Suppliers of liquefied natural gas (LNG) are under increasing pressure to lower the carbon footprints of their cargoes. But the question of who pays for the costs of decarbonization is a tricky one, Poten & Partners analysts said Wednesday.
With more LNG supply expected to come online by the middle of the decade, sellers are already finding it difficult to compete on prices, Poten managing editor Sophie Tan said during a webinar.
“Any increase in costs in terms of decarbonization solutions, they wouldn’t be able to put it into the LNG price at the moment until the demand is there, or the oversupply somehow gets resolved,” Tan said.
Still, she said buyers expect to see those costs reflected in the price of LNG in the future.
The sector has seen a fair amount of growth this year in carbon-neutral cargoes, where the emissions of LNG shipments are offset through the use of credits. Fifteen carbon-offset LNG trades have been announced so far in 2021, compared to eight in 2019 and 2020 combined, according to data compiled by NGI’s LNG Insight. According to Poten, over 1 million tons (Mt) of carbon-offset LNG trades have been announced this year.
Sellers and buyers usually split the cost of offsets, with sellers paying for emissions from upstream, liquefaction and shipment, and buyers paying for emissions from combustion. Some sellers have also borne the cost of combustion, which makes up about 76% of a cargo’s emissions profile.
Those offset costs can add up for suppliers who could end up paying up to 20-30 more cents per million Btu on an already-agreed long-term sale and purchase agreements (SPA), said Poten’s global head of Business Intelligence Jason Feer.
“That cost, especially when you’re negotiating a long-term SPA, is not being reflected in the offer at this point,” Feer said. “That’s sort of a potential risk, I think, if the supplier is going to foot the bill for this in the long run.”
Besides purchasing offsets, LNG producers have recently turned to carbon capture developments, emissions certification programs and electric drives powered by renewables in efforts to attract climate-conscious buyers. Some, including Sempra and NextDecade Corp., have also scaled down their liquefaction projects.
“If you were to have a larger project, maybe they couldn’t really manage the cost of decarbonization,” she said.
While the market for carbon-offset LNG is growing, it is still a tiny fraction of the global LNG market. Poten’s head of Business Intelligence for Europe and Africa Oleg Vukmanovic questioned whether that corner of the market could be a long-term decarbonization strategy without greater transparency.
“There’s not much transparency about what these carbon offsets are, if they get the job done, how they’re measured and how they’re priced. All that stuff is still just very opaque,” Vukmanovic said.
“So maybe it’s about if this is even a viable long-term solution to have carbon offsets, because monitoring and verification seems so difficult. If it is going to be something in the long term, then probably that’s what needs to happen.”
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