(Editor’s Note: This story is one in a series providing expert forecasts for the global natural gas and oil markets in 2022. Look for NGI’s extensive coverage of what happened in 2021 and what can be expected in 2022 and beyond in terms of prices, the LNG export markets, ESG, Mexico’s production and project prospects, North American midstream infrastructure plans and exploration and production strategies.)
Commitments to responsibly produce U.S. natural gas surged in 2021, and this year is expected to be even better, as the energy world works to reduce emissions, according to experts.
Responsibly sourced gas (RSG), ensuring the flow from the wellhead to the end-user is differentiated via certification, has grown from a niche that began about 10 years ago to a must-have today.
Exploration and production (E&P) companies, utilities and midstream operators are looking for an edge to ensure they are meeting their environmental, social and governance (ESG) initiatives. The new-and-improved gas streams also appear to hold more appeal for liquefied natural gas (LNG) buyers overseas.
A variety of nonprofits offers similar pathways to achieve voluntary certification and to assess ESG initiatives using independent third-party auditors. NGI recently spoke with officials from some of the major certification systems to see where the market is headed in 2022.
MiQ CEO Georges Tijbosch said his firm has a “methane goal” to certify 100% of the global gas market.
“Differentiating gas is a term we quite like, because ultimately, that’s where we want to take it,” Tijbosch said. “By certifying gas, you get differentiated gas…It was differentiated on location or flexibility or things like that..That is exactly what we’re aiming for, for the gas to be differentiated.” And the certification process is set to expand for LNG too.
How Are Methane Emissions Certified?
MiQ works in partnership with RMI, formerly the Rocky Mountain Institute, for methane-certified gas, and it works jointly with Equitable Origin (EO) to assess ESG progress.
“We thought this through very hard,” Tijbosch said. “How are we going to make this work? And what is needed to make this work? First of all, we want to do this on a global scale, because gas ultimately trades everywhere. It has to be scalable.”
The standards in place used to certify a company’s emissions are open source, Tijbosh said, “because we want to keep evolving. We’re not trying to totally protect what we are doing…We are not here to try to push a particular technology. We’re technology neutral.”
The end goal is to determine the methane emissions “across the wider spectrum.” That might include using cameras, data providers, drones and satellites that conduct flyovers.
“We want that market to thrive and innovate, because we believe ultimately, that is going to help them meet certification.”
Companies begin certifying their gas emissions in one asset or facility then expand from there. For example, MiQ helped BP plc certify methane emissions from 70 wells in the Haynesville Shale.
MiQ grades a facility using an “A” to “F” system for how much methane is emitted. An “A” represents methane intensity of less than 0.05%, while “F” represents up to 2%. Third-party auditor GHD independently verified and awarded an “A” to the BP facility.
BP’s Lower 48 arm BPX Energy Inc. now is “assessing further certification opportunities” in the Haynesville, as well as the Eagle Ford Shale and Permian Basin.
“That is the whole point,” Tijbosch said. “That’s what we hope, obviously, that indeed, one starts with one facility. And that’s the same for some of the other companies that have had some operations certified.
Expanding the verification of the emissions is important, “because what we want to avoid is basically people taking one or two really special wells” to assess methane emissions. “It just doesn’t work. So you have to go on a higher level.”
And third-party, independent auditors are paramount to verification, “because otherwise, we would be judging by our own standards,” Tijbosch said. “We’d be conflicted if we did that.” An MiQ audit for one asset may take around two months, he added.
Looking Ahead To Expanding Differentiated LNG
What advantage does certification give to a company that wants to trade the gas, Tijbosch was asked. “Ultimately, there will be more liquidity in the certified gas market, but it’s not close yet, ” he said.
Certifying LNG supplies is gaining traction, though.
“There is a logic in a difference in price” if a company achieves an “A” for its methane emissions versus scoring a “B” or a “C.” Whether an “A” guarantees a premium price “will probably depend a bit on the buyers,” and in particular, the destination market.
“It’s like any trading in an emerging market,” Tijbosch said. “People have to figure out where it ends up.” Some buyers would want to demonstrate their supply has emissions credibility.
As the market grows, it likely will be a no-brainer to certify gas, Tijbosch said. “Later on in the market, it could be where if you don’t certify, people are going to ask, ‘why should I buy this?’…I think there’s absolute logic to that, and, why shouldn’t there be?”
Low-emission LNG cargoes are particularly important for markets with stringent carbon regulations, including Europe and some Asia Pacific countries. In those regions, ensuring the gas has low emissions is not only a “good thing” but a “required thing,” Tijbosch noted.
The focus for 2022 is to expand the LNG certification process. MiQ has completed some LNG modules to enable certification, which have been sent to “quite a lot of operators…
“There is quite a lot of U.S. certified gas available. But if you would want to sell that into Europe…then you would have to export via the LNG chain. You then have to certify the liquefaction plant, the ship and the regas as well.”
Certifying LNG requires a different standard because “there is no physical connection” as there is with assessing a specific set of wells from a specific basin, he said. “But we’ve decided to make this credible, we are going to have to create this connection…”
A lot of interest in responsibly produced U.S. gas has come from the European utilities, the MiQ chief said. Certification systems are underway for marine shipments and pipeline gas. Those systems could allow a European gas buyer to compare the methane emissions from a U.S. LNG cargo to a pipeline delivery from Norway.
‘Level Playing Fields’
“So you suddenly create level playing fields,” Tijbosch said. Buyers “can then compare apples to apples. That’s ultimately what we are trying to achieve here. We just create that transparency and then let the markets do their role, basically.”
Tijbosch was asked to forecast the progress of RSG and certification one year from now.
“Where we think we will be is that certification of anything along the gas chain is just what you do amongst more or less the global players in the global markets,” he said. “There will be some that will still be trying to get their heads around it. And honestly, there’s always going to be certain players that just do it. But that doesn’t matter.
“We are aiming for the 80% or 90% that will just get on with it. Ultimately, that’s going to change the industry overall and the technologies, and that will force the change. That’s where I think we will be next year.”
On a global basis, buyers in Europe and Japan should be able in about a year or so “to compare gas coming from anywhere,” from LNG to pipeline gas. “They will compare Qatar LNG with Australian LNG, compare that with U.S. LNG…”
Global import standards for natural gas in the future are likely to become ubiquitous. In the United States, the MiQ CEO also expects regulators in some regions to ponder whether to require gas utility supplies be certified.
“I think that’s when there will be more and more monitoring technology available,” he said. “Markets will grow, will basically get better, cheaper, faster…There’s just too many stories,” Tijbosch said. “There’s just too many people trying to transition… They want to please the shareholders, and they need to do it for the world.”
Basically, the certification is creating transparency. It’s back to what is measured, he noted. “We know the industry can manage it. They just need that signal to get going.” It will get to the point when certifying gas “is not even a subject anymore because we are just doing it…”
First Mover: EO
NGI also discussed the future of certification with executives from EO, which in 2012 created the world’s first stakeholder-led, independent, voluntary standards system for energy development. Today, the nonprofit partners with business, communities and government to support ESG performance development through a framework known as the EO100 Standard.
The voluntary EO100 standard is a nonregulatory approach “that’s market-based and incentivizes responsible behavior,” said principal adviser Jennnifer Stewart.
The certification process is a way for companies “to validate all their ESG practices,” Stewart said. “They may have an ESG report, but this is a third-party validation” to show “they’re going above and beyond what their competitors may be doing.”
There’s also a market emerging “that puts a premium price on this certified product. For the consumers, they get to demonstrate that they’re thinking about their procurement.” Companies are “thinking about the mission and responsible sourcing of their supply chain to ensure that they’re responding to concerns from consumers.”
EO’s team speaks “with a lot of investors and shareholders for the public companies that are interested in learning more about ESG risks and performances of the companies that are invested in,” Stewart said. In addition, regulators have “more transparency into the industry that they’re regulating.”
At the end of 2021, EO had certified around 19 North American upstream producers with nearly 8 Bcf/d. The EO100 also can address other forms of energy, including renewables and oil.
“It is moving very rapidly,” Stewart said. “We’re getting new interests all the time. It’s been really exciting. Like MiQ, EO uses third-party independent auditors to ensure there is an arm’s length arrangement with customers.
E&Ps Early Movers
As to where the certification growth is centered, Stewart said “it’s all driven by demand” from stakeholders that include LNG offtakers, industry and local distribution companies. “They are seeking to show to their stakeholders that their supply is…being produced in a responsible manner.”
To some E&Ps, responsible development might be defined by methane emissions. Other companies “may mean the entire spectrum,” which is the type of assessment that EO can perform.
“The producers got on board really fast,” Stewart said. Interest from the midstream sector is growing too. As interest expands by LNG exporters, the process would involve the “entire value chain,” from wellhead to water to shipping.
Buyers want to know where the molecules were produced, how it was transported and processed. In Stewart’s opinion, “that’s where, at some point, where the market is going to go…This is not an EO viewpoint.”
Others may have different views, but “at some point, it will become a minimum requirement to sell your gas.”
As to whether that certified supply brings a premium price will be determined by the market, Stewart noted. “That’s a marketplace dynamic.”
Bloomberg reported that recent deals for certified gas have secured a premium of 3-7 cents/MMBtu, about 1-2% over commoditized gas prices.
Stewart said there come a time when a state utility’s request for proposal, or RFP, requires the natural gas seller “to show some type of third-party certification on some type of element.”
This is already happening in Canada, where a consortium of energy companies in December finalized an agreement to supply certified natural gas produced in the country.
German utility Uniper SE, which sells and trades North American commodities, plans to supply the differentiated gas to Canada’s Rockpoint Gas Storage’s wholesale supplier Access Gas Services. Supply would be provided by Calgary-based Vermilion Energy Inc., which in October obtained from EO the differentiated label for its West Pembina gas output in Alberta.
Ensuring gas is differentiated “is starting to happen, but time will tell,” Stewart said. “We’ve had some contacts from some of the midstream operators already, and we’ve also been in touch with some of the LNG facility operators, where they have some interest.”
Like MiQ, EO has to build out its standards for LNG. “It’s definitely something we’re looking to do in 2022,” she said. For now, though, EO is focused on measuring “pieces,” i.e. particular assets of a company over a typical six-month period. The process could then expand to another piece of a facility.
Expansion into Europe also is being eyed as the EO100 standard could be used “in any country in the world, and we’re interested in doing that.”
‘Buy Side Coming In Fast’
Project Canary CEO Chris Romer’s nonprofit uses the TrustWell system to measure data points that certify the conditions under which gas is produced, delivered and consumed. It also is the firm that uses the term RSG in its certification process.
Companies that don’t get in the certification game soon may lose out on the early benefits, Romer said during a webinar sponsored by Energy Dialogues LLC. He was joined by co-founders Anna Scott, chief science officer, and COO Wiliam Foiles.
“The buy side is coming in fast,” Romer said of the market for RSG and differentiated supply. “Airlines, utilities, LNG, sovereigns” are looking at certified gas and oil supplies. “We’ve had lots of conversations with foreign LNG companies. The buy side is going to start expressing its issues in what it wants from the molecules before it goes into the airplane…They want to know…That’s coming,” and “instead of fighting that trend,” it is time to join it.
RMI senior principal Deborah Gordon said 2022 could become the year of differentiation as markets begin to choose their gas and oil supplies based on the degree of carbon emissions. That would put more pressure on the entire energy sector to decarbonize.
There are other voluntary systems in place or underway that may help companies assess their methane emissions.
While some investors are pushing companies to divest fossil fuels, that is not the answer, Romer said. Instead, “differentiate fossil fuels.”
Ensuring gas streams have fewer methane emissions is likely to be worth more to the market, Romer said.
“We think that there is a premium…We think that over time, that premium may go away. We don’t know when, but our view is that at some point in the future, this will just be table stakes. And so what that means is that for real leaders, people who are getting out ahead of this, they can get that premium now. They can get it today…”
Romer estimated the premium for the RSG “is probably 10-12 cents/Mcf. It’s not trading perfectly yet…To be honest, the average rate now is 3-5 cents.”
Romer, who formerly served in the Colorado State Senate, said, “the thing that I’ve learned about markets is, sooner or later, they’re like people in an election…The voters speak and the politicians just have to live with the results. Sooner or later the market is going to speak about the RSG market that we developed the last few years, and it’s going to happen.”
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