Week Ending October 30, 2020

Moves by Japan on Carbon, EU on Methane Put U.S. LNG Exporters on Alert

This Article Appears as Published in Foster Report No 3322
Moves by Japan on Carbon, EU on Methane Put U.S. LNG Exporters on Alert

With U.S. LNG exports going to more countries, developments in Europe and Japan on emission issues have LNG exporters concerned about the potential for market disruptions.

Officials from LNG Allies and the Center for LNG addressed the issues and highlighted how the industry’s effort to reduce methane emissions, along with carbon mitigation by LNG buyers, can meet foreign nations’ environmental goals. The methane emission strategy recently adopted by the European Union (EU) is something that the U.S. LNG sector can live with and will be addressed, said Fred Hutchison, president and CEO of LNG Allies.

Eurogas, the European natural gas industry trade group, is holding an online event November 5 where Hutchison is among the speakers, and he intends to provide the U.S. LNG perspective. “We believe the EU will work with industry to see that LNG has a place in Europe and we realize [methane emissions] is an issue that will continue to be addressed,” Hutchison said in a brief interview.

U.S. LNG project developers have not shied away from taking on the methane challenge and they understand the importance of a clean energy future, added Charlie Riedl, executive director of the Center for LNG. “It’s disappointing if other governments have false perceptions about U.S. LNG,” Riedl said in an email response to questions. “We’d urge them to look at the data and to understand that there are federal regulations on [volatile organic compounds] that govern methane emissions, in addition to numerous aggressive voluntary programs in place,” many in partnership with nongovernmental organizations, Riedl said.

Hutchison and Riedl were addressing news from Japan and France, where ENGIE decided to take more time to consider an LNG purchase from U.S. project owner NextDecade. The French government owns a portion of ENGIE, and media stories have circulated that the government convinced the ENGIE board to delay or consider canceling the deal with NextDecade because of methane emission concerns. French government officials have declined to comment on the record, and ENGIE has maintained that the move is only a step to take a more detailed look at the transaction. The ENGIE board decided on September 30 to make that move, with no comment on whether the French government was involved.

Media outlets, including Politico and Bloomberg News, referred to unnamed sources in stories that the French government intervened on the NextDecade LNG purchase by ENGIE, which is worth $7 billion and would stretch to 2045.

NextDecade has taken steps on its own to lower the emission profile of its planned Rio Grande LNG project, reducing the liquefaction trains from six to five while maintaining the same production capacity, and announcing plans to make the facility carbon neutral. The company intends to use carbon capture and storage solutions to reduce about 90% of the Rio Grande project’s carbon dioxide equivalent emissions, while exploring other options to address the remaining 10%, it said earlier this month.

The Rio Grande project has yet to receive a final investment decision (FID), and NextDecade is working on commercial agreements with buyers to support an FID in 2021. The company’s work to lower the emission profile shows that competitively priced LNG and responsible environmental stewardship are not mutually exclusive, Matt Schatzman, chairman and CEO of NextDecade, said in a statement.

Methane emissions and flaring in the Permian basin have been a point of concern for the U.S. gas industry and outside groups for some time, with comments at a 2019 event from the head of the International Energy Agency that methane emissions are the Achilles heel for the U.S. industry. At the same event, Brian Kelly, vice president at Sempra Energy, which is developing LNG export projects, said “if we do not address the methane issue it will come back to bite us.”

Hutchison and Riedl have noted in past comments that methane emissions have dropped, and that flaring will decline as pipelines and production takeaway infrastructure in the Permian are put into service. A rise in LNG exports can reduce flaring as the gas will have foreign market outlets, and enhanced monitoring of global methane emissions will put the U.S. producing sector in a more favorable position compared with production in Russia and other countries, Hutchison said before the COVID-19 pandemic hurt global LNG demand.

The EU on October 14 adopted a strategy to reduce methane emissions, including reductions from LNG suppliers and enhanced monitoring/reporting on methane emissions. The EU vowed to work with international partners and the energy, agriculture and waste industries to tackle methane emissions and meet climate neutrality goals.

The energy sector is where methane emissions can be reduced the quickest and with the lowest cost, said Kadri Simson, EU Energy Commissioner. “Europe will lead the way, but we cannot do this alone. We need to work with our international partners to address the methane emissions of the energy we import,” Simson said in a statement.

European countries importing gas from Russia through pipelines might face methane emission concerns as well, once the methane profile of Russian production becomes more clear, EU market observers have noted.

The Trump administration this summer issued final rules to remove methane emission regulations put in place by the Obama administration in 2016. The Environmental Protection Agency rules have requirements for lower emissions of volatile organic compounds in the production and processing segments, which will reduce methane emissions, while stating that the separate regulation of methane imposed in 2016 was improper and redundant with state and other efforts on methane.

The Natural Gas Supply Association in early October announced methane principles that have members taking steps to reduce flaring, using drones or satellite imagery to detect methane leaks and supporting regulations that are scientifically sound, cost-effective and flexible to allow efficient implementation.

“There are reasons that U.S. methane emissions have decreased 18% since 1990 and the hard work of the natural gas industry is a big part of that,” Riedl said in the October 27 email. “For sure you’ll see natural gas companies continue to address methane emissions head on and to educate potential trading partners on the subject,” he said.

In Japan, Prime Minister Yoshihide Suga on October 26 pledged to have the country be carbon neutral by 2050. The move adds Japan, a key export destination for U.S. LNG project owners, to the list of countries aiming to be carbon neutral by 2050, joining those in the EU and many others.

Using recent data from the Department of Energy, LNG Allies noted that Japan was second, behind South Korea, in the top destinations for U.S. LNG exports over the previous 12 months. Japan imported about 250 Bcf in that time frame.

While Asian nations are often the top destinations for U.S. LNG exports, the regional breakdown shows that Spain, United Kingdom and France rounded out the top five, making Europe higher in the regional market breakdown, slightly ahead of Asia.

Japan’s move to become carbon neutral by 2050 provides plenty of time for markets to adjust, and it could lead the nation to import more LNG rather than move away from it, Hutchison said. Japan still has a reliance on coal-fired power generation and the future of its nuclear power plants will be a big factor in the country’s future carbon reduction plans, he said.

For LNG project owners and buyers, carbon offsets can “green up” LNG deals to make them more palatable with carbon reduction strategies, Hutchison noted. The offsets pay for greenhouse gas (GHG) emission reduction efforts and can be calculated as part of an LNG purchase at about 70 cents/mmBtu to 75 cents/mmBtu. Global suppliers Shell and Total have shipped LNG cargoes with GHG offsets included in the price, and Singapore’s biggest buyer of LNG, Pavilion Energy Ltd., is encouraging bidders to offer carbon offsets as part of any LNG sales deals.

“We view these developments as positive statements for U.S. LNG going forward,” as Japanese buyers could pay for carbon offsets to meet carbon neutrality goals and reach deals with U.S. suppliers, Hutchison said.

Riedl maintained that LNG will have an important and long-lasting role in countries like Japan that have announced goals to be carbon neutral.

“We’ll continue to improve air quality by replacing dirtier hydrocarbons around the world, encouraging innovative technologies and most importantly, by providing a cleaner-burning, affordable and reliable energy source to help lift people out of energy poverty,” Riedl said.

By Tom Tiernan ttiernan@fosterreport.com

Want to try it out? Sign up for a free trial!
Subscribe Here