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The Pitch to De-Commoditize Natural Gas

Natural gas is a hydrocarbon energy source with widespread use across the global economy in applications including as fuel used to generate power, a feedstock for chemicals, and a cooking or heating fuel in residential homes. But in 2021, natural gas the commodity cannot escape the politics of our times.  Is it an abundant, low-cost transition fuel enabling the world’s population to have reliable access to the standards of modern life while displacing more harmful fuels?  Or it is a villain in disguise that perpetuates all the worst traits of the status quo?  Companies with established businesses producing or consuming natural gas are on the receiving end of inquiries about their plans for the future.  Some companies are advocating for the benefits of natural gas, while also setting the stage to de-commoditize natural gas by creating new categories of natural gas that might either command a higher price or meet ESG standards that ensure a long-term source of demand.  Today’s energy market commentary reviews some of the avenues being explored to de-commoditize natural gas.

Renewable Natural Gas

Renewable natural gas (RNG) is a purified stream of natural gas sourced from decomposing organic matter, most often landfills, food waste or farms that is used in place of natural gas from fossil sources.  RNG production can be used to meet government targets for the US Renewable Fuel Standard, and in at least one case a gas utility is allowing retail customers to designate a portion of their natural gas use to come from RNG at an increased price along with carbon credits. 

The cost to produce renewable natural gas is significantly higher than natural gas produced from reservoirs.  A 2016 study referenced by the EPA in its overview of RNG from biogas quoted costs ranging from $7 to $25/MMBtu for projects to upgrade biogas to RNG for pipeline injection.  However, government programs that provide carbon credits can make the economics of production feasible at a project level, particularly for local uses which don’t require the cost of pipeline connection.  Costs and an inability to scale limit the ability for RNG to capture significant market share from other supplies of natural gas.

For more information on Renewable Natural Gas, see our primer here.

Responsible Natural Gas

Responsible natural gas or responsibly sourced natural gas are somewhat inexact terms that refer to gas coming from operations voluntarily committed to methane emission limits or other ESG standards.  Companies such as Project Canary, MiQ, and Equitable Origin can be hired to certify, and in some cases, monitor operations for companies pursing certification.  Producers such Chesapeake, Southwestern and EQT have had gas certified, and management teams have indicated that they believe that gas meeting certain ESG hurdles will be able to command a premium price in the market, even if that premium is $0.05 – $0.10/MMBtu.

Click here to access links in below chart – Select RNG/RSG Certification Announcements

Carbon Neutral LNG

In the past year several liquified natural gas (LNG) deliveries have been billed as carbon neutral LNG cargos, and Shell announced an agreement with PetroChina billed as the world’s first term contract for carbon-neutral LNG this summer.  To make this claim, involved parties have used third-party verified carbon credits to offset estimated lifecycle emissions across the “LNG value chain” or the “whole carbon footprint of the LNG cargo (including production, liquefaction, shipping, regasification, and end-use)”.  The announcement has indicated that the offsets being purchased or created are from nature-based projects to date.  Cheniere Energy announced earlier this year that it plans to begin providing its customers with GHG emissions data associated with cargos coming out of Sabine Pass and Corpus Christi in 2022, which will make it easier for buyers to purchase offsets if they choose.  News reports confirmed that Aethon Energy, Ascent Resources, EQT and Pioneer Natural Resources have agreed to join in an emissions monitoring program that will employ ground-based, aerial and satellite monitoring.

Click here to access links in below chart – Select Carbon Neutral LNG Announcements

Conclusion

While there are a few prominent examples of buyers willing to purchase natural gas at a higher price to support environmental goals, there is not yet sufficient evidence that a significant number of buyers are willing to pay substantial green premiums for natural gas in the absence of governmental incentives.  However, many companies in the industry are heeding the call to measure, monitor and manage the impact of their operations on the environment, to ensure future access to markets with stakeholders focused on ESG impacts.  For monthly deep-dives on the trends impacting upstream investment, activity, and production, request a sample of our Upstream Outlook service.

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Kathryn Downey Miller is President of BTU Analytics where she leads the firm’s consulting and analytics groups in delivering market advisory services to clients across all sectors of the industry. Additionally, Kathryn oversees strategic planning, financial budgeting and analyst development for the company. Prior to founding BTU Analytics, Kathryn built market expertise in a diverse set of prior industry roles, including buyside investment research at an energy focused hedge fund, energy market fundamentals consulting at Bentek Energy, investor relations strategy consulting for E&P companies and investment banking at Citigroup. She speaks frequently at industry events on North American energy markets and is a CFA charterholder.

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