Gas Line, Q1 2021

Gas Line is a quarterly publication that looks at major news stories in global gas—ranging from project development to markets and geopolitics. My goal is not to cover every story but to draw connections between stories across time and space in order to shed light on the major themes that will drive global gas markets in the years ahead. My main takeaways from this quarter:

Qatar Finally Makes Its Big Move

The bottom line: Qatar has moved ahead with the first phase of an expansion project that will sustain the country as the world’s largest liquefied natural gas (LNG) exporter. The move signals Qatar’s willingness to compete and head off rivals like the United States, Russia, Australia, and even Mozambique. It also comes after a tough year in 2020 where Qatar did little to adjust output to prop up prices—a signal, again, that Qatar does not fear competition that pushes prices down. Moreover, Qatar said it would undertake steps to reduce the environmental footprint of its production, a clear challenge to other suppliers to make their LNG less carbon intensive (more on that in the next section). The only question is whether this investment will crowd out others, or whether the stresses that challenged the gas system in early 2021 will anyway trigger another cycle of investment into new projects.

The backstory: On February 8, 2021, Qatar Petroleum announced a final investment decision on the first phase of its North Field expansion project, increasing capacity by 43 percent from 77 million tons per annum (mmtpa) to 110 mmtpa (another phase, not yet approved, would lift capacity to 126 mmtpa, or 64 percent relative to 2021). This is a big move—this one project is more capacity, on its own, than the average annual capacity that the industry has sanctioned over the past 20 years. If this were the only project sanctioned this year, 2021 would rank the third highest year for new investments since 2000. This is not an insignificant move.

Right after Qatar announced this decision, it signed three new long-term contracts in the span of one month (for deliveries into Pakistan, Bangladesh, and China), an unusual level of activity in a short time span. These deals fit into Qatar’s strategy—mixing short-term with long-term sales, prizing flexibility but not being afraid to commit at the right moment and price, branching out geographically, etc. There is also evidence that Qatar has been more flexible on price, a reasonable response for a country that has just committed to one of the largest expansions in the market’s history. Qatar has chosen volume over price—but without skimping on price.

What Qatar’s expansion means for the market remains to be seen. In part, it signals the arrival of the “era of the gas mega-players,” a market where the United States, Russia, Qatar, and China tower over all others—with all the geopolitical and market wrinkles that this entails. And it also shrinks the space for competitors, especially at a time when concerns over carbon neutrality grow, creating a race for the last investment cycle.

Reducing, Mapping, and Offsetting LNG Emissions

The bottom line: The LNG industry is increasingly focused on managing and reducing the life-cycle greenhouse gas emissions associated with LNG. This push is leading suppliers to commit to reduce the emission intensity of their operations, creating increased transparency about the emissions that come with LNG cargos, and creating a growing market for carbon-neutral LNG. These measures, of course, are not all the same—reducing emissions, reporting emissions, and offsetting emissions are different things, and the latter two—reporting and offsetting emissions—will be successful only if they can gain the trust of the market when it comes to the quality of the data and the quality of the offsetting solutions, and especially the sometimes-blurred distinction between absorbing carbon dioxide and avoiding it.

The backstory: When Qatar Petroleum announced that it would expand its liquefaction capacity (see above), it also said that it would build a carbon capture and storage (CCS) project at the site in order to reduce the carbon dioxide emissions from the production and liquefaction process. In the United States, NextDecade, which is developing the Rio Grande LNG project, said it would implement a CCS project at the site to reduce emissions by “more than 90 percent.” According to the company, by designing the CCS system from the beginning, rather than doing retrofits later, it can reduce costs by 60 to 80 percent. Together with the U.S.C. 21 § 45Q tax credit, the company believes that adding CCS would only raise costs by 5 cents to 9 cents per million British thermal units (MMBtu), a trivial amount.

There was also greater movement on improving the greenhouse gas transparency of existing LNG flows, marking some progress in the trajectory from estimated data based on emissions factors to measured data that better represent real-life conditions. Cheniere Energy announced that it would start providing emissions data for each cargo delivered, a move that comes as the Biden administration is looking for ways to reduce methane leakage and thus address one of the most significant environmental challenges facing the gas industry. In Singapore, Pavilion Energy signed another agreement, this time with Chevron, that will include a statement quantifying the emissions from the wellhead to the port of delivery (this builds on a similar deal signed with Qatar Petroleum in November 2020).

This quarter also saw a proliferation of deals for carbon-neutral LNG (as well as questions about what exactly it means to have carbon-neutral LNG). On March 8, Shell announced that it had delivered its first carbon-neutral LNG cargo to the United Kingdom, supplied by Russia’s Gazprom; RWE also sold a carbon-neutral cargo to POSCO in South Korea. Also in March, Vitol announced the launch of a “Green LNG” product that offers customers the option to offset emissions associated with a cargo. And 15 Japanese companies pledged to form an alliance to boost the use of carbon-neutral LNG (although it not clear, exactly, whether this is an “alliance” or a common pledge).

Biden Moves Predictably on Natural Gas

The bottom line: As expected, President Biden has put climate at the center of his domestic and international agenda, and he has taken a number of actions that could affect natural gas. None of his moves so far are surprising and they follow the tone he took during the election: firm in the need for the country to achieve an ambitious decarbonization agenda, but also careful not to antagonize workers and communities involved in fossil fuels. Even so, we are still at the start of his presidency and several of his more ambitious targets that could affect gas—chiefly the target of carbon-free electricity by 2035—are still in formation.

The backstory: Since taking office in January, President Joe Biden has taken a number of steps on climate change, calling on a number of departments and agencies to put the issue at their center for planning, and some of those policies will impact the gas industry—most of them quite expected. On his first day in office, he signed an executive order to rejoin the Paris Agreement, issued a moratorium on implementing the Coastal Plain Oil and Gas Leasing Program in the Arctic National Wildlife Refuge, initiated a process to tighten rules on methane, and started a process to raise the social cost of carbon (which it did, on an interim basis, on February 26).

A week later, on January 27, President Biden signed another executive order that touches on gas issues. He called for a Leaders’ Climate Summit where the United States will unveil its latest nationally determined contribution under the Paris Agreement, possibly offering additional insight on the future role of gas in the U.S. energy system. He signaled his intent for the United States to cease financing of carbon-intensive fossil fuel projects and exports, he set a target to eliminate fossil fuel subsidies from the federal budget in fiscal year 2022, he asked the secretary of interior to pause new leasing for oil and gas on public lands and federal waters, and he directed an interagency group to identify and direct resources to “revitalize the economies of coal, oil and gas, and power plant communities.”

There are also several initiatives with unclear implications for the industry. The Federal Energy Regulatory Commission, for the first time, approved a gas pipeline while considering greenhouse gas emissions from the combustion of the fuel rather than merely from the gas used during the transportation process, a shift that could impact permitting for pipelines and LNG. The directive to the Export Import Bank of the United States and the International Development Finance Corporation to rethink their policy toward financing fossil fuel projects has yet to become clear —it remains to be seen whether it is a blanket ban or whether it might include exemptions. The work at the Treasury Department on climate change could impact the cost of capital for the gas industry, but it is too soon to know how much and in what ways yet. The same is true for the elevation of environmental justice as a White House priority. Nor is there much clarity yet on how the president plans to deliver on his promise for a carbon-free electric sector by 2035 at the latest—a move that will inevitably affect natural gas, which in 2020, generated 40 percent of the country’s electricity.

Extreme Weather Tests Energy and Gas Systems

The bottom line: From Japan to Texas, extreme weather events tested energy systems, which struggled under the pressure. In a narrow sense, this is a reminder that resilience and energy security are always works in progress and require constant investment and vigilance in proper regulations and redundant systems. But for gas itself, the crises in Asia and Texas, and less so Europe, will trigger a deeper conversation about what gas did well during these crises and where it failed.

The backstory: Extreme weather events have always tested energy and electricity systems, and so it is no surprise that the cold spell that cast over Asia in January and much of the continental United States in February created an enormous strain for the system. In Asia, the crisis exposed some of the limits of long supply chains and logistics—prices for LNG cargos kept rising so fast that they no longer acted as a signal for markets. Long-haul travel, some of it from the United States, congestion at the Panama Canal and insufficient shipping capacity—as well as other problems downstream in individual markets—are a reminder that energy security is still a physical concept that requires supply and demand to be matched not in some theoretical market but in a real, physical space.

In Texas, the crisis was different and exposed the interconnected nature of gas and electricity systems in a relatively isolated market that could not draw support from neighboring grids. Gas both succeeded and failed in Texas—it succeeded because there was a surge in gas-based generation, which was essential to meeting demand; but it failed because outages at gas plants accounted for much of the capacity that went offline in February and that caused blackouts. And it was the interdependence between the gas and power systems—insufficient gas supply for power generators, no power to run gas supply systems—that caused the grid to fail. More importantly, it was the failure to regulate the system—to implement weatherization measures that could prevent some of the failures that hit the state back in 2011—that should remind us that we can only avoid future crises if we learn from past ones.

Some Further Reading

Nikos Tsafos is deputy director and senior fellow with the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Nikos Tsafos