The nascent carbon-neutral liquefied natural gas (LNG) market is set to gain momentum this year as global buyers are increasingly concerned about their emissions footprints.
The market is on track to quadruple this year, according to a recent report from FTI Consulting. The firm has tracked six carbon-neutral cargoes through April, compared to only five during all of 2020.
However, the growth in popularity of carbon-neutral LNG has also brought to light questions about how environmentally friendly the super-chilled fuel could become. Standards vary, making it difficult to determine how much carbon has been mitigated, emitted or offset through trading.
“It’s totally the Wild West out there in terms of verification systems and standards,” FTI’s Madeline Jowdy, senior director and co-author of the firm’s report, told NGI’s LNG Insight. “But I think because we’re in the early stages, it’s still really difficult to account for the emissions generated in the upstream and liquefaction processes.”
Columbia University’s Center on Global Energy Policy separately reported major differences in the range of value chain emissions covered in 14 carbon-neutral trades announced since 2019. For example, cargoes transacted by Royal Dutch Shell plc, TotalEnergies SE, Gazprom PJSC, and Mitsui & Co. Ltd. covered emissions across the entire value chain. The emissions included those from upstream production, transportation, liquefaction, shipping, regasification and final consumption.
However, one carbon-neutral LNG trade by Japan’s Jera Co. Inc. in 2019 only covered the direct emissions from final consumption. Cargoes purchased by South Korean steelmaker Posco last year and Pavilion Energy Pte Ltd. earlier this year only covered emissions from production to delivery, also known as well-to-tank.
“These differences not only have significant impact on the amount of emissions requiring mitigation but also on the environmental credentials of this emerging carbon-neutral LNG trade,” according to the Columbia report.
Though demand for carbon-neutral LNG is growing, it is only a sliver of the market. About 1% of expected LNG shipments this year are forecast to be designated carbon-neutral, according to FTI. The firm estimated full-cycle costs for offsets of 60 cents-$1.70/MMBtu. The extra expense is likely to keep carbon-neutral LNG a ”premium product” rather than a standard one, the consultancy said.
“Buyers who want to secure carbon-neutral cargoes for whatever reason are going to pay up for them, regardless of what the spot prices are,” Jowdy said. “So they’re going to pay for them if the spot prices are $4, and they’re going to pay for them if the spot prices are $12, because they have reasons, or they have a motivation to do so.”
FTI noted that the move from point-to-point trades to an independent, transparent and tradable market “remains to be seen.” There has, however, been a push to establish a universal standard.
Carbon-neutral cargoes “are an example of where we want to be in a few years time as an industry, not what will work at scale today,” said Emstream CEO Melissa Lindsay. “Right now, the economics simply don’t work if you strip out the marketing or learning value from doing a test trade. They are a step in the direction people want to go in.”
Lindsay is a member of the Taskforce on Scaling Voluntary Carbon Markets, a private sector-led initiative working to build a voluntary carbon market to help meet the goals of the United Nations global climate accord, aka the Paris Agreement. The taskforce, which counts more than 250 member institutions including buyers and sellers of carbon offsets, standard setters, and international organizations, is developing core principles to define standards and carbon credits.
Lindsay told NGI’s LNG Insight that greater transparency in several factors, including measuring carbon emissions, is needed to establish a universal standard. In particular, methane conversion calculations are important, she added.
Methane leaks across the value chain can have “outsized impacts” on LNG’s final warming potential, according to the Columbia researchers. While there has been progress in measuring methane emissions in upstream operations, researchers said there has not been as much data collected from liquefaction sites and the shipping segment.
“You can’t go and say something’s carbon-neutral, when in fact it’s incredibly high in methane, but you weren’t including the methane conversion at the right levels,” Lindsay said. “ And I think that’s one of the things that there hasn’t been a huge amount of transparency on.”
Lindsay said she has seen trades using a 100-year methane conversion factor in their calculations, which may not be ambitious enough to meet decarbonization targets. “The whole point of all this work is we need to kind of fix all the damage by 2050,” she said. “For me, basing on a 100-year conversion rate is not good enough.”
The other major component of the carbon-neutral LNG trade is the nature of the offset itself.
The market for offsets is fractured because of the number of registries set up around the world. Abaxx Exchange Chief Commercial Officer Joe Raia estimated there are 70-80 different carbon registries in the marketplace.
“There are just a lot of opportunities to set up these registries, and that’s causing them to proliferate and not be able to be standardized,” he told NGI’s LNG Insight.
That lack of standardization means some offsets may be higher quality than others, Lindsay said. She said that’s a reason greater transparency is necessary to source and purchase offsets for the carbon-neutral market.
“Offsets should be used as your last resort,” she said. “You really should be doing everything you can first to abate those emissions. And then with what’s left, use offsets.”
Delivering cargoes offset with credits from environmental or renewable energy projects are aimed at restoring ecosystems or removing greenhouse gases from the atmosphere. But offsets that are considered high-quality generally adhere to principles around measurement, permanence, independent verification, and uniqueness, according to the Columbia report.
“In a scenario where low-quality credits are employed, a commodity claiming to be carbon-neutral, such as carbon-neutral LNG, may not fully, if at all, neutralize its emissions load,” Columbia researchers said.
While the carbon-neutral LNG market can be opaque, suppliers are making efforts to be more transparent when it comes to accounting for the emissions associated with their cargoes. Cheniere Energy Inc. plans to offer emissions certificates with its cargoes starting next year. The company this year shipped its first carbon-neutral cargo.
Meanwhile, MiQ and Carbon Limits are expected to soon roll out an emissions certification standard specifically for LNG. MiQ is also partnering with some U.S. natural gas producers to calculate upstream emissions, many of which supply liquefaction facilities.
In addition, several U.S. LNG projects have unveiled plans to introduce carbon capture and sequestration at their sites, with some aiming to become net-zero emissions facilities.
More action to reduce methane emissions is also likely to take place with targeted policies expected from the European Union and the Biden administration, according to the Columbia report. Better monitoring and repair practices within the industry are also expected to have an impact. Those efforts are likely to result in genuinely lower-emission LNG cargoes, Lindsay said.
However, “The LNG market stands to grow 50% over the next decade in underlying supply,” she noted. “So even if people managed to cut emissions 20-30% as an industry, we’re still higher.”
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