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Path for US LNG narrows as markets wary on emissions

Highlights

Global gas demand grows 1.2% per year in the 2020s; uncertainty follows

US exporters face 'race to make LNG as green as possible'

The US natural gas industry is facing new urgency to keep its exported LNG cargoes attractive to consumer nations aspiring to meet net-zero carbon targets by 2050.

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As the global energy transition unfolds, US LNG will influence and be influenced by the international landscape for natural gas.

The election of President Joe Biden has focused more attention on climate, clean energy, and managing the emissions of fossil fuels in the US. In Europe, buyers have expressed a preference for LNG cargoes with low associated greenhouse gas emissions. In many other countries around the world, the decarbonization goals outlined in the Paris Agreement on climate change are now figuring more prominently.

ADDITIONAL COVERAGE: Natural Gas in Transition

Some analysts see the potential for climate policies to expand growth opportunities for gas in the global market, especially in parts of Asia that favor it as a bridge fuel. But there is also uncertainty when looking out to 2050 as analysts and industry players try to answer questions about the shape of energy policies in gas markets, the selection of energy resources, and the competitive pressures on gas.

"There is a clear clock ticking until 2050," said Nikos Tsafos, a senior fellow with the energy security and climate change program at the Center for Strategic and International Studies. "The idea of gas as a useful short-to-medium decarbonization strategy has lost a lot of its appeal. Not everywhere, obviously. But the conversation is just so different."

As countries adopt aggressive decarbonization goals, it is becoming harder to make decades-long investment decisions on gas projects without asking tough questions about the role of the fuel, Tsafos said.

Other countries' attitudes toward gas are important to the US because LNG feedgas demand is poised to be the single-largest driver of growth in domestic gas consumption in the next 20 years.

S&P Global Platts Analytics estimates global gas demand will grow by some 1.2%/year in the 2020s, fueled by growth in the Asia-Pacific region and the use of gas as a bridge fuel in western power markets. The growth is forecast to slow in the 2030s, however, as net-zero carbon goals put pressure on governments to rely less on gas and LNG.

European LNG demand is likely to peak in the mid- to late 2020s, said Ross Wyeno, lead LNG analyst with Platts Analytics. A steady increase in Asian natural gas demand will be an integral sink for new supply out to 2040.

Organizations such as the International Energy Agency and BP have released outlooks over the past year that show a narrowing space for gas over the next three decades. The IEA's roadmap for reaching net-zero emissions by 2050 shows many of the LNG facilities under construction or at the planning stage will not be needed, with the LNG trade falling 60% from 2020 under its scenario.

"In most advanced economies, the window for increased natural gas consumption is probably already closed, while developing and emerging economies, especially in Asia, have some further room to grow in the decades ahead," said IEA analyst Akos Losz. "Gas can play a more positive role in the transition, but for that, the whole value chain would have to adapt."

Even assuming demand growth, industry observers anticipate an increasingly competitive global gas market, with national oil companies growing in importance. Increasing the pressure on US export developers, Qatar recently announced a 33 million mt/year LNG expansion that features several technologies aimed at improving the facility's carbon footprint, such as carbon capture and storage.

Scrubbing the US industry

The Biden administration is expected to set stricter environmental controls for US shale gas production — something that could help buttress exports in the near term. But cleaning up the supply chain will be especially challenging in the US, where thousands of independent producers supply gas for export.

Fred Hutchison of US trade group LNG Allies said he sees the US gas industry now embracing the need to address its externalities, such as leaks, emissions, and flaring, to remain relevant in a net-zero carbon future. The question is how quickly it can do so.

Cheniere Energy in a recent report analyzing different climate change policy scenarios said it expects LNG demand growth to continue for the next two decades, but added that "continued action to reduce global GHG emissions may cause LNG demand to decline beyond 2040."

The company also underlined its belief in the long-term resilience of its business.

At the CERAWeek IHS Market energy conference in March, Cheniere CEO Jack Fusco was bullish about a "long, very robust runway" for gas throughout the world.

But Cheniere is also putting new emphasis on its efforts to drive transparency and curb emissions along its supply chain. The company recently unveiled plans to report carbon-equivalent emissions for each LNG cargo it produces, starting in 2022.

Cheniere's announcement joined those of other sellers marketing carbon-neutral cargoes. At least 14 "carbon-neutral" cargoes have been announced, according to Platts Analytics, with all but two of those cargoes going into the Asia market. Among them was a carbon-neutral cargo that Cheniere said it delivered in early April to Royal Dutch Shell in Europe.

"There is a race to make LNG as green as possible," Tsafos said.

But there are questions about how the efforts to assign GHG emissions to LNG cargoes will develop, such as whether buyers will choose cargoes based on lower emissions numbers and pay more for greener cargoes. It is also unclear whether there will be widespread adoption and standardization of the practice.

Some analysts suggested that the next, more difficult step will be finding ways to reduce emissions.

In one move to curb its emissions profile, LNG developer NextDecade in March launched a carbon-capture project tied to its proposed Rio Grande liquefaction terminal in Texas. That followed reports last year that France's Engie halted talks about a long-term contract with the project at a time when it faced pressure over the emissions profile of US shale gas. Fellow LNG developers Cheniere, Sempra Energy, and Venture Global have since said they are looking at adding carbon capture projects at their own facilities.

Green groups say leave gas behind

Environmentalists caution against pinning long-term plans on natural gas. They pointed out that gas already faces competition from low-cost renewables, and that ultimately, climate policies could further erode market share for gas.

"We're still a long way from seeing the kind of pledges and actions from governments that will get us to 1.5 degrees Celsius," said Lorne Stockman of Oil Change International. His group is trying to shape the outcome by lobbying against US financing of overseas gas projects, including in growing Asian energy markets.

The Natural Resources Defense Council, which is also involved in that effort, argued in a December 2020 report that the carbon footprint of US LNG is only "marginally better" than that of coal when considering emissions throughout the supply chain. The group has warned about a lock-in effect if the US continues to build out its LNG export infrastructure.

"There needs to be a recognition from investors that in a climate-conscious world, you're talking about infrastructure that's designed to last to the point where we are net-zero," NRDC analyst Amanda Levin said. "How do you make that money back?"

Mark Brownstein, senior vice president of energy at the Environmental Defense Fund, said, "If oil and gas want to continue to be relevant in many parts of the world, they're going to have to be clean and low-carbon to compete with those technologies that can provide those services in cleaner, low-carbon ways."

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