Going Green with Carbon-Neutral LNG

  • 10 Jun 2021
  • By Adila Mchich and Chad Britnell
  • Topics: Energy

Carbon-neutral liquefied natural gas (LNG) has emerged as an innovative way to sell natural gas while mitigating its environmental impact.

As the world is increasingly embracing clean energy, oil and gas producers and users are ramping up their efforts to reduce their carbon impact.

Carbon-neutral LNG has attracted a lot of interest from producers and users who face the challenge of addressing environmental concerns while maintaining shareholder returns. The natural gas market faces environmental scrutiny from investors and regulators, as well as from lenders who provide access to capital. Making cargoes carbon neutral is an attractive way to partly allay such concerns.

What is Carbon-Neutral LNG?

Carbon-neutral LNG involves offsetting the carbon emissions from the LNG supply chain through the purchase of carbon offsets. Carbon neutrality can only be achieved through the offsetting of product lifecycle emissions, or all the emissions associated with the production, transportation, and use of a specific product. Based on the Greenhouse Gas Protocol1, which is the most widely used accounting standard, lifecycle GHG emissions can be divided and measured according to three ‘scopes’ (Scope 1, 2 and 3):

  • Scope 1 emissions are direct emissions from owned or controlled sources. 
  • Scope 2 emissions are indirect emissions from the generation of purchased energy. 
  • Scope 3 emissions are all indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions. 

Decarbonizing LNG cargoes enhances the environmental competitiveness of the LNG market and allows producers to sell a differentiated and premium product that is attractive to buyers looking for an LNG cargo with environmental added value.

The first carbon-neutral LNG cargo was traded in 2019 when Tokyo Gas and GS Energy bought a carbon-neutral LNG cargo from Shell. Under the terms of this trade, the seller committed to the removal of carbon emissions generated from the entire value chain covering Scope 1, 2, and 3.

 Since then, other energy companies have announced additional deals with different stipulations, such as partial offsets of certain activities i.e. end-user combustion as opposed to lifecycle offsets. The decision to trade a lifecycle or partial carbon-neutral LNG transaction is driven mainly by the buyers’ requirements and the seller’s capabilities.

Figure 1: Carbon-Neutral LNG Deal List  

Date

Seller

Buyer

Tanker

Delivery

Source of Certificates

Scope covered

Press Release

19-Jun

Shell

Tokyo Gas

LNG

Japan

From Shell
project portfolio

1, 2 & 3

link

19-Jun

Shell

GS Energy

LNG

South Korea

From Shell
project portfolio

1, 2 & 3

link

19-Jun

JERA

 

LNG

India

CER

3

link

20-Mar

Shell

CPC

LNG

Taiwan

From Shell
project portfolio

1, 2 & 3

link

20-Oct

Total

CNOOC

LNG

China

VCS units

1, 2 & 3

link

21-Mar

Mitsui

Hokkaido Gas

LNG

 Japan

From Mitsui
portfolio

1, 2 & 3

link

21-Mar

Gazprom

Shell

LNG

 U.K.

VCS

1,2 & 3

link

21-Jan

Occidental

Reliance

Crude oil

India

VCU through
CBL platform

1, 2 & 3

link

21-Mar

Woodside

Trafigura

Condensate

N/A

Gold Standard,
VCS

 

link

21-June

Oman LNG

Shell

LNG

U.K.

N/A

   

Supply chain implications

The decision about which parts of the supply chain should be offset depends on negotiation and on the structure of the deal, which will determine the buyer and seller’s relative responsibility for supply chain emissions.

Integrated LNG sellers have a comprehensive view of the emission profile of the value chain since they own and control the upstream gas supply, the liquefaction plant, and the marine terminal.

The use of a tolling model, whereby the LNG seller is responsible for sourcing feedstock gas from upstream producers, can make quantifying and measuring emissions more challenging due to the lack of overall control.

Determining the product lifecycle emissions for an LNG cargo is challenging, given the diversity in upstream technology, transportation methods, and downstream use cases.

A universally accepted framework focusing on the monitoring, reporting, and verifying of emissions across all stages of the LNG supply chain would increase accuracy and promote acceptance in the industry2. Firms like Pavilion and Wood Mackenzie are working on bringing such a framework to market as demand and growth expectations for carbon-neutral LNG cargos continue to build.

LNG emissions monitoring and measurement

Until a universal methodology is agreed, public reporting tools can be used to illustrate the approximate emissions resulting from LNG operations and therefore the number of offsets required to achieve carbon neutrality.

On average, the product lifecycle emissions of a conventional LNG cargo (175,000 cubic meters) are generally estimated at around 250,000 tons of CO2 equivalent. This amount can vary depending on various factors such as the source of the LNG, the type of liquefaction technology, the vessel used to transport the LNG, or the equipment and procedures in place at the regasification terminal3.

Based on UK Government GHG Conversion Factors, around 75% of GHG emissions from LNG are associated with its consumption (i.e. linked to the combustion of natural gas) 4. In 2019, the UK Government Emission Factors estimated that GHG emissions from the LNG supply chain were as follows5:

  • 2.54 kg of CO2 equivalent generated for each kg of LNG for the fuel combustion (Tank-to Wheel).
  • 0.88 kg of C02 equivalent generated for each kg of LNG for the extraction, refining, and transportation of the fuel (Well-to-Tank).

Achieving carbon neutrality through carbon offsets

Gaining access to and managing price risk in the carbon offset market will be critical in the development and acceptance of carbon-neutral LNG cargos.

The voluntary carbon offset market can provide the liquidity, standardization, and credit quality necessary to meet the demand for offsetting LNG cargoes.

Voluntary offsets have the flexibility to allow firms to reduce carbon emissions outside a regulated framework and to take near-term action to meet carbon reduction goals such as achieving carbon neutrality within the supply chain.

Figure 2. Emissions from an LNG Cargo

GEO Futures – making carbon neutrality possible

CME Group offers LNG market participants critical tools to construct carbon-neutral LNG trades.

By combining CME Group’s benchmark Henry Hub Natural Gas futures contract with the CBL Global Emissions Offset futures (GEO) contract, customers can effectively hedge carbon-neutral LNG supply agreements.

GEO, created in partnership with CBL, an Xpansiv company and the leading environmental spot commodity exchange, is a physically settled contract that allows for delivery of CORSIA-eligible voluntary carbon offsets from three registries: Verified Carbon Standard (VCS), American Carbon Registry (ACR), and Climate Action Reserve (CAR). Deliveries will be facilitated through CBL. Launched on March 1, 2021, GEO is a market-based solution that can be utilized by participants across sectors and geographical borders to reduce emissions and mitigate climate pricing risk.

GEO futures represent 1,000 emissions offsets per contract and are based on a rigorous selection criteria and review process developed by ICAO and a group of carbon experts from 19 countries known as the Technical Advisory Body (TAB).

ICAO and TAB have spent years developing a stringent screening process to determine which offset registries and project types are eligible for CORSIA. The result is a set of criteria that firms across industries can use as guidance to assess the robustness of emissions offset projects and associated credits.

With the GEO contract, market participants can be confident that they are receiving a trusted, verifiable emissions offset product. The GEO contract offers standardization and price convergence based on the underlying ICAO selection criteria while CBL markets and CME Group platforms enable accessibility to transparent data for the spot and futures markets.

Hedging a carbon-neutral LNG cargo/supply agreement

Using the UK Government’s emissions factors measurements, on average, an LNG cargo emits 250,000 tons of CO2 equivalent of product lifecycle emissions.

This means that 250,000 emissions offsets (1 offset = 1 MT of CO2) must be purchased to bring the cargo to carbon neutrality. CME Group and CBL provide the products, platforms, and services to execute this transaction.

Example 1: Carbon-Neutral LNG Trade with Futures

A customer locks in one cargo for lifting in January 2022, amounting to approximately 250,000 tons of CO2 equivalent that she plans to mitigate using emissions offsets. In order to hedge both the cost of the LNG and the offsets, the customer purchases January 2022 NG futures using CME NG futures and 250 CBL Global Emissions Offset (GEO) futures.

 In January 2022, the customer receives one LNG cargo, closes out her prompt month NG futures position, and lets the GEO futures position for that month go to delivery. The customer receives 250,000 emissions offsets (250 x 1,000 offsets per futures contract) and retires them to offset the carbon footprint of that January LNG cargo.

Alternatively, instead of allowing the GEO futures to go to delivery, the customer can close out the January 2022 GEO futures position and purchase 250,000 emissions offsets on CBL’s spot market platform. By utilizing the GEO futures, the customer is still able to hedge the cost of the offsets purchased through CBL’s liquid spot market.  

Summary

While carbon-neutral LNG is still at an embryonic stage, the market has the potential to grow and become more liquid.

Growth will be driven by corporate climate goals, environmental regulatory environment, and access to financing. A standardized methodology for measuring GHG emissions in the LNG supply is still being developed and is receiving substantial attention from major market participants.

As the market evolves, CME Group and CBL can facilitate carbon-neutral LNG trading and risk management through our liquid spot and futures products.

References