Commodities 2021: Pivotal period lies ahead for methane limits; US LNG takes notice

The year 2021 could be pivotal for methane emission regulations in the US and abroad, with potential ramifications for competitiveness of US LNG exports and acceptance of natural gas domestically, according to industry observers.

Not only is President-elect Joe Biden expected to renew the push for regulation in the US and rejoin the Paris Climate accords, but the European Commission is poised to pitch new methane regulations. And individual countries could set sights on methane as they draft plans to demonstrate their climate ambitions in the run-up to the 26th UN Climate Change Conference in November.

How the US handles the question of methane is growing in saliency for US LNG exporters and project developers as more buyers in Europe and Asia adopt net-zero greenhouse gas emissions targets, and as Europe looks ahead to the potential of stricter controls.

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Some observers view the optics of the US stance as important, and renewed US regulation and rejoining Paris as likely to help US LNG exporters' position.

"To have regulations in place on oil and gas and methane leaks and operations, to be preventing routine flaring, to start putting the US back into Paris, to start putting our country back on the stage for climate change has got to be helpful," said Erin Blanton, senior research scholar at Columbia University's Center on Global Energy Policy. That is especially true because buyers eventually will want to verify what the emissions are, she said.

Blanton also sees a market already starting to develop for LNG differentiated for lower emissions in Asia, where the first buyers for carbon-neutral LNG have emerged.

In her view, overarching regulation in the US is needed because the existence of thousands of exploration and production companies in the US makes full engagement in voluntary collective action difficult. Research has shown emissions from the oil and gas sector to be significantly higher than levels reported through the official Environmental Protection Agency inventory, she noted.

Among actions teed up for 2021, the European Commission is expected to propose legislation focused on transparency — requiring measurement, reporting and verification — as well as a requirement to improve leak detection and repair in the EU. The EC also is expected to examine options for methane targets, standards or incentives on fossil energy consumed and imported into the EU.

"That's a big thing," Mark Brownstein, senior vice president of energy at Environmental Defense Fund. "Europe is the single largest market for imported gas in the world. It sends an important signal to other gas markets. It's foreshadowing maybe what one could expect to see from other major gas importers over time."

UN climate targets

Brownstein also noted that countries are in the process of evaluating their nationally determined contributions, or their game plans for how they are going to meet Paris climate commitments.

"The question coming into the [UN conference of parties] in November is what steps can countries and companies take that will have an immediate impact in slowing the rate of warming," Brownstein said. "There's probably nothing more immediate, more cost-effective than reducing oil and gas methane emissions. It's the lowest of low-hanging fruit."

Industry groups also are taking note of how the US stance is viewed. "When there is oversight or what looks to be regulations in place, I think that helps secure footing for LNG exporters internationally," said Charles Riedl of the Center for Liquefied Natural Gas.

Jack Fusco, Cheniere Energy CEO, in a recent interview with S&P Global Platts, said his company is putting effort into increasing transparency along the supply chain, and working closely with Europeans to ensure there are common definitions and a level playing field.

Getting a handle on Cheniere's carbon footprint is "something we are totally focused on right now," he said. "I've got a team dedicated to trying to take that to the next level and digitize our carbon footprint per cargo," he said, noting Cheniere has bought from over 100 different producers and transported on over 25 different pipelines to its two facilities. His company supports methane emissions rules to help drive improvement in the upstream segment, he said.

On the US side, Biden has mentioned methane emissions among the priorities in his first 100 days. That could entail starting the longer process of reversing the Trump administration's rollbacks of Obama administration rules. Anticipated steps include regulation of new oil and gas sources, limiting emissions from oil and gas operations on federal lands, and the likely more contentious step of extending controls to existing oil and gas facilities.

Also on tap for 2021 is European outreach with North America on methane emissions and with large buyers in anticipation of UN climate target updates, along with European overtures for participation in an international methane emissions observatory.

Challenges for long-term contracts

With European gas prices regularly trading below the long-run marginal cost of delivered US LNG, securing new long-term contracts with European utilities has become increasingly difficult, according to S&P Global Platts Analytics.

The Dutch TFF, generally considered the benchmark price for natural gas in Northwestern Europe, averaged just $3.22/MMBtu year to date in 2020, a mere $1.09/MMBtu premium to the US Henry Hub. On average, this minimal spread barely covered variable liquefaction costs and transport, leaving many Northwestern European buyers on the hook for considerable liquefaction fees, which generally range from $2.50 to $3.50/MMBtu.

Platts Analytics estimates that long term, the TTF will need to trend at around a $3-$4/MMBtu premium to the Henry Hub to incentivize these European utilities to sign new long-term contracts. The current forward curve, however, is only implying a roughly $2.82/MMBtu spread between the Henry Hub and the TTF through 2025. Elsewhere in Southern and Eastern Europe, where pipeline interconnectivity is more limited and gas tends to price at a premium to the TTF, US LNG may still be an attractive marginal supply source.

Katie Bays, managing director at Fiscalnote Markets, suggests methane regulations in the US are unlikely to end challenges for US LNG exporters in Europe, where some objections center around fracking, where there may be a broader turn away from fossil fuels, and where the US is not viewed as a primary supplier of energy.

She pointed to India and the Asia Pacific as more likely to be the large drivers on the demand side.

Debate about methane controls is nonetheless likely to be front and center in 2021.

"My own sense is that the US industry can and must show the world that it is leading and dealing with methane issues," said Fred Hutchison of LNG Allies in a recent interview. "And by doing that, it will then purchase the additional 'social license' needed to continue operating in every key global market, but especially in Europe. These issues simply aren't going away."

Despite news reports about Europe potentially turning away from US gas, "we don't see that reflected in the attitudes from the EU officials that we've been talking to in Brussels," he said.

"There's a real, ongoing commitment from the European Commission itself to maintain the role of US LNG in Europe's energy mix," he said, noting US cooperation over the last six or seven years in developing gas infrastructure, especially in Central and Eastern Europe. "We see a lot of opportunity for expanded cooperation with the EU, most notably in the collection and dissemination of methane emissions data."