Issues around “carbon-neutral” LNG

This article, written by Alicia Prager, was originally published in Der Tagesspiegel and we are grateful for their permission to reproduce it here. This article was inspired by our original research on gas flaring within the LNG supply chain.

The market for “climate-neutral” liquefied natural gas is growing – that raises questions. A gas project in Australia, where high emissions occurred, shows how problematic CO2 compensation for LNG can be. Germany also contributed to its financing.

Liquefied natural gas that does not cause any damage to the climate – CO2 compensation programs should make it possible in purely mathematical terms. Last year, around one million tons of LNG with a climate neutrality stamp were sold. The fact that the emissions from natural gas production can be calculated so easily is criticized – not least because the calculation of the climate impact is often not transparent.

In addition to the question of whether fossil fuels can be sold as “climate-neutral” at all through compensation, it is unclear in many cases whether methane emissions are taken into account in the calculation of the climate impact. Although methane breaks down faster in the atmosphere than CO2, it has a climate impact that is around 80 times greater over a period of 20 years. In the case of natural gas, which consists mostly of methane, it escapes through leaks during production or transport, is vented intentionally, or is released when so-called associated gas is incompletely flared. This so-called flaring causes up to two percent of global emissions of CO2 equivalents.

Such emissions also emerged at the time of a “carbon-neutral” LNG shipment that French group Total Energies loaded at Australia’s Ichthys LNG terminal in 2020 and shipped to China. According to the operating company Inpex, Ichthys, together with the associated offshore gas field of the same name, is one of the “most significant oil and gas projects in the world”. It is the “first delivery of LNG with carbon offsetting throughout the value chain,” said Laurent Vivier, President of Natural Gas at Total. It is “a new step to support our customers on their way to carbon neutrality”.

However, at the time of this delivery, large quantities of natural gas were being flared, according to records from the British data analysis service provider Capterio. Recently released documents from Australia’s Offshore Safety and Environmental Management Agency also show “unscheduled and continuous flaring” of natural gas. “It’s possible that the resulting methane emissions were offset as well, but I was certainly amazed to see carbon-neutral LNG being shipped from a facility that flared so much natural gas,” said Capterio CEO Mark Davis.

Certificates from China and Zimbabwe

In order to be able to describe the LNG from the Ichthys project as climate-neutral, Total and the Chinese energy group CNOOC bought compensation certificates that were issued according to the international Verified Carbon Standard of the compensation service provider Verra. Among other things, the money went to a wind power project in China and a forest protection project in Zimbabwe.

This approach is becoming increasingly prominent on the LNG market, and offsetting emissions is likely to increase significantly in the coming years. According to a report by the energy information service “Argus”, the LNG industry assumes that “climate-neutral” LNG will account for a large proportion of the global LNG market in ten years. The business magazine “Forbes” cites Shell and BP as examples, which want to double the LNG share in their portfolios.

When asked, the Ichthys operating company Inpex also described LNG as “part of the solution on the way towards a low-carbon society”. It is working with governments, academia and industry, among others, to meet the increasing demand for “sustainable, affordable and secure energy” while reducing greenhouse gas emissions, the spokeswoman said. Compensation for the other emissions has been checked and validated by Socotec Certification Japan.

However, it is not clear whether the large amount of flared natural gas was adequately compensated – there are doubts whether the flaring was in line with Inpex’s emissions management plan. Almost eight months after the first batch of the LNG, which was declared carbon neutral, was shipped from Australia, the regulatory agency asked the operating company to review its management plan because the emissions “may not be compliant with the accepted environmental plan”.

Export credits for natural gas projects

Most of the natural gas was flared at Ichthys at a time when work was being done to refinance the project – including in Germany. The project was refinanced with 8.3 billion US dollars in 2020. The bank KfW-Ipex, which specializes in project and export financing and belongs to the state development bank KfW, took part. The credit insurer Euler Hermes was also involved.

The reason for the financing decision was “exports from various European countries worth several billion,” explained a KfW Ipex spokeswoman on request. At the world climate conference in Glasgow, the federal government declared that it would largely stop international state financing for the fossil energy sector from the end of 2022. But in an additional protocol, she emphasized the importance of gas for the “orderly transition to climate neutrality”. The KfW Ipex-Bank also shares this view, according to the spokeswoman. They want to accompany and support the European industry in the transformation process.

A spokeswoman for the ministry said on request what that will mean in concrete terms for export credit guarantees. This will define the exceptions in export promotion and affect “particularly certain gas projects”. It thus seems possible that LNG projects such as Ichthys will continue to receive state support from Germany.

“Methane emissions must be taken more seriously”

In the case of Ichthys itself, the situation has now improved. Much less natural gas is now being flared there than in 2020. “But the example shows that calling LNG carbon-neutral can be problematic,” said Mark Davis of Capterio. Above all, it makes it clear that the methane emissions generated along the supply chain must be taken much more seriously – not only when LNG is sold as climate-neutral, but in all natural gas projects.

“There are many solutions to prevent flaring that can save a lot of emissions very quickly and generate additional energy,” says Davis. However, this requires investments and the right political framework. A role model is Norway, which flares the least gas among the natural gas producers.

Flaring less natural gas does not make LNG carbon neutral, Davis said, but it is an important step towards avoiding many unnecessary emissions worldwide and improving the credibility of producers.