LNG: Between condemnation and reality

Last week South Korean industrial conglomerate SK Group came under fire for finalising an LNG investment deal with Australian Santos and U.S. ConocoPhilips. The deal, environmentalist organizations said, clashes with SK Group’s pledge to stop investing in new fossil fuel projects.

SK Group countered with the fact that the development of the Barossa-Caldita gas field will involve carbon capture and storage, which, the company said, would cut “nearly all” emissions the project would be generating. This is unlikely to quell environmentalist and activist shareholder concerns about the planet but it highlights something those with any degree of involvement in the energy industry already know. LNG is gaining popularity despite its fossil fuel status and this popularity is unlikely to start declining any time soon.

Here are some figures. Last year, LNG trade hit a record bucking the overall trend in the energy field. The annual rise was modest at 0.4% because of the pandemic but it did raise trade volumes to an all-time high of 356.1 million tonnes. Then, at the beginning of this year, prices for LNG on the spot market hit their own record, driven by tightness of supply and a sudden surge in demand amid harsh winter weather in the key Asian market. Notably, that happened despite China’s drive to stock up on LNG to avoid a repeat of the gas shortage crisis it suffered a couple of years ago on insufficient supply of the fuel as it moved away from coal.

Demand for LNG is set for strong growth in the coming decades and this fact is enough to turn the attention of environmentalists and ESG investors towards it. The logic of the opposition accurately steps on the fact that all fossil fuels emit carbon dioxide and other greenhouse gases and for a carbon neutral planet we need to cut our use of all and any fossil fuels as much as possible. The problem is that such deep cuts would leave the energy revolution moving on sheer momentum and momentum cannot sustain motion forever even if it is powered by solar panels and wind mills. This is why so many like SK Group are betting on LNG.

According to the EIA, natural gas has half the emissions footprint of coal. From a radical climate change perspective anything over zero is too much. From a more realistic perspective, gas is half as polluting as coal. it is going to be even less polluting than than as the pressure that activists and shareholders are exerting on the industry forces it to invest in things like carbon capture and storage. This is yet another piece of evidence in favour of LNG.

Carbon capture and storage systems are notoriously expensive. Nobody would spend money on them unless they really have to. Apparently, those that eye leadership in the LNG world believe they really have to. Qatar Petroleum is adding CCS to its North Field expansion — a project that will cost close to $30 billion but will serve to cement the tiny Gulf nation’s lead in the global LNG export market by boosting its LNG production capacity to 110 million tonnes per year from 77 million tonnes currently.

“The tremendous amount of greenhouse gas from the Barossa-Caldita project will raise serious doubts on SK Group’s ESG initiative, and more importantly, it will undermine the global efforts to mitigate climate change by reducing greenhouse gas emissions,” a group of environmentalist organisations wrote in a letter criticising SK Groups’ $1.4-billion investment in the Australian LNG project, as carried by the FT.

“Our investment was made on the condition that LNG is developed in an eco-friendly, low-carbon way,” the South Korean conglomerate countered.

Although the critics’ letter brushed off the CCS plans of the project developers as lacking technical or economical feasibility, it is a fact that LNG developers have done their homework. Pressure to lower emissions will not go away soon and it is making buyers pickier than before. French Engie’s exit from its long-term LNG supply deal with U.S. NextDecade is the most notorious case in point. Other examples include buyers wanting to know what the methane emissions footprint of the LNG they are buying is, so there is now an international organization, MiQ, that certifies cleaner LNG that costs more but has a lower emissions footprint and that makes it attractive.

It may sound counterintuitive to pay more for gas only because it has a lower emission footprint but with the green transition narrative becoming louder by the day, companies such as SK Group are becoming acutely aware of the reputational damage that association with “dirty” fuels may cause them. So they pay the clean-gas premium and sleep better at night. And this fact is another argument in favour of LNG.

To be certified as a producer of gas with a low methane footprint, a company must invest in methane detection and capture systems. To put it bluntly, if you want to go low-carbon, it will cost you. If companies are willing to pay that cost, then going low-carbon must be economically feasible, regardless of opponents’ accusations of greenwashing. According to energy consultancy Wood Mackenzie, going low-carbon in LNG production is not just economically feasible, it is a must.

Australian LNG producers need to reduce the carbon footprint of their operations, a senior analyst at Wood Mac said earlier this month at an industry event. Countries that had made climate neutrality pledges accounted for 30% of global gas demand and as much as 75% of LNG demand, Daniel Toleman said. These countries would want their LNG low-carbon and unless Australian producers could supply it, they would fall behind competitors who were investing in low-carbon production.

The same argument could be used for all LNG producers. After all, they all compete on the same markets. What is somewhat ironic is that for all the talk of LNG-related emissions there is no clear criteria for accounting for these emissions, as Wood Mac’s Toleman noted in his speech. Basically, LNG producers are being told “Cut whatever emissions you can, it’ll add up in the end.”

Yet it’s worth remembering that climate pledges by governments are not immutable universal rules akin to Newton’s laws. In fact, climate pledges are quite mutable when reality pressures their authors into facing it. The European Union, which has been reluctant to add natural gas to its net-zero plans for the future eventually added it to what it calls the EU Taxonomy Climate Delegated Act. The move was effectively an admission that solar and wind can’t go it alone, even with the help of hydropower where available.

What’s more, there is emerging demand for LNG in countries that have not made climate pledges but their energy demand is growing and they need a fast, cheap and reliable way to satisfy it. Even those with pledges might find themselves in need of long-term energy supply that is affordable enough to not plunge their population into poverty. LNG producers would be only too happy to respond to that demand.