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Ambiguities dull lustre of carbon-neutral LNG

The complexity and cost of pricing carbon emissions from LNG’s full lifecycle will likely deter adoption—so a narrower approach may work better

Sales of so-called carbon-neutral LNG cargoes may have created positive PR for the companies involved. But it remains an amorphous term with no industry consensus about how to measure emissions or quantify offsets.

Carbon-neutral LNG can involve engineering improvements to lessen carbon intensity and methane losses, carbon capture and storage, and reduced flaring. Other strategies include using renewable power, switching to biomethane as a feedstock, and upgrading ships and engines to make them more fuel-efficient.

But, more commonly, not much changes from an operational viewpoint, with industry players instead buying carbon offset credits. Proponents argue offset credits measure and certify emissions and fund reforestation programmes. For sceptics, this is simply greenwashing, with no actual reduction in carbon emissions.

1.5bn – Trees required to offset 2019’s 5,500 LNG cargoes

“How far upstream and downstream should sellers be responsible for? Should they in fact be responsible for the entire value chain or should they only be responsible for those portions of the value chain that they control?” Steven Miles, energy sector chair at law firm Baker Botts, asked at the Gastech Virtual Summit.

“How do we measure and quantify those emissions? How do we then measure and quantify the amount of carbon reduced or offset? Who audits both of these and how do you compare and integrate different greenhouse gases into a single number that needs to be reduced or offset?”

Consistency & transparency

Regardless of these uncertainties, Shell in 2019 agreed to sell carbon-neutral LNG cargoes to South Korea’s GS Energy and Japan’s Tokyo Gas. Shell claims “nature-based carbon credits” would offset the CO2 emissions these cargoes generate, from production to delivery and consumption by the end-user. As such, these encompassed scope one, two and three emissions.

Scope one emissions refer to emissions direct from controlled or owned resources. Scope two covers indirect emissions such as those from the electricity an entity uses in its operations, while scope three includes all other indirect emissions occurring across a company’s value chain.

Other carbon-neutral shipments used a narrower scope of emissions that only included scope one and two emissions. “What is apparent from these deals is the lack of consistency and transparency in measuring emissions. There is no consensus yet as to what a carbon-neutral LNG cargo actually means,” says Lucy Cullen, principal analyst for Asia Pacific gas & LNG at consultancy Wood Mackenzie.

“There is no unified, accepted standard for measuring emissions, reductions or offsets” Miles, Baker Botts

Burning gas in downstream and power-plant operations typically accounts for 75pc of the 250,000t of CO2 emissions created by a 175,000m3 LNG shipment, according to Baker Botts calculations. Extraction represents 3pc, transport and storage 3pc, liquefaction 11pc, shipping 3pc and regasification 5pc.

Were carbon-neutral LNG to be defined as full lifecycle offset, offsetting 2019’s 5,500 LNG cargoes would require planting 1.5bn trees, Cullen estimates. Those would cover an area 5.5 times the size of Singapore.

“Full lifecycle offset may be achievable for a smaller subset of cargoes and for certain players who have visibility over the full value chain, but a more focused approach which targets emission reduction in the upstream and liquefaction segment of the value chain may be a more achievable long-term goal and one that could be adopted widely by the LNG industry,” adds Cullen.

Certification challenge

There are vastly different offset pricing mechanisms. certified emissions reductions, which are verified under the Kyoto protocol, were trading in September at c.€0.28/t ($0.33/t) of CO2 equivalent. If applied to an LNG cargo, that would cost c.€70,000, according to Miles.

But these costs can rise to $10/t CO2 equivalent, argues LNG importers’ group GIIGNL in a June research note. At that price, offsetting a standard cargo’s CO2 emissions would cost $2.5mn.

“It depends upon the project location, the buyer's preferences, the types of transaction. This variability shows that we are still in a world in which people are trying to price things that they are just not fully sure of,” adds Miles.

“We would expect to see over time that the prices of the involuntary and compulsory compliance markets would start to come together but, at the moment, there is a very significant variation… there is no unified accepted standard for measuring emissions, reductions or offsets.”

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