Environmental awareness and a push for decarbonisation have been growing in all parts of the energy industry, and LNG is no exception. The US LNG industry has been increasingly focused on ‘greening’ and reducing the carbon intensity of its operations amid pressure from government policies, investors, and buyers. International customers have shown concerns around US gas supply methane emissions, such as in the case of the proposed Rio Grande LNG facility in South Texas, US. Back in 2020, under pressure from the French government, the French energy company Engie decided to withdraw from negotiations to buy LNG from this project due to its perceived sourcing of ‘dirtier’ US gas supply from hydraulic fracturing. To increase their competitiveness not only domestically but also internationally, US gas producers and LNG developers are seeking ways to track and mitigate the emissions tied to their operations, paving the way for a surge in responsibly sourced gas (RSG) or certified gas.
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Certified gas refers to production that is certified and graded by third parties where operators have to measure, monitor, and reduce the carbon footprint of their gas supply. Three certifiers have emerged in the North American gas industry – Project Canary, MiQ, and Equitable Origin – and each has different performance criteria for its standard. While measurement of methane intensity is a common criterion for Project Canary and MiQ, Equitable Origin takes a more holistic approach to address broader topics, such as air quality and indigenous people’s rights.
According to the US Environmental Protection Agency (EPA), nearly half of the total methane emissions from the oil and natural gas industry comes from the gas production segment, where methane mitigation efforts have been very much voluntary and therefore poorly quantified. However, with growing pressure for faster decarbonisation and methane reporting requirements in its recently proposed regulations, reduction of their methane intensity level has been on the rise among many US gas producers. For US gas producers, the value of certifying gas runs in parallel with reducing their Scope 1 emissions to meet net zero targets. Already, 20% of US gas has been committed to be certified by the end of 2022.
Approximately 7 billion ft3/d of North American gas production had already been certified by the end of 2021 and the growth is set to accelerate as another 12 billion ft3/d of RSG is expected in 2022. Most of the producer commitments made for certified gas have been focused on the Northeast and Haynesville, where they are better positioned to be certified due to the basins’ already lower emissions profiles. Wood Mackenzie expects approximately 8 billion ft3/d of LNG export growth in the US for the next five years, most of which is met by supply from Haynesville and Permian. Half of the current Haynesville gas production has already been committed to be certified. Certification is likely to become a prerequisite for new gas sales agreements with LNG exporters, and with its proximity to US Gulf Coast LNG export facilities, the share of certified gas in Haynesville is likely to grow even further. On the other hand, Permian has the highest methane intensity. This is due to associated gas production where flaring is still occurring. Although Permian suppliers will require more effort to reduce their emissions profile, ExxonMobil and Chevron have announced pilot projects to certify small portions of their assets. Wood Mackenzie expects other Permian producers to follow in their footsteps and ramp up efforts to certify a larger portion of their assets, allowing them to stay competitive in a market which is increasingly sensitive to global gas needs. The value of using certified gas supply for LNG could potentially equal the carbon cost abated if taxed under carbon price, such as Europe’s ETS carbon price. This would be the difference between the carbon cost of LNG feed gas sourced with a higher methane intensity and certified gas at a lower methane intensity. Under Europe’s ETS carbon price of US$80/t of carbon, an average 3.3 billion ft3 LNG cargo could be valued at a carbon abatement cost of US$3.3 million if sourced from US-certified gas at production level methane intensity of 0.2% vs. regular gas from the Permian basin at 2.3%. Therefore, certifying gas is also a strategic option for upstream developers to secure sales agreements into LNG export facilities. For LNG offtakers, a US LNG cargo sourced from certified gas would be increasingly competitive vs. global LNG cargoes from cleaner sources. Certified feed gas for a 3.3 billion ft3 LNG cargo would abate approximately 41 000 t of CO2 equivalent, which equates to carbon sequestered by growing 44 395 acres of US forest annually.
While the cost of producing responsibly sourced gas will likely balance out the cost of abatement as the market equilibrates, the pull from end users who need to manage their emissions profile will continue to provide producers with reasons to certify their gas. LNG buyers will prefer US certified feed gas, as it reduces the remaining abatement required to deliver carbon-neutral LNG, making US LNG cargo more in line with LNG cargoes from other sources around the world.