Listen: LNG exports, pauses, climate impacts: Are we having the wrong debate?

Arvind Ravikumar:

Most US LNG exports in the 2040, 2050 timeframe might go to places in Asia. What kind of energy policies do they have and what is their future outlook on the demand for natural gas as well as growth in clean energy is a much more complicated question and where we really do need to think about what does this look like in 20, 30 years? And that's a very different question, requiring a very different kind of analysis or thinking around energy security, decarbonization goals, as well as domestic politics around fossil fuels.

Jasmin Melvin:

Welcome to the Capitol Crude podcast. I'm Jasmin Melvin. The Department of Energy, in late January, hit pause on its work issuing key LNG export permits. The permits at issue authorize LNG exports to countries that lack free trade agreements with the US, and they are critical for major LNG projects to advance because these countries represent most of the global LNG import market. DOE said the permitting suspension is meant to give the department time to update the analysis it uses to consider whether LNG export authorizations are in the public interest. The White House said the review will take a hard look at impacts of LNG exports on US energy costs, energy security, and the environment, with an emphasis on climate change.

US LNG exports are already on track to double by the end of the decade, from an average of about 13 BCF per day in 2023 when the US became the world's largest exporter. So the near-term impacts of the permitting suspension are limited, as it primarily affects new projects. But the freeze has added significant risks for proposed projects that have yet to reach a final investment decision and created new uncertainty about the longer term global market share of US LNG. As a result of the permitting suspension S&P Global commodity insights analysts delayed their expectations for all final investment decisions on new LNG projects in the US and in Mexico, where projects need DOE approvals because they would be supplied with US gas. About 30 million metric tons per year of probable export capacity additions in the US and Mexico are at risk because of the permitting hold.

Climate activists have celebrated the White House decision as a massive win, while industry groups have warned that it could endanger future LNG projects and undermine the role of the US as an LNG exporter as well as climate goals. S&P Global, America's LNG reporter Corey Paul caught up with Arvind Ravikumar, co-director of the Energy Emissions Modeling and Data Lab, and a professor within the University of Texas at Austin's Department of Petroleum and Geosystems Engineering who believes this is the wrong debate to be having. Arvind shared his perspective on the way we should be thinking about the future of US LNG exports. Stick around after the interview for Jeff Mower with the Market Minute, a near-term look at oil market drivers. Now, here's Corey's conversation with Arvind Ravikumar.

Corey Paul:

Arvind, you wrote an excellent piece following the recent White House suspension on new LNG export permits. Environmental activists have heralded this permitting halt as a big climate win and this sort of watershed moment that could signal the end of major gas expansions. Industry groups have criticized the move as undermining climate goals and the long-term role of the US as an exporter of energy security. But in your article published in the MIT Technology Review, you argue that this is the wrong debate to be having. Can you talk a little bit about why that is and why this sort of framework is not the way we should be thinking about the Biden administration's decision on LNG or about the long-term impacts of US LNG exports?

Arvind Ravikumar:

Sure. One of the reasons I wrote the piece is that too often when we talk about the future of natural gas or future of crude oil in the world, it often devolves into a debate between fossil fuels and renewable energy. And the challenge with that narrative is that the world and the energy system is much more complicated than that. So every energy system, every source that we are going to be using, whether it's crude oil or natural gas, is going to have significant climate impacts. And in the context of imports, what we really need to be thinking is whether US LNG exports contributes to emissions reductions at the global level. And answering that question depends not just on what are the absolute climate impacts of US LNG exports, but really what is it replacing in the countries that buy US LNG? That's a really important question because we cannot look at this in a vacuum.

We have to look at this in the context of what other fuels are being used around the world. For example, let's talk about US LNG exports to China. A large part of US LNG that goes to China is being used for district heating. This is essentially to heat buildings and homes in China. And if they did not have US LNG, the most immediate alternative that they have are coal-based heating systems from coal mines in China. Recent research has shown that coal mines in China have high methane emissions. Therefore, if you compare realistic alternatives to us LNG in this context between US and China, you're almost always going to have higher emissions from the use of Chinese coal from Chinese coal mines. So in the context of US-China LNG trade, the use of US LNG in China reduces global carbon emissions. Now, this is the case for one LNG trade relationship. Is this true everywhere? We don't know. We have to analyze this on a country by country basis to answer the question of whether US LNG exports are reducing the global carbon emissions reductions.

Corey Paul:

I really like this approach because I think when there are these political decisions in the rushed way that this particular one was rolled out, we can hear this rhetoric that's akin to, "We don't know everything, therefore we know nothing." But just because we don't know everything about an issue doesn't mean we know nothing. What are some important things, broadly, that we do know from a climate standpoint about US LNG exports?

Arvind Ravikumar:

Right. This is a really important point because often the public debates get reduced to very opposing alternatives, and the reality is always somewhere in the middle, leaving for the politics of how the announcement was made when the announcement was made. If you think about impacts of US LNG exports, you can think of it in two different terms. The short-term impact and the long-term impact. If you look at what the administration has announced through this past, it's mostly for future projects for trade to non-free trade agreement countries, which is most countries in Europe, for example. And this is important to note because if you look at terminals where LNG permits have already been issued, the export capacity of the US could actually more than double over the next five years or so. Because there have been a number of terminals in the pipeline that have already permitted, that are either under construction or are waiting for a final investment decision.

So over the next five to 10 years, our export capacity will more than double. And so, the short-term impacts of US LNG exports are going to be minimal because that's not really going to affect who we are selling to over the next five to 10 years. So in the context of short-term impacts of US LNG exports, what you really need to look at is the countries that US is currently selling to, which is mostly Europe, Japan, South Korea, and to some extent China and India. What are the realistic alternatives in those countries if they did not have access to US LNG? So that's what it takes to calculate what the climate impacts of US LNG exports are in the near term. And this has to be done on a country by country basis, but it's a different question when you think about the long-term impact. And the reason is that long-term impacts not only depend on who we are selling to, but what are the energy policies in those different countries.

Let's take Europe, for example. Ever since the Russian invasion of Ukraine, Europe has been buying a lot more of US LNG. But what they also did, in parallel, was pass what's called the RePowerEU Act. This RePowerEU Act was a policy intended to accelerate the deployment of clean energy across the European Union in an effort to reduce dependency on foreign imports of natural gas and other energy sources. So what the Russian War did is yes, it did increase US exports of LNG to Europe in the near term, but it also set Europe up in the long term to switch to zero carbon sources like renewable energy. So 20, 30 years from now, Europe might not need US LNG exports at all.

And so, most US LNG exports in the 2040, 2050 timeframe might go to places in Asia. What kind of energy policies do they have and what is their future outlook on the demand for natural gas as well as growth in clean energy is a much more complicated question, and where we really do need to think about what does this look like in 20, 30 years? And that's a very different question requiring a very different kind of analysis of thinking around energy security, decarbonization goals, as well as domestic politics around fossil fuels.

Corey Paul:

These are kind of critical and complex questions with a lot of nuance. One thing we hear a lot, both from the administration and just people reacting to the news is this comparison between LNG and coal. Can we even say. "Is LNG worse for climate than coal?" Is it fair to even ask or try and answer a question like that?

Arvind Ravikumar:

So there are two answers to this question. The first answer, let me directly answer the issue of whether LNG is better than coal. If you look at climate impacts of LNG, there are two things associated with it. One is the carbon dioxide emissions when you burn natural gas. And the other is methane emissions across the supply chain of LNG. As the listeners might know, methane is a much more potent greenhouse gas with a potential for climate warming that is significantly higher than carbon dioxide. So on the carbon dioxide basis, we all know that natural gas emits about half the amount of carbon dioxide compared to coal for the same amount of energy generated, so it's 50% better. Now that 50% better slowly erodes away as you add in methane emissions along the supply chain. What research has shown is that if you have methane leakage around three to 4%, which is total methane emissions to the atmosphere as a function of total production, if it exceeds about three to 4%, then you're sort of eroding the benefits of natural gas over coal.

So if you have methane leakage across the supply chain, so from production through transportation to shipping to the destination location, if that total exceeds over about 4%, then you can claim that your LNG is not really that much better than coal. Which is why the first thing we should be doing, starting today, is to reduce methane emissions across our supply chain. And I think that's something the US is a leader in. We have a very robust regulatory environment where companies are required to significantly reduce methane emissions going forward. The Environmental Protection Agency recently finalized methane rules last year that would reduce emissions by about 80% by 2030 compared to 2022. So there are a significant policy and regulation in place that reduces emissions. We have seen tremendous technological innovation in terms of satellites, aircraft, drones, and other technologies to measure methane emissions. And we have seen companies take voluntary action to reduce emissions, both from a public perception as well as investor activism from around the world. So there's been a lot of effort to reduce methane emissions.

That's the first part of the answer to your question, that if we can reduce methane emissions to as low as possible, then we can definitely see that natural gas is better than coal in terms of its climate impacts. The second question is much more broader. Now, is that the right question? Do we always have to be comparing natural gas to coal? The reason is coal is the dirtiest fuel on the planet. And saying that you're better than the dirtiest fuel on the planet, it's not really much of a claim that you should be making. So the question is where is natural gas demand going to come from? This is where we have to be creative and think about the possibilities of where this could be used in the future. There are already indications that natural gas might find end uses where you don't burn natural gas at all.

The fertilizer industry right now uses natural gas as a feedstock to make fertilizers, so they don't burn the natural gas. There might be future applications where natural gas is not burned, and that would significantly reduce its climate impacts because about 70% of the climate impacts of LNG is from burning the natural gas in the power plant or other place.

Corey Paul:

From end use, yeah. You had mentioned a lot of, I think, important points. I just wanted to circle back really quickly to this point you made about this three or 4% leakage threshold. What's our present understanding of leakage rates in the United States supply chain? I mean, do we have any reason to believe that the leakage levels are that high, at three or 4%?

Arvind Ravikumar:

This is a very exciting area of work, not just for researchers, but also for government agencies as well as companies. We have been lucky in the United States because over 90% of the technologies that have been developed in the past decade to measure and monitor methane emissions have happened in the United States. So if you look at the universe of methane emission studies that have been done over the past decade, over 80% of them have been in North America, in the United States and Canada. So we have a wealth of information on methane emissions in the country that helps us better understand the benefits of natural gas versus coal. There was a comprehensive study that was done a few years ago that estimated that national average methane emissions in the US is about 2.3%. So this aggregated emissions... Across all studies, it looked at what researchers have found in different field campaigns and put them all together and said, "Okay, what we understand from all of the studies over the past 10 years or so is that the average methane leakage from US natural gas supply chain is about 2.3%."

This goes all the way from production, all the way through processing and transmission of that gas to end users. So 2.3%, as we discussed, is still a number that where natural gas has benefits compared to coal, but it's an average number. And what we have learned in the past few years is that methane emissions actually vary a lot across the United States. Recent studies in the Marcellus Shale basin, the largest natural gas producing region in the country in Pennsylvania, Ohio, and West Virginia, has methane emissions that are less than 1%. In some studies, they have measured as low as 0.4%. So a very low methane leakage basin. And of course, it's going to have significantly better climate benefits compared to coal.

But if you look at recent studies in the Permian Basin of New Mexico and Texas, we have seen reports of methane emissions that are 3%, 4%, even as high as 9%. So there are basins in the United States that have very high methane leakage, and there are basins that have very low methane leakage. The challenge for us going forward is can we make sure that our entire supply chain, irrespective of which basin gas comes from, all has low methane emissions that are less than 1%? I think that's the challenge for the next six years for us.

Corey Paul:

When we're talking about climate impacts of US supply, I mean it's not just competing against coal. I mean, that's not the only consideration. It's against other natural gas supplies as well, right?

Arvind Ravikumar:

Right.

Corey Paul:

Is assessing how US LNG supply compares to other global gas difficult?

Arvind Ravikumar:

It's not difficult, but we have a limited set of tools to apply to other regions around the world. So here's the challenge. There's been a lot of work in the United States around measuring methane emissions. So every news article, if you open Google and said methane emissions, is going to give you a hundred different articles on some satellite finding very large methane emissions in the United States. We haven't had that opportunity to do that kind of detailed measurements across other large gas producing countries in the world. That's Qatar, Australia, and Russia for the most part. But that's going to be changing very soon. We have had significant advances in satellite technologies, where they're now able to tell you what methane emissions are from other supply chains remotely. All these measurements in the United States, you do them and you need access to those facilities. So you go to those facilities, you undertake these measurements and then report those numbers.

But a country like Russia will not give access to US researchers to go out and do these measurements on their facilities. You need technologies that can do this remotely. And until recently, we haven't had satellites with high resolution to do this, but now we do. In the next five years, you're going to see several new satellite launches that are going to provide much better information on methane emissions from global supply chains. And that's really important because for too long we have been talking about the climate impacts of US natural gas and US LNG in isolation. But the real solution is if we stop exporting LNG, people who need LNG, whether it's Europe or China or Japan or South Korea are going to buy it from somewhere else. It could be Russia, it could be Qatar, it could be Australia. And the question is, who has the lowest climate impacts? We really need to better understand methane emissions from global supply chains to be able to assess the benefits of LNG that come from different parts of the world.

Corey Paul:

I think part of the challenge and part of what you've been talking about is that a lot of what we understand today rests heavily on engineering estimates. And there's this kind of imperative, this need to develop a better concrete understanding of true emissions, which is a lot of the work that you do at the University of Texas. Could you just tell us quickly at a high level about the work that you're doing and some of the important findings so far?

Arvind Ravikumar:

So as you just noted, one of the things that we really need to do to be able to understand climate impacts of global LNG supply chains is to get information on supply chain methane emissions from around the world. And this will only happen if there is a common framework to measure, monitor, and report methane emissions from different parts of the supply chain. So one of the key things that, for example, the US Department of Energy is currently working on is participating in international working group that has 15 countries that are major LNG exporters and importers to develop a common framework to measure, monitor, report, and verify methane emissions. Because as we discussed, that is really important. It's not just that we have good information on what US methane emissions are across its supply chain. We also have to know what are the methane emissions from around the world.

This is important in the context of the global methane pledge where I think over 150 countries pledge to reduce methane emissions by 30% by 2030 at the climate conference last year. If you want to achieve that goal, you have to be able to know what your current emissions are. And if you want to know what your current emissions are, you need to measure them, not just in the US but around the world. So what we are doing at the University of Texas is developing the technical elements that you're going need to be able to do this and expand it globally. So we're doing all these methane measurements to talk about what are the technologies that are going to be most effective in measuring and monitoring methane. We are developing models of climate impacts of different natural gas supply chains. We take the data from the field and put them into these models to understand what the climate impacts of natural gas are, and then we go out and train stakeholders to start doing these measurements and interpreting those measurements and reporting them in a consistent manner around the world.

Because we started by saying that a lot of these measurements and technologies have been developed in the United States. And all the field campaigns have also been conducted in the United States. How do we take what we have successfully done here to other parts of the world? Natural gas facilities in other countries look very different, and so what does it mean for having a common framework for measurement reporting and verification? So that's the kind of research that we're doing, to measure these emissions, to understand what the climate impacts of natural gas supply chains are, and then developing a training program so that we can take the lessons we have learned in the United States and apply them to other parts of the world where you have significant natural gas activity.

Corey Paul:

At the policy level or in terms of market participant behavior, are there other efforts underway, could really help drive down emissions from the US supply chain?

Arvind Ravikumar:

So there are a number of steps that are currently active in addressing methane emissions from US oil and gas supply chains. The first one is regulations is necessary because not everyone will participate in voluntary programs. You'll need a regulatory framework to make sure that everyone achieves a minimum standard to reduce methane emissions. That's why the EPA and other federal agencies have worked really hard over the past few years to develop a robust umbrella of methane emissions for the oil and gas sector. So that's our first bulwark work against addressing methane emissions. The second one, I think it's a lot more interesting, are different voluntary programs. I'll highlight one of them. A new idea that has sort of taken hold, both in the United States and around the world, is the idea of differentiated gas. What this means is that different companies across the supply chain are doing a lot of different things to reduce emissions.

It's important that companies that take proactive measures to reduce emissions should be rewarded for their low emissions. And one way to do it is through a differentiated gas mechanism. What it essentially says is that you reward companies and entities that demonstrate effectively and accurately that they have reduced methane emissions, that they have low methane emissions. So if you develop a market like that, then you can think of large buyers of natural gas giving a preference for suppliers that demonstrate low methane emissions. So maybe it's market access, maybe it's a slightly higher price for natural gas if you can show that supply has low methane emissions. And that's really helpful because it crowds in other investments. It makes sure that companies that are not currently involved in voluntary programs also start reducing their methane emissions because they don't want to lose market access or potentially higher prices they could get for selling natural gas.

And so this differentiated gas mechanism has emersed as an attractive manner to voluntarily and rapidly reduce methane emissions across different players in the space. But the key part of it is that we need information on methane emissions that are trusted by all stakeholders. So not just something that the company announces in the press release, but something that governments will believe, something that civil society will believe, and something that scientists like us can look and say, "Okay, this is an accurate number for the supply chain." That credibility, that trust in mapping emissions information is really key to get a differentiated gas market to work.

Last thing is, of course, all the other voluntary initiatives and pledges from actors that are peripheral to the oil and gas industry. For example, there's been a lot of discussion about investors thinking about addressing their climate risk and asking oil and gas companies that they invest in to reduce methane emissions. This is sort of external and public pressure, whether it's from activists, whether it's from investors, or whether it's from lending organizations or insurance companies that are also crowding in to help companies reduce their methane emissions. So it's not one action that's going to help us achieve our targets of low methane emissions. It's all of them together that's going to help us to get to that low methane target over the next several years.

Corey Paul:

It's very interesting. And it sounds like some of the things that we're seeing from EPA oil and gas rule making, which you mentioned, or like a methane fee or some of the QMRV efforts that you're working on, [inaudible 00:23:48] to maybe have a much bigger impact than a delay or a suspension of longer dated LNG export projects. But that does bring me back to the permitting halt. So the impact of the permitting suspension is largely going to depend on its duration, which is unclear. The hold is raising questions about the role of the US as an LNG exporter, but that's mostly long-term because it mainly affects proposed projects. That's just to say there are some significant uncertainties. But one thing that does seem clear is that there's going to be a review of the analysis that the DOE uses to make its decisions on export permits. So I wonder, as a final thought, if you could share some of your thinking about what this review should include, maybe what do you see as the highest best uses of this policy update?

Arvind Ravikumar:

That's a really important question because at the end of the day, as you said, this is not going to affect near-term exports. US is going to continue exporting LNG to Europe and Asia at least for another 10 to 20 years, just with existing projects that are either already operating or will be operating very soon. So when it comes to climate review, one of the things that we need to understand is that this question is a question that beyond any single administration. I know the Biden administration announced its permitting pause, but the question of climate impacts of US LNG exports is not something that's going to go away. Because the impetus for thinking about climate impacts is not coming from the administration. It's coming from the biggest customers of US LNG. The European Union, for example, has announced a methane import standard that will be operational by 2027, where access to European markets is going to depend on demonstrating that you have low emissions.

Similarly, Japan and South Korea announced what's called the Clean Initiative, where they want assurances of low methane emissions for every cargo of LNG that lands in those countries. So whether it's this administration or a different administration, the issue of climate impacts of US LNG exports is going to be an important question that customers of US LNG care about. So irrespective of what any administration thinks, this is an important issue that we need to address going forward. And then comes the question of, "Okay, what should we do about it?" And this is where I think what this analysis should look into is where is the future demand for natural gas going to come from? Because one of the things you want to avoid, as been discussed publicly, is you don't want to build a whole bunch of new LNG terminals only to realize that there's not much natural gas demand from around the world in 30, 40, 50 years.

So to avoid that risk, what you need to be looking at is what is the trajectory of natural gas demand in major destinations? That's the European Union, that's China, that's India, that's Japan and South Korea. And what are their policies in their countries and what does their demand for US LNG look like? Far into the future. Not next year, not in 2030, but in 2040, 2050 and 2060. And that kind of analysis is really important to think about what is the future of US LNG exports, how much demand is there going to be for US LNG exports? And how can we protect both US customers as well as US LNG operators from accidentally building up too much that ends up becoming a stranded asset?

Corey Paul:

Fascinating, Arvind. Thank you so much for taking time to be on Capitol Crude today. We greatly appreciate your time and your expertise.

Arvind Ravikumar:

Thank you very much for having me.

Jasmin Melvin:

Now here's the Market Minute with Jeff Mower.

Jeff Mower:

Market watchers will be keeping a close eye on US diesel inventories, which have tightened because of refinery maintenance. US distillate stocks at roughly 122 million barrels the weekend in February 16th were down 13 million barrels since mid-January, and are now 10% below the five-year average, US Energy Information Administration data shows. Distillate stocks are 21% below the five-year average on the US Atlantic Coast, home was a New York delivery point for the NYMEX ULSD futures contract. The stock draws have helped to support NYMEX ULSD prices, although downward pressure on diesel prices has come from a mild winter and sluggish economic growth in Europe. In the US, distal production has fallen 1.1 million barrels a day since end December to 4.2 million barrels a day, the EIA data showed.

Several refinery outages have reduced output, notably BP's 420,000 barrel a day Whiting, Indiana plant. With the upcoming spring maintenance season, downtime is expected to remain high in the near term, even as refiners recover from unplanned outages. Now, diesel traders will be keeping an eye on agricultural demand with the upcoming planting season around the corner. Lower grain prices are calling into question in the need to increase planting activity. The USDA's grains and oil seeds outlook report released a mid-February showed high stocks for the 2024, 2025 marketing year. While the USDA estimated an increase in corn yields, it also forecasts lower acreage and production. This has been Jeff Mower with your Market Minute.

Jasmin Melvin:

Thanks, Jeff. Well, that's it for today, but don't be shy about letting us know what topics you want to know more about. Get in touch. Kate and I are on Twitter, so drop us a line at Jasmin Melvin or at Kate Ann Winston. And if you like what you hear, please consider leaving a review on your favorite podcast app. Capitol Crude is produced by Jasmin Melvin and Kate Winston in Washington DC and Jennifer Pedrick in Houston. Thanks for listening, and we'll see you next time.