Will Biden’s Climate Bill Really Reduce LNG Emissions?

The climate bill that President Joe Biden is expected to sign into law today will increase pressure on U.S. exporters of liquefied natural gas to reduce methane emissions. But the extent of those reductions is an open question, thanks to a series of exemptions in the bill that could allow LNG facilities to circumvent a new levy on methane leaks.

The stakes for the US LNG industry are enormous. The new tax, coupled with the EPA’s proposed methane regulations, could help industry counter Europe’s new tax on carbon-intensive goods and secure a long-term market for the fuel. At the same time, it could also add new costs to U.S. natural gas supplies, potentially making exports more expensive.

Either way, the industry must first determine how the new fees will be implemented. Fundamental questions surrounding issues such as emissions reporting must be resolved before the impact of the fee can be truly assessed, analysts said. It will be up to the EPA to answer these questions as it finalizes new methane regulations for oil and gas facilities.

“I think the challenge is nobody knows what that means and where they are right now,” said Arvind Ravikumar, a professor at the University of Texas at Austin who studies methane emissions from oil and gas operations.

The passage of the bill comes amid an LNG boom in the United States. The United States overtook Qatar as the world’s top LNG exporter in the first half of 2022, boosted by a series of terminal expansions and new facilities. The surge in US LNG shipments comes at a good time for Europe, which is scrambling to find alternatives to Russian imports following Moscow’s invasion of Ukraine. Europe bought nearly two-thirds of US LNG cargoes in the first five months of the year, according at the Energy Information Administration.

Fear of a fuel shortage this winter has overshadowed European worries about methane emissions. But US LNG exports face long-term skepticism about the environmental profile of their fuel. In 2020, a French utility canceled a multibillion-dollar LNG contract due to concerns about flaring and leaking gas field equipment.

Europe will institute a new carbon border adjustment from next year. The charge on carbon-intensive imports does not currently include LNG, but is expected to expand over time to encompass oil and gas imports.

The European Union is currently negotiating a proposal it would require national oil, gas and coal facilities to measure and report their methane emissions, detect and repair methane leaks, and prohibit the venting and flaring of natural gas – a common practice in the oil wells that release methane.

It also aims to reduce emissions of imported gas by requiring importers to report on how the countries and companies from which they source fuel are working to measure and reduce emissions from their operations.

Analysts said they do not expect new regulations on either side of the Atlantic Ocean to temper trade volumes between the United States and the European Union, but rather help better control the methane leaks.

“Between the fees and the closing of export markets for companies with higher leakage rates, there would be a huge incentive for companies to achieve low leakage rates,” said Drew Shindell, climate scientist at the Nicholas Duke University School of the Environment and Chair of the Climate and Clean Air Coalition.

Methane is a potent greenhouse gas that can trap heat in the atmosphere at around 85 times the rate of carbon dioxide over a 20-year period. It is also the main component of natural gas.

The oil and gas sector is the second largest source of methane emissions in the United States after agriculture, according to EPA data.

Climate efforts in recent years have increasingly focused on reducing leakage from gas infrastructure. Last year, 121 countries, including the United States, formed the Global Methane Pledge with the goal of reducing methane emissions by 30% below 2020 levels by 2030.

The “Reduction of Inflation Act,” as US climate legislation is called, would add weight to the country’s commitment by imposing a charge of $900 per ton of fugitive methane emissions. The royalty would increase to $1,200 per ton in 2025 and reach $1,500 per ton in 2026.

But there is considerable uncertainty about how the new fees will be implemented. Facilities complying with the new EPA methane rules would not be subject to the penalty. Other eligibility criteria in the bill could exempt LNG facilities from paying fees.

Consider Cheniere Energy Inc.’s Sabine Pass liquefaction facility, the country’s largest LNG terminal by volume.
Sabine Pass reported methane emissions equivalent to nearly 30,000 tons of carbon dioxide in 2020, according to the most recent EPA data. On the face of it, the southwest Louisiana terminal would be subject to the levy, which would apply only to facilities with annual emissions exceeding 25,000 tons.

But a second provision could potentially allow Sabine Pass to avoid paying a penalty. Only LNG facilities whose leakage rate exceeds 0.05% of total gas sales are subject to the levy. (The bill establishes separate leak rates for other gas infrastructure such as wellheads and pipelines.)

A spokesperson for Cheniere said the company believed Sabine Pass emissions were less than 0.05%. The company declined to comment further.

It’s hard to assess whether Sabine Pass is an outlier or part of an industry-wide trend. Of the country’s seven operating LNG terminals, Sempra Infrastructure’s Cameron LNG facility was the only other LNG facility with emissions above the 25,000 tonne threshold in 2020. The EPA does not detail leak rates for the facilities. Individual LNGs.

LNG cargoes were significantly affected by the Covid-19 pandemic in 2020, and the industry has grown significantly since then. Five LNG facilities have increased capacity since 2020, while a sixth shipped its inaugural cargo this year. This raises the possibility that LNG emissions have increased, potentially subjecting other terminals to the charge.

But even if the LNG terminals themselves avoid paying the fee, the new requirement could lead to widespread changes to the gas system that supplies the terminals, analysts say. Flared or leaking compressor stations, which push gas along pipelines, would suddenly become an expensive proposition for companies. They would likely respond by reducing flaring and moving quickly to repair leaks, industry watchers say.

“Another spoke in the wheel”

The adoption of the fee also comes at a time when companies are under increasing pressure from investors to reduce emissions from their operations, said Ravikumar, a Texas professor.

“The methane tax is another spoke in the wheel that will put additional pressure on companies to differentiate themselves, to show that they emit less than other companies,” he said.

Companies will also have a direct financial interest in seeing the EPA’s methane regulations completed, as compliance with the new rules will exempt them from paying the fee, Ravikumar noted.

But whether that leads to actual emissions reductions is a separate question, he said. The methane tax will focus on the EPA’s greenhouse gas reporting program. Today, most companies self-report their emissions to the agency based on estimates of leaks from their equipment.

Yet the introduction of a fee raises the stakes surrounding agency reporting. Improved satellite monitoring and direct ground measurements allow more accurate calculations of methane emissions.

But the frequency with which these measures are taken and by what means will have to be specified by the EPA. The “Reduction of Inflation Act” requires the agency to update its reporting program within two years.

Kevin Book, managing director of ClearView Energy Partners LLC, said it was difficult to assess the economic impacts of the royalty on the LNG industry. For one, EPA regulations and fees leave US importers well positioned to sell in Europe as the continent’s climate regulations tighten.

But the royalty is also likely to create regulatory costs for producers and suppliers, which could lead to the closure of particularly leaky wells.

This would limit supplies and put upward pressure on natural gas prices. Yet any inflationary pressure on gas prices is also likely to be offset by a reduction in domestic demand for gas, with clean energy tax credits in the bill driving down the amount of natural gas used for electricity production.

“I think that’s probably more good than bad” for the industry, Book said. “Some operators will lose out and conclude that they cannot affordably meet non-maintenance capital expenditure requirements… But for people selling US LNG overseas, it could make it more expensive. – and therefore less competitive. It also helps it look greener.

Journalist Sara Schonhardt contributed to it.

This story also appears in Thread of energy.