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US LNG sees warning on methane emissions in delayed deal with France's Engie

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US LNG sees warning on methane emissions in delayed deal with France's Engie

The decision by France's Engie SA to put off a potential long-term supply agreement with U.S. LNG developer NextDecade Corp. alarmed industry officials who saw it as a sign that U.S. supplies could suffer from concerns over methane emissions.

Engie, which is partly government-owned, told S&P Global Platts on Oct. 22 that its board of directors decided the utility needed "more time" to consider the project pending "further studies." But the utility's comments followed a report earlier this month by the French news outlet La Lettre A that Engie delayed the deal at the request of the French Ministry of the Economy and Finance, over concerns about methane emissions. That was also the main takeaway for the U.S. industry.

The Center for Liquefied Natural Gas trade group described the scuttled deal as a consequence of the European Union moving to strengthen its regulations of methane emissions at a time when the U.S. is working to ease its own.

"There were bound to be some unintended negative consequences as a result of that," Charlie Riedl, the executive director of the trade group, said in an interview. "It was hard to suggest that that was going to be the case without a concrete example. And now we have one."

Methane, the main component of natural gas, is a potent greenhouse gas and the second-biggest contributor to climate change behind carbon dioxide. Experts and industry officials have flagged the need to curb methane emissions from the natural gas supply chain as a critical challenge for U.S. LNG.

The French government's intervention to delay the deal was likely driven at least in part by trade tensions, according to analysts at Height Capital Markets. The Trump administration is in a dispute with France over its taxes of large tech companies and has threatened a 25% retaliatory tariff on imports of French luxury goods.

"Climate is a key driver, clearly, but the trade context is maybe equally important just given the relationship between France and the U.S. at this point," Josh Price, a senior analyst at Height, said in an interview. "I wouldn't necessarily call it a harbinger. I don't see a scenario in the short term where the EU shuts off access to its markets for U.S. producers and exporters, particularly if Biden wins, with his promises to implement stricter methane regulations and take a more climate centric-approach to trade."

LNG is a central part of the Trump administration's energy diplomacy and would make sense as a target for France in the trade dispute, Clayton Allen, a senior vice president at Height focused on trade and geopolitics, said in an interview.

"It has become very apparent that the Trump administration deals in realpolitik, and it has become beneficial for countries to respond in kind," Allen said.

The environmental group Les Amis de la Terre France, which was pressing the French government to drop the deal, told Platts that the ministry had not taken an official position on opposing the project and that Engie's board could consider it again. The French ministry declined to comment.

The LNG trade group nonetheless saw scrutiny of methane emissions as the main driver of the delay.

"We've been saying for some time that an apples-to-apples comparison of sources of natural gas is going to be critical for all of us in order to continue to make the case for U.S. LNG," Riedl said. "The fact that we are seeing a deal now delayed as a result of real or perceived concerns about U.S. extraction methods is something that obviously needs to be addressed and addressed pretty quickly."

The EU released a methane strategy Oct. 14 that included the possibility of binding minimum standards for fossil gas imported into the economic bloc, which has been a key outlet for U.S. LNG. The methane strategy did not go as far as some experts expected, such as by establishing sustainability performance standards for imported fuels.

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NextDecade has touted steps in recent months to lower the environmental impacts of its project, the proposed Rio Grande LNG export terminal in Brownsville, Texas. In July, the developer announced plans to abandon a sixth train at Rio Grande LNG, saying it could achieve the same total production capacity of 27 million tonnes of LNG per year with five trains.

Earlier this month, NextDecade said it would further retool the project with the goal of achieving carbon neutrality. Those plans involve using carbon capture and storage technology to cut the facility's greenhouse gas emissions by 90%.

NextDecade declined to discuss Engie specifically, citing a policy against discussing ongoing commercial negotiations. Patrick Hughes, the company's senior vice president of strategy and business development, said in an Oct. 22 statement that the company is in talks with "a significant number of prospective customers."

"Our LNG customers in Europe and around the world are acutely aware of the long-term benefits of purchasing reliable, clean-burning U.S. natural gas," Hughes said. "NextDecade is proud of its leadership in environmental and social performance, which aligns with the goals of many of our customers amid the global energy transition. We recently announced that we are targeting carbon-neutrality at Rio Grande LNG, and our work to date confirms that reliable, competitively priced LNG and responsible environmental stewardship are not mutually exclusive."

NextDecade is one of several developers of U.S. LNG export projects forced to delay its target for making a final investment decision until 2021 amid market uncertainty driven by the coronavirus pandemic. Developers have struggled to sign sufficient long-term supply agreements required to secure financing for their multibillion-dollar projects. So far, NextDecade has a 20-year supply agreement with Royal Dutch Shell PLC for 2 Mt/y of LNG. The company has said it needs to sell another 9 Mt/y of supply under long-term contracts to commercially sanction two or three trains at Rio Grande LNG.

Some market observers said U.S. gas should stack up well from an emissions perspective against alternative supplies to the EU such as gas transported by pipeline from Russia, but the development in France created greater uncertainty about whether other negotiations between U.S. suppliers and European consumers could falter in the near-term over environmental concerns.

"If this happened again in the not-so-distant-future it wouldn't strike me as surprising," Riedl said. "Gas not getting further scrutiny going forward, especially in the EU, seems pretty unlikely."

S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.