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US industry turns to 'responsible' natural gas to fetch premium price

Highlights

Independent standards company evaluates wells on environmental, social criteria

First transaction based on certification took place in September 2018

Houston — The natural gas industry has seized upon consumers' environmental consciousness and is beginning to market "responsibly produced" gas - at a premium price.

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The first public transaction involving gas certified under the Responsible Gas program by Independent Energy Standards Corp. took place in September 2018 when Southwestern Energy sold an undisclosed volume to local utility company New Jersey Natural Gas, Jory Caulkins, IES CEO, said in an interview.

In the intervening months, Caulkins said the standards and certification company has seen one additional deal close involving responsibly produced gas, as well as rapid growth in demand for its flagship product -- a TrustWell rating, similar to the Leadership in Energy and Environmental Design (LEED) rating for buildings. "We've had a number of transactions and [requests for proposals] go out over the last few months," he said.

A positive rating allows a gas supplier to charge a premium of "a few pennies per Mcf, up to 10 cents/Mcf," for its product, Caulkins said.

In a survey of about 1,600 households across the US Northeast and Midwest, IES found that 80% of respondents said they would be willing to pay a premium of as much as 20% to be able to consume responsibly produced gas, Caulkins said.

"We've seen a notable and rapidly growing need from end-markets for differentiated gas and a willingness to pay a premium for gas that's been independently and credibly verified as responsible," he said.

On Tuesday, IES announced it had completed its 2,500th rating of gas wells under the TrustWell program.The program certifies gas wells, as well as, in some cases, associated facilities on the surface.

The milestone was achieved as part of the second phase of certification work IES completed for Carbon Creek Energy, a producer that operates in Wyoming's Powder River Basin. The company is one of the first producers to market 100% of its gas as being responsibly produced. Because Carbon Creek produces its gas from a naturally fractured coal seam, its wells do not require hydraulic fracture stimulation, as is the case with the majority of gas produced from shale formations across North America.

A well can receive a TrustWell rating whether or not it has been fracked. If it has been fracked, IES evaluates a number of elements of the risks and impacts associated with that process in its scoring and rating certification.

IES evaluates the wells according to a schedule of environmental criteria, evaluating the incidence of emissions of methane and other substances, leaks and spills, well integrity and water sourcing.

Each well is measured using a four-step process, listing the well's inherent profile, control measures established, performance rating and continuous improvement.

Caulkins said initial interest in the gas certification program has come from utilities and local distribution companies, whose customers are interested in purchasing energy produced with a minimum of environmental and social impact.

"Those are some of the first-movers. Their constituents are starting to understand the supply chain and want to vote with their feet and their wallet and reward responsible practices," he said.

INTEREST FROM UPSTREAM COMPANIES

More recently, the IES program has attracted interest from upstream companies, who see the certification as a way to monetize the best environmental practices they already are pursuing in the production of their gas.

The certification agency is working with a number of E&P companies, ranging from "large public companies with many thousands of wells, to small operators with five wells, two guys and a bird dog sitting under the desk, and everything in between," Caulkins said.

Jennifer Stewart, senior vice president of government and regulatory affairs for Southwestern Energy, said under its deal with New Jersey Natural Gas, Southwestern provides about 14% of the latter company's gas supply from the producer's Marcellus Shale wells in the West Virginia Panhandle.

"There is physical connection from the wellhead to the intake point that New Jersey Natural Gas uses so they can say they are using gas to generate energy that was sustainably produced," Stewart said.

Under its contract with NJNG, Southwestern plans to certify up to 20 wells under the IES Responsible Gas program. As the production rates for the initial wells involved in the transaction begin to decline, Southwestern will obtain certification for new wells to meet the volumetric requirements of the contract.

Stewart said the producer does not need to take any extraordinary steps to have its wells certified as responsible. "It's how we already do our business," she said. "This is just a matter of getting an objective third party to come in to confirm that with data and site observations."

She said the company is considering entering into similar contract arrangements with other utility companies, to buy certified gas from its West Virginia acreage or from its Marcellus production in northeastern Pennsylvania.

"For New Jersey Natural Gas, sourcing responsible gas is important to us and strengthens our sustainability efforts as a business, in particular how methane emissions are reduced and managed up and down the value chain," NJNG spokesman Kevin Roberts, said in an email. "We are open to similar transactions in the future."

Under the IES certifications program, gas wells and related facilities are rated based on four key metrics: impacts to water, impacts to air and impacts to land, as well as community and social considerations. Wells are scored on a zero-to-150 scale, with wells scoring 125 to 150 given a Platinum rating, which comprises the top 10% of operators.

The next tier is Gold, which includes wells scoring 100 to 125 and includes the top quartile of producers. Wells scoring 75 to 100 fall into the Silver category, and those that rate below 75 are classified as actively improving.

-- Jim Magill, jim.magill@spglobal.com

-- Edited by Keiron Greenhalgh, newsdesk@spglobal.com