Is Clean Gas Worth The Premium?

When a company called Jonah Energy last year reported that it had become the first to be awarded a low-methane standard by the IES, it didn’t exactly steal the headlines. Yet the report was an early sign of a transformational trend looming over gas markets: methane certification. The Independent Energy Standards Corporation said last year it was expanding its TrustWell Responsible Gas program to include methane certification just as the gas – an indivisible part of natural gas production – started garnering more attention from media, environmentalists, and regulators alike.

In Europe, a non-profit organization was set up recently for the same purpose: MiQ is an independent certifier of methane emissions, which, according to senior advisor Georges Tijbosch, can help both gas producers and regulators.

Producers want to gain a competitive edge in an environment of intensifying competitions. They can do this by offering buyers cleaner, lower-emission gas, certified by an independent body such as MiQ or IES. Regulators, on the other hand, want stricter control of methane emissions but, to put it crudely, don’t know where to start. It’s a win-win for the industry and governments, according to Tijbosch.

Interestingly enough, it is also a win for buyers. Although it might sound counterintuitive at first, it appears that some gas traders would already prefer to pay a premium for gas that has been extracted with fewer methane emissions, Tijbosch told Oilprice. That’s despite a tight spending environment across the industry and it means a lot. It means the industry may be ready for the transformation that, Tijbosch says, will lead to a differentiated gas market.

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Methane emission reduction costs money. It would mean additional investments for energy companies. Yet it would be money well spent as it would give these companies an advantage over competitors.

“Trusted certificates based on robust technology give companies the tools they need to turn good climate stewardship into a competitive advantage and extract a premium for emission-free molecules,” Antoine Halff, chief analyst at Kayrros, told Oilprice. Halff, who added that the analytics company was launching a working group to examine the idea of a voluntary market in methane certificates “as a way to fast-track the elimination of methane emissions.”

The news may be good for those with the means and ambitions to reduce their methane footprint, but it may be bad news for others. U.S. LNG exporters may be among the latter after last year, French Engie canceled a $7-billion deal for the acquisition of a stake in the Rio Grande LNG project of NextDecade. The cancellation, according to media reports, came after pressure from the French government, which was worried about the emissions footprint of the natural gas that would be liquefied at the facility.

Greater regulatory and public attention to methane is driving a change, and this change would be challenging in more than one way. For starters, there are multiple points of methane emissions along the natural gas supply chain, Mark Davis, CEO of Capterio – a company that provides flaring elimination services – told Oilprice. Then there is the question of the investments that need to be made in reducing these emissions.

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While the latter challenge of finding the money to plug the leaky parts of the supply chain remains, the leak detection challenge already has a solution: emissions tracking systems like the ones used by Kayrros to basically create a methane emissions map of the world.

Once the data on what and where is leaking is available, it would be a lot easier for companies to plan their emissions-reduction effort. LNG producers may seem more vulnerable than pipeline gas exporters since the liquefaction process itself involves methane emissions but, as MiQ’s Tijbosch noted, pipeline gas is also vulnerable because of the leak risk.

All gas producers will be affected by the push for methane verification, Kayrros’ Halff says, although in different ways. The responsible producers will benefit from being responsible as buyers opt for the cleaner gas. The less responsible ones will get an additional incentive to clean up their act. There is even a benefit for end-consumers: in exchange for a slightly higher price, Halff says, they would be able to load up on methane-free gasoline or use methane-free electricity just like they buy organic vegetables at a slightly higher price.

The issue of the higher price is only an issue on the surface, according to Davis, Tijbosch, and Halff. Despite tighter cash availability, many buyers appear willing to pay more for cleaner gas than less for dirtier gas. 

Last month, Wood Mackenzie issued a report that said this year will be a defining one for the natural gas industry. One of the reasons for this was the decarbonization drive spearheaded by European governments but taken up by others as well.

Methane certification has the potential to help the new priorities by providing companies with the means – and motivation – to reduce their methane footprint and by helping government regulators develop rules for emissions by setting standards for these emissions. It also has the potential to change the gas market in such a way as to ensure the bridge-fuel future of the commodity now that this future is being called into question because of methane emissions.

By Irina Slav for Oilprice.com

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