FEATURE: LNG market may see differentiated cargo pricing on methane intensity

The global LNG market could see differentiated pricing for cargoes sourced from upstream operators with different methane intensity levels as various policies to regulate methane emissions consolidate, participants at the LNG Producer-Consumer Conference 2024 in Hiroshima said this week.

The conference also saw a raft of agreements on methane reductions from key proponents such as Japan, South Korea and Europe, which sets the stage for methane initiatives to be discussed at the COP29 climate summit in Azerbaijan in November.

Japan and South Korea have been part of an initiative called Coalition for LNG Abatement Toward Net Zero, or CLEAN, under which they sought methane emissions data from suppliers – a total of 36 LNG liquefaction plants supplying Japan and 35 supplying South Korea. Meanwhile, the EU approved its methane regulation in 2024, seeking to establish methane intensity standards for all fossil fuel imports.

“An important aim of the EU Methane Regulation is to give importers a standard by which they can compare the methane intensity of different sources of available LNG. These intensities may translate into a price premium or discount for LNG delivered to different markets, but in Europe this is unlikely to be established until 2030,” Jonathan Stern, distinguished research fellow, Gas Progamme, Oxford Institute for Energy Studies, said.

Stern said the CLEAN initiative may present Asian LNG importers with similar choices on supply over a similar time frame and give LNG exporters around six years to demonstrate their methane footprint to different markets.

“The ability to credibly demonstrate emission reductions could prove to be a substantial competitive advantage for LNG exporters, and in some jurisdictions essential to the continued acceptability of LNG in energy balances,” he added in the first annual CLEAN report launched at Hiroshima.

Buyers' influence

Manfredi Caltagirone, head of the UN Environment Programme's International Methane Emissions Observatory, said the gas market is not particularly liquid and is mostly traded through medium- or long-term contracts due to security of supply concerns and the need for financing gas infrastructure.

“The consequence is that there are deep and long relations between buyers and sellers, who meet regularly to adjust contractual or logistic conditions,” Caltagirone said in the CLEAN 2024 report, adding that contracts typically are partially renegotiated every five years or renewed at the end of their term.

“The views expressed by gas buyers on the quality of available methane data and the embedded emissions in the supply will carry significant weight, both at the negotiating table or throughout the operational phase of these contracts. This extends to the smaller share of spot cargo purchases,” Caltagirone added.

Ben Cahill from the University of Texas at Austin said the CLEAN initiative suggests gas buyers in Asia will also exert their influence on methane emissions in addition to the EU, and policy changes and buyer demand in Northeast Asia have ripple effects.

“If globally accepted frameworks emerge, and if EU and Asian LNG importers begin to demand such data and incorporate these metrics in commercial frameworks and sales agreements, suppliers will have to adjust,” Cahill, director of energy markets and policy at the university’s Center for Energy and Environmental Systems Analysis, said.

Methane at COP29

On Oct. 6, the European Commission and Japan’s Ministry of Economy, Trade and Industry issued a joint statement to formalize collective efforts to reduce methane emissions and expand the CLEAN initiative under KOGAS (Korea Gas Corp.) and Japan’s JERA and JOGMEC, representing two of the world’s largest LNG importers.

“As part of the EU’s efforts as co-leader of the Global Methane Pledge, the European Commission will launch a Methane Abatement Partnerships Roadmap by COP29, following President von der Leyen’s announcement at COP28,” the statement said.

At Hiroshima, Italy’s Eni said it will support the CLEAN initiative for assessing supply chain emissions of LNG projects, while Australia’s Woodside Energy and JOGMEC signed an MOU on joint methane emissions management called Titled Methane Emissions Technology Reduction and Innovation Collaboration, or METRIC.

Engie’s head of Global LNG & Biomass Ralf Dickgreber said in an interview on the sidelines of the conference that the EU methane regulation was an important topic because the market has to adjust quickly to new rules and find practical ways to implement them.

“The methane regulation is a complex matter. We take it very seriously and consumers and producers need to work on this collectively. I think there is some feedback to be given to the EU regulator as well. Is the implementation feasible as proposed?” he said.

Dickgreber said the market needs a little bit of time to adjust, and the industry can adhere and comply, but it will take some more time, and the regulations need to be put into perspective.

“We cannot necessarily jeopardize security of supply. We need to be mindful that those two things go hand in hand. Yes, we need to monitor and reduce methane emissions. At the same time, we need to also secure supplies. And if both elements are balanced in the right way, it can be achieved,” Dickgreber added.