1. Measuring emissions
1.1. Value chain complexity
LNG is traded as a global commodity, which makes measuring the actual associated carbon footprint very challenging as emissions are distributed across different market players. The implementation of GHG reduction measures requires gathering relatively hard-to-measure data related to carbon footprint of a particular supply chain, and then devising a dedicated decarbonization strategy for an individual delivery (per cargo). Special consideration should be given to the following:
1. In the upstream - emission intensity of a given mine bed should include venting and flaring.
2. In the midstream - the key is to measure emission intensity of the liquefaction, shipping and regasification processes, also taking into account technologies employed in a given terminal.
3. In the downstream (including combustion) - it is crucial to measure emission intensity in the off-take markets, including possible leaks.
To date, there are no globally recognized methods developed for accurate measurement of emission intensity across the LNG market. Instead, monitoring, reporting and verification (MRV) procedures have been developed for some market segments.
For instance, emissions related to maritime transport with regard to deliveries to and from the EU are subject to the dedicated MRV Shipping Regulation 2016/2071. Revision of this legislation is planned for 2021 according to Fit for 55 package, which proposes extension of the EU ETS to maritime transport. The MRV for global gas value chains will also be one of the key elements of the upcoming policies under the EU Methane Strategy. Furthermore, the measurement of emission intensity is already carried out by individual companies (for instance Shell LNG), but there is no coherent and standardized approach developed for the whole sector.
1.2. Trading
The traditional LNG trade model was based on a long-term agreements between buyers and sellers with dedicated and purpose-built vessels sailing on the regular shipping route - so called the “floating pipeline” or “tramline service” model. Due to increasingly more complex trade patterns between gas supplying and buying countries, as well as a growing need for flexibility, the conventional “floating pipeline” model was slowly transformed into a more supply-demand driven one. In the wake of LNG “commoditization”, new trading models have emerged with several market players in upstream and downstream sectors, oftentimes redirecting LNG on short notice to the market that offered higher prices. In these circumstances the measuring and accounting for the actual carbon and methane emissions poses significant challenges.
1.3. Variabilities
In general distribution of emissions across LNG value chain is as follows (source: Bloomberg):
However, the actual emissions associated with a particular cargo can vary depending on several factors such as natural gas composition in the hydrocarbon reservoirs, overall efficiency of the value chain, different liquefaction processes or even ambient temperature. Also, due to molecular instability of LNG and its cryogenic nature, the chemical composition of a given cargo might change during transport, affecting the value and quality of LNG itself.
2. Decarbonization efforts
Reduction of carbon footprint along the LNG supply chain can be achieved through a combination of various low- and zero-emission technologies across the value chain, as well as processes that save primary energy. For instance, LNG produced in British Columbia, which has one of the lowest CO2 per tonne, employs electrification in the upstream processes such as drilling and processing, and hydro power in the liquefaction phase.
The major decarbonization technologies across the value chain include:
1. In the upstream – CCS infrastructure capturing CO2 from raw material extraction processes; elimination of venting and flaring.
2. In the midstream – use renewable energy for liquefaction and regasification processes in terminals, either from own sources or contracted based on physical or virtual power purchase agreements; energy efficiency solutions in terminals for energy-intensive processes; boil-off gas minimizing or recovery; low-carbon fuels used in shipping.
3. In the downstream – improved efficiency of combustion through cogeneration and trigeneration; better pipeline quality to minimize leaks.
All of the above measures require investments from individual market players: terminal operators, shipowners, energy companies and final customers. It should be pointed out that depending on the specific supply chain decarbonization efforts may have to be undertaken by a number of actors in order to ensure carbon neutrality of the final product. It will be therefore crucial to ensure coordination and concerted actions by all participants of a given supply chain. Effectively each delivery may require a different configuration of actions and a dedicated top-down plan for LNG decarbonization.
3. Carbon offsets
Carbon offset is a reduction of CO2 emissions (for example, by improving energy efficiency) or an increase in carbon sequestration (for example, by planting trees) undertaken to counterweigh emissions that occur elsewhere. A carbon credit is a tradable instrument that represents a reduction or sequestration of one metric tonne of CO2, or an equivalent quantity of other greenhouse gases, through the implementation of a specific project.
An entity that obtains carbon credits can retire them to claim reductions in its own greenhouse gas emissions or sell the credits to make profit. To prevent double counting of emission reductions under the same carbon credit, credits are recorded in the dedicated registries administered by authorized entities. Trading in offsets is considered to constitute a "voluntary" carbon market because the purchase of carbon offset credits is not required for compliance purposes.
3.1. Carbon offsets quality
The quality of carbon credits is one of the key aspects to ensure credibility of the claim regarding carbon footprint reduction. The most common objections relate to a lack of valid greenhouse gas reductions and potentially negative impacts of offset projects on local communities. There is no single, fixed set of characteristics of a high-quality carbon credit, but most commonly used standards provide some guidance in this regard.
The first criterion to highlight is additionality. In order to prove that a project submitted for certification meets the additionality requirement it is necessary to demonstrate that an investment would not be developed under business as usual scenario.
Another important feature is permanence to prevent a particular reduction from later being reversed.
Another important element is to avoid "double counting" of emission reductions. The inclusion of credits in a reputable registry guarantees one-time use and reduces errors in determining the number of credits generated by a specific project.
Last but not least, the avoidance of social and environmental harm involves compliance with all applicable legal requirements in the specific territory. Sometimes additional audits or obligations that are not legally mandated in a specific country may also be requested. This may be particularly important in developing countries where environmental regulations might not be sufficiently detailed.
3.2. Carbon offsets in the LNG sector
Liquified natural gas sector started using carbon offsets to substantiate the claim of carbon neutral LNG back in 2019, with about thirty deals to have been concluded by the industry to date by companies like BP, Gazprom, Jera, Mitsui, Total and Shell. Publicly shared information regarding carbon offset transactions includes nature of a given project, scope of emissions covered and sometimes the approximate volume of ‘carbon neutral’ LNG that was delivered as a result. Typically, LNG producers do not disclose how many offsets were bought and at what price.
Most of the projects analyzed aim at offsetting emissions across all three scopes. There was one instance where in connection with a given LNG cargo only scope 3 emissions were offset. It is important to note that declarations regarding the number of offsets to compensate for emissions associated with a given LNG cargo are based on estimates of the latter, and do not reflect the actual greenhouse gases emitted throughout the value chain of an LNG cargo, mostly due to challenges outlined above.
Most popular types of offset projects used for achieving LNG carbon neutrality come from reforestation and habitat restoration projects. Analyzed projects were located in developing countries: China, Ghana, Indonesia and Peru. This follows the general trends among the major registries, which favor projects in least developed regions which would not be pursued without additional financing coming from the sale of carbon credits. Apart from climate change considerations there is a preference for projects that help develop local communities.
Summary
‘Carbon neutral’ LNG is increasingly becoming a necessity due to market and regulatory demands. While applying emission abating technologies and processes will be fundamental, carbon offsets are likely to play an increasingly important role in decarbonization of this commodity. At the same time it appears that there will be no shortage of challenges in developing accurate methodologies for measuring the actual emissions associated with individual cargos. To that end, collaboration of market players across the entire value chain will be necessary.
At EY, we understand the complexities of the LNG market and its regulatory ramifications, as well as the design of voluntary carbon markets. We would be more than happy to use this cross-cutting expertise to help you navigate the challenges, mitigate risks and maximize opportunities.
