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The Pitch to De-Commoditize Natural Gas

Economics

By Kathryn Downey Miller, CFA  |  November 10, 2021

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 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 is it 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 future plans. Some companies are advocating for the benefits of natural gas while also setting the stage to de-commoditize it by creating new categories that might either command a higher price or meet environmental, social, and governance (ESG) standards, which ensure a long-term source of demand. Here we will review 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 U.S. 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. In its overview of RNG from biogas, a 2016 study referenced by the U.S. Environmental Protection Agency (EPA) 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 that 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.

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 pursuing certification. Producers such as 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.

select-rng-rsg-certification-announcements

Click here to access links in the table above: 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 this summer, Shell announced an agreement with PetroChina billed as the world’s first term contract for carbon-neutral LNG. 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 greenhouse gas 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.

select-carbon-neutral-lng-announcements

Click here to access links in the table above: 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 isn’t sufficient evidence yet 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.

BTU Analytics is a FactSet Company. This article was originally published on the BTU Analytics website.

The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.

ESG Investing Solutions

Kathryn Downey Miller, CFA

President, BTU Analytics, a FactSet Company

Ms. Kathryn Downey Miller is President of BTU Analytics, a FactSet Company. In this role, she leads the firm’s consulting and analytics groups in delivering market advisory services to clients across all sectors of the industry and oversees strategic planning, financial budgeting, and analyst development for the company. Prior, she built market expertise in a diverse set of industry roles that included buyside investment research at an energy-focused hedge fund, energy market fundamentals consulting at Bentek Energy, investor relations strategy consulting for exploration and production (E&P) companies, and investment banking at Citigroup. Ms. Downey earned a degree in finance from the George Washington University School of Business and is a CFA charterholder.

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