LNG Shippers Seek Profit From ‘Carbon-Neutral’ Cargoes
By Anna Shiryaevskaya and Ewa Krukowska (Bloomberg) –Seeking to blunt concerns about the damage natural gas does to the environment, some of the world’s largest shippers of the fuel are selling “carbon-neutral” cargoes that include a form of payback for pollution.
Royal Dutch Shell Plc and Total SA are offering to ship liquefied natural gas along with offsets for the emissions the fuel will produce, while industry pioneer Pavilion Energy Pte Ltd. is drafting the world’s first long-term contracts for such deals. The offsets pay for renewables, forests or other measures that allow buyers to show they’re working to lower their output of climate-damaging greenhouse gases.
The move highlights concerns in the gas industry that it’s targeted by governments and pressure groups seeking quicker action to limit fossil-fuel. Once viewed as a cleaner alternative to coal, gas is in the cross hairs of policy makers from the Europe to China, which are targeting much lower emissions by the middle of the century. The gas industry hopes its buyers including big utilities and heavy industry willing to pay a premium of up to 40% more for LNG sold with offsets.
“We were quite amazed to see that companies are much more advanced in those details than what we think they are,” said Frederic Barnaud, chief executive officer of Pavilion, which is based in Singapore. “LNG price is still a key factor in our decision for awarding the tender, but we can talk about a balancing act.”
The oil majors are among the first to move on greening their LNG. After funneling resources into gas as a bridge fuel to smooth the global transition toward greener energy, the companies are feeling pressure to slash their emissions close to zero. Last week in France, Engie SA put off a decision on a $7 billion gas import deal from the U.S. because of government pressure for cleaner supplies. Risks like that are spurring action.
Between six and eight of so called carbon-neutral LNG cargoes have been sold to date, a fraction of the 5,500 cargoes delivered worldwide last year, according to consultants Accenture Plc and Wood Mackenzie Ltd. Pavilion is the first to seek carbon-neutral LNG deliveries and said it has received 25 offers to supply them so far. It’s still finalizing those deals.
Sanford C. Bernstein & Co estimates that the offsetting cost of the first four net-zero LNG trips averaged $2.4 million, or roughly $0.75 per million British thermal units. It estimates the carbon-neutral cargo Total shipped in September cost 70 cents per million British thermal units to offset.
“Not cheap, but it’s the price of doing business in a net zero world,” Bernstein analysts including Oswald Clint said in a note dated Oct. 20.
China’s government is pressing China National Offshore Oil Corp. to buy cleaner fuel, prompting the purchase of three carbon-neutral cargoes this year. Jera Co., the world’s top LNG importer and Japan’s biggest power producer, pledged to achieve net-zero emissions by 2050 and aims for its power plants to run on a mixture of hydrogen and natural gas produced with carbon offsets.
LNG is at the heart of the trend because the shipments are small enough for trialling new products and the process of making the fuel makes it almost as polluting as coal. Gas is super-chilled to minus 160 degrees Celsius (260 degrees Fahrenheit), at which point it turns to a liquid that can be shipped in ocean-going tankers.
Growth will depend on the willingness of buyers to pay a “green premium” for the fuel. That will strain the carefully balanced economics of the LNG industry, where margins are thin and a shift in prices in one part of the world can prompt cargo owners to redirect ships in mid-voyage.
The average emissions for a standard cargo of LNG are roughly about 304,000 tons of CO2, according to Samuele Ravelli, director for ingratiated gas markets at Origin Energy Ltd., a Sydney-based energy company. Benchmark gas prices are under $7 per million British thermal units in Asia and $6 in Europe. The green premium for LNG with offsets may range from 80 cents to $1.70 above those levels, he said. That assumes offsets cost $10 to $20 for every ton of carbon.
“Establishing true cost of neutrality on an LNG cargo is going to increase the cost of that cargo by somewhere between 20% to 40%,” said David Rabley, a managing director and energy transition lead in Accenture’s energy business. “And this is occurring during a time when people are not going to be overpaying for something which doesn’t impact their shareholder, their market, their bottom line.”
The other issue is how exactly to measure the emissions that need to be offset from each cargo when there is no industry standard. There’s no consensus on how much of the gas supply chain the offsets should cover — and there’s many possibilities. Those include:
- Counting only the emissions that will come from burning the LNG
- Including the energy used to chill the gas into a liquid
- Adding in an allowance for methane leaks during the production process — or even from where fields where the reserves are tapped
- Considering indirect emissions, like what comes from offices and business-trips to arrange deals
What the offsets pay for, whether the credits come from planting forests or investing in renewable energy or some form of carbon market security.
“Some have offset just liquefaction or just downstream,” said Steven Miles, a senior counsel at law firm Baker Botts LLP. “A few have addressed carbon through the full value chain. Some are transparent, and some are opaque.”
Production and shipping accounts for about 25% of total emissions from LNG, according a BP Plc presentation citing Poten & Partners. The remaining 75% comes when the gas is burned to make heat or electricity.
“A lot of the innovations on the greener gas side have yet to come to a point of being economic and competitive,” said Tom Earl, chief commercial officer at U.S. LNG developer Venture Global.
–With assistance from Stephen Stapczynski, Aaron Clark, Laura Hurst, Tsuyoshi Inajima, Sergio Chapa and Naureen S. Malik.
© 2020 Bloomberg L.P.
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