LNG exports and Market and Climate Equilibrium
What would happen to the global natural gas market and greenhouse gas (GHG) emissions if the US were to increase LNG exports? The short answer is it depends.
Production and demand of natural gas keeps growing worldwide, which arises the question of the role of natural gas in the clean energy transition. The US has been one of the main drivers of both expansions: the shale revolution has increased production of natural gas, which in turn has lowered prices and therefore increase demand of natural gas. Nevertheless, in the major US crude oil regions, much of the increase in gas production is because of associated gas, natural gas that is extracted from oil-producing wells.
In some of these areas, these dynamics have made natural gas so abundant that prices keep reaching record lows. In fact, during some days of 2019 (ignoring the unprecedented conditions during 2020 due to the COVID19 lockdowns and travel restrictions) natural gas prices at the Waha Hub, the natural gas trading spot near the Permian Basin, were negative, meaning that producers were willing to pay for someone to take their gas. Since their profits are driven by selling higher-priced oil liquids, producers are willing to avoid the costs of storing the gas, reducing production, and, in some cases, venting and flaring. Moreover, pipeline capacity has restricted flow of excess natural gas.
Similarly, spot prices at the Henry Hub, the major natural gas trading spot in the US, have been lower than at international trading hubs, such as those located in Europe or Asia. Given that additional pipeline capacity and liquified natural gas (LNG) export capacity is expected to be on line to meet increased production to keep pace with demand and exports, what would be the effect on the market and the climate?
Market (Dis) Equilibrium
Economic theory dictates that spot prices at the Agua Dulce Hub, where 20% of US existing liquefaction capacity is located, are expected to equilibrate on the medium to long run with Asian LNG spot prices. With additional pipeline and export capacity that would bring cheap gas from the Permian to the gulf coast and make liquefaction and export even more economically competitive, one can infer that US LNG would be exported to the market with the highest spot prices and demand: Asia.
The five largest importers of LNG in 2018 were all located in Asia, and four of those five have had positive LNG imports growth over the last five years. In the two countries with the largest mean year to year growth in LNG imports, China (25%) and India (9%), gas has remained relatively stable in terms of the total energy mix share, which suggests that LNG is not replacing fuels but meeting higher energy demand.
EIA expects US LNG exports to be on average 7.3 Bcf/day in 2021, a figure that would be close to more than 17% of globally traded LNG in 2018. In 2021, several new liquefaction capacities will be put on service, bringing US LNG exports capacity to a level of 25% of globally traded gas in 2018. Another dimension is price, which in the case of LNG is linked to the price of Brent crude oil. US LNG is more competitive with higher oil prices and lower natural gas prices, and level of total LNG exports is depending on oil and gas price scenarios.
Regardless, US LNG exports are expected to impact the global market, but what does this mean for the environment?
Climate Equilibrium?
When associated gas cannot be sold producers opt to either flare it, releasing carbon dioxide, or vent it, releasing methane. Reduced venting and flaring leads therefore to reduced GHG emitted. But most of the projected increase in natural gas production in the US by the EIA will come from natural gas formations, which implies that increased exports won’t lead necessarily to less flaring and venting. As explained before, LNG trade would follow demand and prices, and its destination dictates whether it is ultimately good or bad for the environment with or without flaring and venting.
We can then associate two factors which will be driven by economics that will determine the global balance of GHG of LNG exports: what is being displaced by LNG and what displaces LNG. To explore these tradeoffs, one can use Life Cycle Assessment (LCA) to calculate the associated greenhouse gas emissions from different fuels from cradle to grave. In the case of LNG, using electricity generation as an illustrative case, the LNG specific stages (shipping, liquefaction, regasification) account for about 10% of the total GHG footprint, the rest being distributed between combustion and production with the specific shares depending on the time frame pondered.
Because methane is a more powerful greenhouse gas than methane, GHG intensity of electricity from LNG is extremely sensitive to methane leakage, but since it is also a shorter-lived gas, the results differ on a 20 or 100 year time frame. Alvarez et al. (2012) proposed a Technology Warming Potential metric, which is a robust way to compare the radiative forcing of different technologies, finding that replacing coal with gas on electric power plants can reduce radiative forcing immediately. We can then focus on the efficiency of the power plants and the amount of methane leaked to assess the effect on the climate.
If the exported LNG is displaced by renewables in the US, but it replaces renewables elsewhere, the net effect on GHG balance would be zero (plus the smaller footprint of shipping and liquefaction). But, if LNG replaces coal, especially in regions with low quality coal and low-tech plants, and it is still displaced by renewables in the US, net global GHG emissions decrease. A worst-case scenario would be replacement by coal in the US and displacement of low carbon sources in the importer. On the other hand, if the LNG comes from captured gas or increased production in the US without replacement, its effect on the climate relies whether it is used for increased energy demand or substitution of existing fuel in the importing country. The same intuition in the previous scenarios holds: LNG can be better for the climate if it replaces less efficient fossil fuels and methane leaks are addressed.
