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Carbon-neutral LNG to increase costs of natural gas production, consumption

Highlights

Carbon-neutral LNG may carry price premium of 80 cents-$1.70/MMBtu

Green premium adds 17%-37% per cargo cost in current spot market

Lack of standards and mechanisms are obstacles to market growth

  • Author
  • Eric Yep
  • Editor
  • Kshitiz Goliya
  • Commodity
  • Coal Natural Gas Metals
  • Topic
  • Energy Transition LNG Commoditization

The growing market for carbon-neutral LNG will add a price premium to LNG cargoes, thereby increasing the cost of LNG imports and consumption, with some additional costs passed on to the end-user, according to experts at the Gastech Virtual Summit this week.

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The price premium, while distributed between companies in the supply chain, risks increasing the cost of LNG at a time when low natural gas prices are key to displacing competing fuels like coal and penetrating new price-sensitive markets in emerging Asia.

The estimated costs for pricing a carbon-neutral LNG can vary.

One estimate by Australia's Origin Energy showed that for a standard LNG cargo with average CO2 emissions of 304,000 tons, the "Green Premium" can indicatively be assessed at 80 cents-$1.70/MMBtu assuming an average offset/abatement cost of $10–$20/ton of CO2.

The S&P Global Platts JKM for October was assessed at $4.613/MMBtu on Sept. 9, which means that the premium for a carbon-neutral LNG cargo could be between 17%-37% of the price of an LNG cargo in the current market. At $4.613/MMBtu a full LNG cargo would cost around $15.7 million, while the same cargo could cost around $18.4 million to $21.5 million if its carbon footprint was fully offset.

"The full cost should be shared along the value chain," Mark Schubert, Origin's Executive General Manager, Integrated Gas, said. He said producers and importers will have to reduce the carbon intensity of their supply chain, and take responsibility for some additional costs through regulations or markets.

"Consumers will equally be held accountable for the carbon intensity of their products and a meaningful share of the green premium will have to be absorbed directly as extra cost though some of this could be recouped via premium applied to their final products," Schubert added.

Another cost estimate by law firm Baker Botts showed that Certified Emissions Reductions verified under the Kyoto Protocol trade between 27 euro cent(32 cents) and 28 euro cent per ton of CO2 for each month remaining in 2020, as of Aug. 6, 2020, yielding a cost of Eur67,500 to Eur70,000 per LNG cargo.

However, carbon offsets through reforestation can easily raise the carbon cost to $10/ton of CO2 or more, which means that offsetting one LNG cargo with average emissions of around 250,000 tons of CO2, could cost $2.5 million per cargo, or 60 cents/MMBtu, Baker Botts said, citing data from GIIGNL.

Steven Miles, senior counsel at Baker Botts, said prices can vary so much due to the different markets for compulsory and voluntary carbon offsets.

"This variability shows that we're still in a world in which people are trying to price things. That they're just not fully sure of what the metes and bounds are. Someone said to me recently, they're trying to put a price on fog," Miles added.

WHAT'S DRIVING CARBON NEUTRAL LNG

An LNG cargo can offset carbon emissions from either the full life cycle of the natural gas, including upstream gas production, liquefaction, shipping and end-user combustion, or just a part of it.

Around six carbon-neutral LNG cargoes have been sold on the market so far, and at least one tender has been floated for low-carbon LNG.

These trades were a mix of full lifecycle offsets, such as the LNG cargoes sold by Shell to Tokyo Gas and GS Energy in 2019, and by Shell to Taiwan's CPC and China's CNOOC in 2020; and partial offsets like JERA's cargo sold to India in 2019 for downstream emissions and the tender by Singapore's Pavilion Energy for offsets up to the point of delivery.

Origin Energy's Schubert said the incentives for growing the carbon-neutral LNG market come from a mix of corporate CO2 targets, regulation or policy compliance, access to low cost funding for climate change mitigation and downstream customer requirements.

"If an auto manufacturer in Europe demands that steel sourced is green, the steelmaker in Asia would have to procure carbon neutral LNG as a source," he said.

Consultant Wood Mackenzie analyst Lucy Cullen noted that so far all the carbon-neutral LNG has been bought by companies in Asia, a region where carbon policy and investor pressure are relatively weak.

She said motivations have varied from the mileage from positive "green" news headlines to gaining experience with carbon neutral transactions. "The cost premium in particular will be critical and may ultimately result in two sets of buyers. Those that are carbon conscious and those who are more concerned with price," Cullen added.

"Our Japanese LNG importer customers are now selling net-zero carbon products to their customers. In China, our customers are offering net-zero carbon natural gas on the Shanghai Exchange," Steve Hill, Executive Vice President for Gas & Energy Marketing & Trading, Shell, said.

"It's a way that we can recognize that we don't have a solution to be zero-emissions today, but we can start moving proactively to get there as quickly as possible," Hill added.