Fitch Solutions publishes LNG outlook

Although LNG offers benefits over other fossil fuels, including coal, the LNG market remains one of the highest emitters of carbon globally, on a full lifecycle basis. Despite being labelled as a transition fuel, LNG supply chain remains one of the key emitters of carbon globally. In a report published in 2020, the IEA estimated that the emissions generated from the lifecycle of LNG sourced in various fields in the US and consumed in Germany, India or China lingered at or below 600 CO₂e kg/MWh, as compared to over 1000 CO2e kg/MWh of emissions generated throughout the lifecycle of coal sourced domestically in all three countries.

Carbon emissions are generated throughout the supply chain of LNG starting at upstream natural gas production through liquefaction, regasification and combustion by the end user. The latter remains the key contributor of emissions to the whole LNG supply chain according to a number of publications by various organisations. Based on the GHG Conversion Factors Tool provided by the UK government, approximately 75% of emissions associated with LNG cargoes are generated by the combustion of natural gas in power plants. Shell, in its latest ‘2021 LNG Outlook’, indicates that the GHG emissions from the consumption of natural gas make up around 80% of emissions associated with LNG. According to ICF, the share of emissions generated by power plant operations lingers at 73%, as presented below. Fitch note however that the other stages, especially upstream processes and liquefaction, which requires the cooling of natural gas to minus 162°C, also emit substantial amounts of carbon dioxide and methane. Fitch highlight however, that the share of various value chain components in total LNG lifecycle emissions will depend on the region and technology used to source natural gas and advancements in LNG plants and power plants, to name a few.

In Fitch Research’s view, the expansion of low-carbon or carbon-neutral LNG cargoes will be primarily driven by the tightening of emissions standards in markets of key LNG suppliers and buyers. The trend of tightening emission standards across the energy value chain will drive the adoption of low-carbon or carbon-neutral LNG cargoes and expand this currently nascent niche. The regulatory push in key economies will likely oblige both the suppliers as well as recipients of LNG cargoes to adopt tighter standards. As an example, the expected regulatory push from the Biden administration to curtail methane emissions from upstream operations will automatically translate into the adoption of higher standards by key LNG suppliers in the US. On the demand side, Fitch expect the EU and China to be supportive of mechanisms focused on cutting carbon emissions of LNG cargoes, in light of ambitious carbon neutrality pledges. Fitch highlight that the growing adoption of tighter environmental standards in Asia, especially among key LNG importers like South Korea, China or Japan, which will be key drivers behind LNG demand growth over the long term, will likely fuel widespread adoption of lower-carbon or carbon-neutral LNG offerings.

As of now, the LNG carbon-neutral market remains in a very nascent stage, with only a few companies offering offsetting emissions related to the LNG cargo.

Given the early stages of adoption, the market has not yet specified the definition of ‘carbon-neutrality’ of LNG as suppliers have explored various approaches to provide clients with low-emission LNG. We highlight that so far only a few carbon-neutral cargoes were delivered globally, as presented above. Each producer has pursued a slightly different approach in ensuring the carbon neutrality of its cargo. As an example, Shell has sent carbon-neutral LNG cargos to recipients in Asia and most recently Europe, for which the LNG producer offset the emissions generated throughout the whole LNG lifecycle, from upstream operations to combustion in the power plant. Jera Global Markets, a subsidiary of the Japanese power generation company, delivered a carbon-neutral LNG cargo to India. In this case, carbon-neutral means that only the downstream emissions, caused by the combustion of natural gas in the power plant, will be offset. In the future, we are likely to see a variety of offerings with the full or partial offset of emissions which will impact the price premium of LNG cargoes.

In Fitch’s view, the LNG decarbonisation efforts will likely drive technological advancements. The producers or buyers could offset the emissions by purchasing carbon credits that support re/afforestation or other renewable projects. It is noted though that the variable price of carbon credits and risks related to expanding into renewable business could push LNG producers to limit the carbon footprint of LNG production instead. Thus, in Fitch’s view, the decarbonisation of LNG will also likely drive technological advancement to limit the emissions at the source, including technologies capturing emissions generated through upstream, liquefaction, regasification, or natural gas combustion processes. As an example, some of the key LNG producers in the US, including Cheniere or Sempra LNG, have announced plans to incorporate carbon capture technology at their plants in the future. Similarly, LNG Canada, the first LNG export terminal which is currently under construction in Canada, will be powered with hydro energy from BC Hydro and use energy-efficient gas turbines to green its cargoes. Although we expect that offsetting carbon emissions generated throughout the LNG value chain with carbon credits will likely prevail over the near term, the upstream and LNG facilities will likely incorporate greener solutions over the medium term to respond to the tighter regulations across supplier and buyer countries.

This commentary is published by Fitch Solutions Country Risk & Industry Research and is not a comment on Fitch Ratings' Credit Ratings. Any comments or data are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.

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