We were shook last October when Engie announced that it had not only scrapped a proposed SPA with NextDecade, but it was backing out because of fears surrounding NextDecade’s methane emissions. The implications for U.S. LNG were potentially seismic: the European Union is arguably the LNG industry’s most important market. While we’re not as startled by the EU’s newest proposed methane curbs, we continue to believe that the EU’s ESG turn will prove highly challenging for U.S. LNG producers. If the EU passes more stringent methane regulations, existing U.S. LNG exporters will almost certainly face higher costs and lower netbacks to Europe. Proposed U.S. LNG projects will face even greater hurdles, should the proposed regulations move forward. Still, it’s not all bad news for U.S. LNG exporters. Stricter methane standards will largely disadvantage gas in fuel-on-fuel competition, but U.S. LNG may be able to outcompete other natural gas suppliers if upstream producers can lower their methane emissions profile.
EU Climate Policies and Methane
The EU is seeking to reach net zero greenhouse gas (GHG) emissions by 2050, and plans to cut 55% of GHG from 1990s levels. Importantly, the EU plans to increase renewable energy’s share of power consumption from ~32% currently to about 40% by 2030. Natural gas – and U.S. LNG imports in particular – may be displaced as the EU shifts to a zero GHG posture.
There is increasing transparency and environmental concern surrounding methane emissions. Due to cost reductions for satellites, non-governmental organizations (NGOs) such as the Environmental Defense Fund, or EDF, can affordably and accurately monitor methane emissions from space. While methane persists only a short time in the atmosphere, there is a growing scientific consensus suggesting that methane emissions are larger than previously thought. Moreover, since methane is an extremely potent greenhouse gas, environmental groups and regulators are increasingly directing their attention to this form of emissions.
Greater scrutiny of methane could pose risks for U.S. LNG exporters. Some U.S. basins are notoriously methane emission intensive. The Bakken, for instance, has acquired a reputation for extensive flaring and even venting. European offtakers and regulators will surely continue to scrutinize the entire U.S. LNG complex, from upstream production all the way to liquefaction and transport – wellhead to burner tip.
Or will U.S. LNG outcompete Russian Pipeline Natural Gas?
But we’re not convinced that U.S. LNG will lose the most from stricter methane emission standards. First, the U.S. O&G complex has proved highly innovative and will very likely find ways to reduce methane emissions under a proper incentives structure. Second, Russian natural gas – even shipped through pipelines – may have a worse methane emissions profile than U.S. LNG. In 2018, the latest full-year figure according to the World Bank, Russia produced 36% more methane than the U.S. on an absolute basis. Gazprom has also come under fire after it produced the most severe release of methane attributed to O&G since September 2019. We’ll wait and see for more data collection and analysis on each country’s methane profile, but it’s not clear as of this writing that Gazprom’s methane profile will be any better than U.S. LNG’s. In fact, U.S. LNG could conceivably become more competitive relative to many of its intra-fuel competitors.
EU renewables are incoming, but natural gas is still needed
The EU’s new methane regulations pose risks, potentially severe ones, to U.S. LNG exporters. As the cost of producing methane rises, EU and EU-area clean energy solutions will become more competitive vis-à-vis natural gas. Still, natural gas and U.S. LNG may find a role as a needed fuel for a decade – or perhaps even much longer. Stricter methane restrictions will raise the price of coal, natural gas is a highly reliable baseload fuel source, and the EU – particularly Germany – is skeptical of nuclear power. Moreover, U.S. LNG exports may ultimately prove to be less carbon intensive than Russian pipeline natural gas. We’ll keep tracking developments in this space.