What’s the issue?
Greenhouse gas impacts from the production of LNG may become the new way to differentiate the product and win contracts needed to support a final investment decision.
Why does it matter?
The second wave of LNG export terminals are fighting over a limited pool of customers. Some of those customers have now indicated that the amount of greenhouse gases released to produce the LNG they buy may be a factor in their contracting decisions. Those who respond to this demand may have an advantage in the competition for contracts.
What’s our view?
LNG is likely to join most of the rest of the energy market where the regulators are running behind commercial demands to reduce the amount of greenhouse gases released. Companies that are most responsive to these demands may be the ones most likely to sign the commercial deals necessary to support a final investment decision. For instance, among the three projects along the Brownsville Ship Channel, Rio Grande has announced an initiative that would move it from the most carbon intensive, by a factor of ten, to the leader over both Annova and Texas LNG.
In early November, the French energy company Engie announced that it would not pursue commercial negotiations with NextDecade with regard to a purported $7 billion contract for LNG from NextDecade’s Rio Grande terminal. Press reports indicated that the decision was based on a concern about the greenhouse gas emissions that would be created by the production of the LNG. Apparently, the concern is not only about the operational characteristics of the facility itself, but also about the source of the gas used to create the LNG.
As we discuss today, there are a number of projects in the second wave of export terminals approved by FERC that are hoping to reach a final investment decision (FID) in 2021. Three of these terminals, Annova LNG, Texas LNG and Rio Grande, are all clustered together on the Brownsville Ship Channel in Texas. Today we look at how these three competing projects are addressing this issue and why it may become a differentiator that allows one project to sign sufficient contracts to support an FID, while the others are forced to delay that milestone.
What is Green LNG?
Because LNG is a fossil fuel, it will never be considered entirely green. But that has not stopped the demand for a greener version of LNG based on the source of the gas used and the entirety of the process used to create and deliver the LNG. Last April, Singapore’s Pavilion Energy issued a request for proposals for LNG deliveries beginning in 2023, and included a requirement that bidders include a commitment to jointly develop and implement a greenhouse gas quantification and reporting methodology covering emissions from the well to the discharge terminal.
In a webinar sponsored by the Baker Institute for Public Policy, Pavilion’s Group Chief Executive Officer, Frédéric Barnaud, indicated that the goal by the end of the contract would be to have a certificate that accompanied each shipment of LNG that stated the greenhouse gas footprint from production of the gas to the delivery of the gas to Singapore. The purpose of the request is to focus the producers of LNG on the need to reduce the carbon-intensity of their LNG supply, and to foster the standardization, certification and price transparency for emissions reductions or offset certificates in Asia and to develop a marketplace and trading hub.
The basis for the decision by Engie to terminate its discussions with NextDecade was not nearly as clear as the stated goals of Pavilion. However, based on press reports, the concern seemed to cover a similar range of issues, including the source of the gas (shale gas fields), the environmental and climate impact of fracking and related emissions of methane, and the process used to create the LNG. In fact, before the announcement of the termination of discussions, NextDecade announced in early October that it had developed a proprietary process using proven technology to reduce carbon dioxide equivalent (CO2e) emissions at the Rio Grande LNG facility by approximately 90 percent through carbon capture and storage, and that it hoped to eventually make the entire process carbon-neutral. The company’s Chairman and Chief Executive Officer stated that the company would be able to provide “reliable, competitively priced LNG” in conjunction with “responsible environmental stewardship.” The company emphasized that it still expected to reach FID in 2021 and that the milestone would be aided by not only its flexible commercial offerings, but also its leadership in environmental and social performance, including targeting carbon-neutrality at Rio Grande LNG.
Differentiation Among Competitors
Rio Grande is not the only project hoping to reach FID. Based on our tracking of such announcements, the company has a lot of competition among the second-wave competitors in trying to achieve that goal.
As shown above, there are projects that will produce a substantial amount of LNG that are hoping to reach FID over the next few years. Given Pavilion’s request for proposals and Engie’s decision to stop discussions, a key differentiator for those companies seeking to reach FID may be the carbon-intensity of the LNG they produce.
Rio Grande is not only competing with other projects around the country, they are also competing with two other projects along the Brownsville ship channel in Texas, Annova LNG and Texas LNG. We have already discussed how Rio Grande is attempting to address the carbon intensity of its own operations, but as discussed above, that is not the only aspect of the chain on which the purchasers of LNG appear to be focused. All three of the projects indicate that they will source their gas supply from the Agua Dulce hub in Texas. However, that hub is served by ten different intrastate and interstate pipelines. As we discussed in ESG and Methane Emissions - Could LAUF be a Performance Metric?, pipelines may have different profiles when it comes to their own carbon footprint. In addition, each of the pipelines may be able to source gas from different producers that may also have their own carbon profile. As the LNG buyers push for an overall carbon score for the LNG they buy, the LNG terminal operators may require their pipelines and gas producers to provide a similar scorecard for their own operations, so that they can certify the extent of the greenhouse gas emissions from the LNG delivered.
The three facilities have also taken different approaches with regard to the carbon footprint of their own operations. As discussed above, Rio Grande has announced a program to use carbon capture and storage to reduce its carbon footprint. As originally planned, the FERC environmental impact statement (EIS) for the project indicated that the operational emissions would be 8,194,766 tons per year (tpy), which is equal to 303,509 tons of CO2e per million tons per year (MTPA) of LNG produced at the facility. Rio Grande can reduce this to 30,351 tpy of CO2e per MTPA, presuming a 90 percent reduction through carbon capture and storage. Texas LNG has not announced any changes in its plans and, based on the EIS for that project, it would produce 613,901 tpy of CO2e for an intensity rate of 153,475 tons of CO2e per MTPA.
Annova LNG promotes itself as the most sustainable project in the United States. It chose to use electric-driven trains that will be powered by 100% carbon-free renewables, which results in the “lowest carbon footprint per tonne of production of all U.S. LNG providers and will set the standard for cleaner LNG production worldwide.” The EIS for the project certainly sets it apart from the other two projects, with operational CO2e expected to come in at only 367,295 tpy, which equates to 91,823 tons of CO2e per MTPA.
FERC GHG Requirements
In The First Casualty of FERC’s Fight Over GHG, we discussed the split among the then-serving commissioners over how to address the greenhouse gas impacts of projects. We expect there to be a substantial change in FERC’s view of greenhouse gas emissions following the inauguration and the expected elevation of either Commissioner Glick or Commissioner Clements to be chair of the Commission. However, any change in the views of the Commission may have little to no impact on the LNG market because the projects awaiting FID have already been approved by FERC. So the marketplace may drive the greatest change in the carbon footprint of the industry, particularly if carbon-intensity becomes a key differentiator that allows projects that have lower carbon profiles to move forward, while perhaps dooming those that do not adapt, as Rio Grande is attempting to do.