Much ink has been spilled on the sale of ‘carbon neutral LNG’ in 2021, fueling more criticism of ‘greenwashing’ at a time of increased public scrutiny on the hydrocarbon industry. By early December, the number of so-called ‘carbon neutral’ LNG cargoes had only reached the low 30s. However, as HC Insider examines in this article, with companies and key institutions taking steps to develop certification methodologies and others developing portfolios of offset projects, the trading of carbon credits for LNG is expected to pick up.
No plain sailing
As the global coronavirus pandemic has put the sustainability agenda further forward, the LNG industry has been keen to take a proactive role to promote gas as the cleanest fossil fuel in the energy transition. Mirroring similar services in other carbon-intensive industries like aviation and metals & mining for instance, companies have been doing so through the trade of carbon offsets on voluntary carbon markets proposed as a mitigation solution by the United Nations’ offset mechanisms, and other voluntary carbon credit agencies.
Those involved in the trade of an LNG cargo agree to buy carbon credits for the equivalent amount of greenhouse gas emissions associated with the cargo. Each credit accounts for one ton of CO2 removed or reduced from the atmosphere thanks to emission reduction schemes like reforestation, conservation or cookstoves distribution projects.
This is not to say it has been plain sailing for LNG companies. In addition to being part of a heavily polluting sector, the concept of ‘carbon neutral LNG’ has raised more questions than answers.
On top of the list, there have been questions over the way carbon emissions are measured and certified, underscoring the absence of a universally agreed benchmark for the monitoring, reporting, and verifying (MRV) emissions at all stages of the LNG lifecycle. Such a mechanism, it is hoped, would help set a standard framework for quantification of emissions and clarify which part of the LNG value chain is to be covered. Some deals announced in past months have covered well-to-tank (WTT) emissions, referring to the entire value LNG chain up to the delivery point. But they did not always cover the Tank-to-Wheel (TTW) section, where the LNG is offloaded, re-gasified and burnt by the end-user. This section alone is estimated to account for around 75% of GHG emissions.
This is starting to be addressed with initiatives designed to provide more transparency on GHG emissions such the Statement of GHG Emissions methodology (SGS) published last month by Singapore’s Pavilion Energy and suppliers Chevron and QatarEnergy. For its part, the International Group of LNG Importers (GIIGNL) also published the Monitoring, Reporting and Verification (MRV) and GHG Neutral framework. Other benchmarking frameworks have been made available by third parties such as consultancy Wood Mackenzie.
The SGS and GIIGNL’s methodologies are expected to be key tools to give more transparency when it comes to measuring actual emissions. Their release also came after the closure of COP26 on 13th November which saw the signing of Article 6 from the Paris Agreement. The sealing of Article 6 is expected to address several pending issues notably on some rules and mechanisms on voluntary carbon markets. Some of these issues involved the elimination of double counting of GHG emissions for compliance markets and establishes a framework to ensure adequate accounting for voluntary carbon markets that fosters emission reductions in countries hosting carbon market activities.
Quality of offsets
Companies are having to factor in the implications of the latest terms from Article 6, although it is true that this year, many have been working on improving their understanding of the inner workings of carbon offsets.
The scale of the challenge depends on the size and profile of participants. Those with internal and financial capability to procure emission credit products may be more upbeat about LNG carbon offsets, given the opportunities to offer differentiated products in a new market.
Speaking at the Reuters Commodities Trading 2021 online conference in November, Carol Howle, Executive Vice President at BP’s Shipping and Trading arm, said the company had been working on building a portfolio of bundled carbon offset products to meet regulatory requirements as well as growing customer demand. “We have offsets that we provide through our low carbon trading teams,” she said. “We provide that package to our customer, and then we retire those BP sourced carbon credits to the portfolio when we deliver that product,” she said.
But this is a work in progress, especially considering growing customers’ pressure for greener products. “We do need to make sure that we focus on the methodology. I do think going forward we are going to continue to change this as we know more and more, and work with experts in the industry around this. Then of course, quality [of offset projects] is critical. Customers are asking for this. There is an opportunity to help address the markets. It is not the sole answer, but it helps,” Howle said.
Those with the financial capacity to invest equity in their own pool of offset projects can ensure a steady supply of offset products and reduce exposure to being price takers, market risks & fluctuations, as well as to legal compliance and paperwork from third parties. Smaller companies may need to be more agile in spearheading new trading operations internally. However, they can already rely on the fact carbon offsets consists in financial products and instruments that do not involve complex operational setups, unlike physical commodity trading.
The lack of liquidity in carbon trading has also highlighted the need to develop more standardized products for carbon offsets for LNG. Exchanges such as US exchange operator CME and Singapore-based Climate Impact X (CIX) have been servicing the market, by offering bundled products of offsets to capture market share and liquidity.
Melissa Lindsay, formerly Global Head of LNG at Tullett Preborn, and founder of Emstream and the Emsurge Carbon marketplace, is a strong advocate of using the voluntary carbon market to create a carbon price and encourage the decarbonization of LNG to offset its environmental impact at least partly. “I see carbon offsets as the last resort, but also as an immediate tool and a way to redistribute wealth to those fighting energy poverty as well as the adverse effects of climate change,” she told HC Insider.
Emstream is also member of the Taskforce for Scaling Voluntary Carbon Markets which is establishing Core Carbon Principles to guide buyers on how to define a high-quality offset. Emsurge for its part is designed to facilitate more transparent and quicker trading of offsets among LNG and other commodity traders. Lindsay stresses that in the past, offset procurement was primarily the responsibility of the Corporate Social Responsibility teams. “We need to change the way we trade [LNG]. I don't think we have started to scratch the surface in terms of demand for carbon offsets. There is a lot happening behind the scenes. People have announced what is just ‘test trades’ but more importantly are working on decarbonization strategies and how to scale the use of offsets and share the cost fairly through the chain,” Lindsay said.
But some market participants are still pointing to lingering issues on the way additional costs of offsets are factored in and passed on – or not - to buyers and eventually to end users. The addition of a price premium has been cited as another risk by traders. But so far, some producers were willing to bear some costs, as a trade-off against improved customers’ satisfaction and the value of being seen as a first mover in tackling carbon emissions in the LNG space.
Little is being traded on the LNG carbon offsets market and it is too early for prices to be considered reflective of any true market for carbon offset LNG. But if this is worth any indication, Platts’ price assessment of the premium linked to carbon neutral LNG (CNL), which is based on carbon credit prices in the voluntary carbon market rose from $9/MTC in late October to $14/MTC in the wake of COP26 in November.
The fast-moving landscape of carbon trading means players across the energy and commodities trading space are building internal carbon capabilities, resulting in more demand for designated carbon specialists. “We are seeing is a huge uptick in talent demand on the carbon front as these markets gain more traction and interest,” says Amelia May, Senior Associate at HC Group. Despite a shortage of targeted competencies, there is a lot of skills that can be transferred such as origination skills of offsets products.
Despite the need for technical and strategic understanding in carbon offset products, the LNG industry will no doubt continue to be challenged to reduce its actual carbon emissions as investors, buyers and financial players are having to meet ESG (Environment Social & Governance) targets.
While financial solutions and products on voluntary carbon markets support the development of effective instruments to quantify and measure emissions – at least that is the aim for now – they should not derail attention from what really needs to be done to cut emissions along the value chain. In addition to CO2 emissions, there has been increased focus on methane leakages across the LNG chain. Even if it has a shorter lifespan in the atmosphere, methane is a more potent greenhouse gas (GHG) compared with C02.
Technical solutions include carbon capture at LNG plants as is the case in Norway’s Snohvit LNG plant. Others involve the installation of less polluting onsite power-generation plants or more efficient shipping fleets. Many hope that the success of carbon offsets and green products will become liquid and profitable enough to incentivize further investments in technical solutions like carbon capture, utilization and storage (CCUS). In this respect, the year 2022 will be a real test for the industry and other commodities’ ability to integrate carbon offsets as a tool to genuinely create a sustainable future. - FS