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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, Climate & Sustainability Group, IHS Markit