-year purchase contract with US LNG developer NextDecade for shipments from the planned Rio Grande LNG facility in the Brownsville Ship Channel in Texas.

In October, Ireland's Supreme Court blocked the construction of an LNG import terminal in the Shannon estuary proposed by US-based New Fortress Energy. Ireland's new coalition government, which includes the Green Party, is on record as opposing hydraulically fractured gas imports from the US.

Is LNG an environmental winner?

Looming over these developments is the key question of whether or not LNG provides a route to reduced carbon and methane emissions.

On the one hand, when LNG provides natural gas to replace coal-fired power or the use of heating oil, it's a clear environmental winner. Studies by the US Environmental Protection Agency found that burning natural gas for power generates 45-55% of the carbon dioxide emissions of burning lignite coal.

On the other hand, the lifecycle of LNG produces carbon emissions at every step of the process: production of natural gas, delivery to a liquefaction plant, liquefaction processing, shipment by vessel, regasification, end-use, and storage at several points along the way. Seen from this perspective, LNG is incompatible with a net-zero future.

Looking at the full lifecycle of coal, gas and LNG, a study in 2019 by the US National Environmental Technology Lab (NETL) found that US-produced LNG shipped from the US Gulf to Rotterdam in the Netherlands, would produce between 20% and 53% less GHG emissions over 100 years than burning lignite coal sourced in Europe and burned in a European power plant. For exports of LNG to China, US LNG would generate between 21% and 54% less emissions than regionally sourced coal.

A study by the American Petroleum Institute (API), using updated emissions modeling available in 2020, indicates that US LNG exports to China, Germany and India would generate, on average, 50.5% fewer lifecycle greenhouse gas emissions than coal-fired power.

US environmental groups dispute the findings favorable to LNG exports. Environmental Defense Fund (EDF) questions a key assumption of NETL's analysis, namely the relatively low methane leakage rate for the production and transmission front-end segments of the lifecycle. NETL's study uses a methane leakage rate of 1.2%, based on production of unconventional (fracked) natural gas in the Marcellus and Utica basins in Pennsylvania and Ohio. But EDF points out that much of the US gas that is liquefied comes from the Permian Basin in Texas and New Mexico, where it has been tracking methane emissions by satellite and mobile ground-level monitors since 2018. EDF has found emissions of methane are, on average, more than 3.5%.

The Natural Resources Defense Council (NRDC) challenged API's findings in its December 2020 report, "Sailing to Nowhere: Liquefied Natural Gas is Not an Effective Climate Strategy." NRDC says that the true comparison should be against renewable power, and it estimates that producing, transporting and liquefying gas for US LNG exports from 2020 through 2030 "will generate up to 213 MMt of new greenhouse gas emissions…equal to the annual emissions of up to 45 million cars."

Contradictory messages

Given the different conclusions that can be drawn from the data and emissions models, perhaps it is not surprising that the actions taken by companies, industries and nations about LNG can be contradictory.

Consider Engie. A month after dropping out of the NextDecade deal, Engie Australia & New Zealand announced it will co-develop an LNG regasification terminal at Engie's Geelong, Australia, refinery and export terminal with Viva Energy. The stated purpose: "transition to low-carbon energy…"

Infrastructure for LNG is being built across Europe too. Croatia opened a new LNG terminal in December, with IHS Markit reporting that its first cargo was expected to arrive from the US on 1 January. New terminals opened in Lithuania and Poland in the final quarter of 2020 as well.

Even the EC, despite its ambition to achieve carbon neutrality in 2050, is eager to pursue LNG contracts. "LNG trade and gas will remain the main topic of our cooperation with the US in the years to come," Anne-Charlotte Bournoville, head of the international relations and enlargement unit at the EC's energy directorate, said during a webinar in November.

European energy consulting firm DNV GL said LNG capacity will be one of the oil and gas industry's areas of growing investment during the next five years, while exploration and production spending are reduced. "In 2024, LNG will account for 17% of world fossil capex and 15% of world fossil capex in 2025, up from less than 4% in recent years," wrote Hans Kristian Danielsen, global head of marketing and sales, oil and gas, DNV GL, in a report.

And while current US LNG production typically can find a home in Asia, additional US LNG producers will most likely need Europe as a steady outlet, said Fred Hutchison, CEO of LNG Allies, a Washington, DC trade group. "The producers that are coming down the road, they need access to the European market," Hutchison said.

To serve the European market, producers will have to address the carbon issue.

"Absolutely, there's more attention being paid to decarbonization and … how natural gas fits into that picture," said Charlie Riedl, executive director of the US-based Center for LNG. "Not just in Europe, but in Asia as well."

US producers are well aware of the situation. "Europe is one of our most promising export markets, given that we will have the lowest carbon footprint among LNG export terminals in North America, if not the world," said Omar Khayum, CEO of Annova LNG, which has proposed building a 6.5 MMtpa facility in the Brownsville Ship Channel.

Annova announced in December it will use electrically driven compressors fueled with 100% carbon-free renewable energy—a clear play for the mantle of cleaner LNG.

While seeking enough contracts to move ahead with the Rio Grande LNG project despite losing Engie as an anchor customer, NextDecade said it is forging ahead with its previously announced plan to use carbon capture and storage to reduce its carbon dioxide-equivalent emissions by 90%.

Another proposed Louisiana project that's not as close to a final investment decision, known as G2 Net Zero LNG, said in December it is seeking $200 million from institutional investors for a petrochemicals and LNG complex that would be powered by renewables and would capture and reuse all of its carbon emissions.

These commitments make a difference to buyers, especially because US environmental laws are enforced with a fair amount of rigor and transparency, according to Hutchison. "The Europeans are serious about methane, but they also know that we are probably the best players they're dealing with, except possibly the Qataris," he said. "The Algerians and the Russians are pretty opaque, so I think the big issue is how cooperative are we."

Yet Russia's largest LNG producer, Novatek, seems eager to close the gap on emissions too. Novatek announced a deal with Siemens Energy on 10 December to explore ways to decarbonize its Arctic LNG production from its existing Yamal LNG facility and the Arctic LNG 2 plant now under construction. (See IHS Markit coverage here.)

LNG producers sourcing gas from companies that have joined voluntary methane reporting and reduction programs send positive signals to buyers around the world, too. This could include the UN-sponsored Oil and Gas Methane Partnership or the US-based ONE Future Coalition. "You see in the US gas industry a commitment to get methane under control with constant monitoring 24/7, and this can be followed up by strict connections through the LNG value chain," Hutchison said.

Policy decisions made by the incoming administration of President-elect Joe Biden will likely put further pressure on methane emissions, with US LNG producers benefitting as well. "I think we can dodge the carbon border adjustment issue by getting back" into the Paris Climate Agreement, Hutchison added. "And based on recent statements, it seems clear that the EPA is going to want to undo the methane rules [of the Trump administration] … and re-regulate methane. Those two things will reduce our pressure in Europe."

Biden might also choose to reverse a recent Trump administration decision that shows an apparent lack of interest in engaging on the emissions impact of US LNG. On 4 December, the US Department of Energy (DOE) issued a regulation that said the agency would only consider direct carbon emissions from the actual loading of LNG vessels and their movement to the edge of US territorial waters in decisions on licenses. All other emissions are "too attenuated to be reasonably foreseeable and do not have a reasonably close causal relationship to the granting of an export authorization," DOE wrote.

Riedl sees the potential benefits of policy changes under the Biden administration as well, especially if the trade war with China that knocked out more than 90% of LNG exports in 2019-2020 is resolved.

Merits of LNG

Despite all the discussion about a zero-carbon future, LNG's merits as a lower emissions, affordable fuel should not be underestimated, nor forgotten, Hutchison said. "I continue to think that the world is still going to come down to what can be done in the here-and-now, what can be done without enormous infrastructure changes…. And I continue to think that carbon strategies are going to focus on coal-to-gas switching; that is the pressure that the world will bring to bear on coal-consuming countries," Hutchison said.

"Europe is not going away from natural gas any time soon," Riedl added.

Another reason for optimism on the part of LNG exporters, even to Europe, is that LNG has many uses. For example, as Germany phases out coal and nuclear power plants, gas-fired power is on the rise, in part as a backup for intermittent renewable power.

Also in Germany, LNG used for heavy-duty vehicles is exempt from fuel taxes through 31 December 2023. As a result, LIQAL, a European fuel supplier, will open its first LNG refueling stations in Germany in 2021.

LNG demand will also be supported by additional LNG import facilities, such as the proposed Hanseatic Energy Hub, which held a fourth quarter of 2020 open season for commitments for its LNG import terminal and 12 billion cubic meters/year regasification project in Sade, Germany. In an effort to show LNG can be more environmentally compatible, the developers of the Hanseatic Energy Hub are partnering with Dow Chemical to use heat generated from Dow's chemical operations to run the regasification facility, thus producing net-zero emissions from the LNG operation.

Further south, in late December, Italy's LNG industry got a boost when Eni and Snam said they will invest in a network of LNG refueling stations as a contribution to decarbonization of the heavy-duty trucking sector.

The maritime trade sector is yet another growth area for LNG, as it's one option for meeting international low-sulfur regulations that went into effect at the start of 2020. Royal Dutch Shell, the world's largest LNG trader, announced on 10 December it has chartered four newbuild LNG tankers that will operate on LNG, to be delivered beginning in mid-2024.

The bottom line

The bottom line, according to Hutchison, is that LNG is here to stay. Demand for LNG certainly is strong in Asia this winter, where S&P Global Platts' benchmark Japan Korea Marker™ price was $11.50-$12.00/MMBtu during the middle of December, and then surged above $21/MMBtu in the past week. In April 2020, the JKM was less than $2.00/MMBtu.

"Where I think we're headed is to be 'short' LNG," Hutchison said. "I think that shortage will materialize if not next year, depending on this winter heating season and drawdown on storage, but may develop in the 2021-22 heating season. And with the three-, four-, five-year timeline for LNG projects, you're looking at a period where the world will be short LNG. That shortage isn't going to lead to more windmills and solar panels; it will be more burning of coal."

Riedl agreed that demand for LNG will outpace supply during the next decade. "Demand is growing from emerging markets, especially India, which has a strong commitment to gas," he said. "I think that 2021 and early 2022 will be huge for the industry…in terms of [final investment decisions on new facilities or expansions]. There are a lot of projects on the cusp in North America and globally. Investments will have to be made."

But Riedl said that how LNG processors are approaching their investment decisions is shifting to reflect the new reality. "We are responding to what we are hearing from the market. The global pandemic has changed the outlook, as well as the carbon issue," he said.

Successful operators will address carbon forthrightly, said Hutchison. "They're going to have to show where they're getting the gas, who is transporting it to their plant, what are their agreements [with counterparties] on methane leakage, and so on," Hutchison said. "And this isn't just Europe; I don't think it's going to work differently with Asian counterparties. Even the Chinese will be more insistent about what they're getting into."

These strategies can serve to assure end-users carbon emissions are being responsibly managed, he said, adding: "I see a tremendous growth decade for gas. It's going surprise people and going frustrate people who think that the era of gas is over."

Posted 13 January 2021 by Kevin Adler, Editor, Energy and Natural Resources Group, IHS Markit