In focus: Is LNG stuck between a rock and a hard place in the energy transition story?

The energy transition towards low-carbon and green energy sources is gaining momentum worldwide, driven by rising climate and energy security concerns.

That being said, the thorny road toward decarbonization always seems to be stuck between the need to ‘act now’ and find the ‘silver bullet’. The sentiment is omnipresent, especially in the wake of the latest ‘groundbreaking’ decision from the International Maritime Organization (IMO) to bolster its decarbonization targets to net zero by 2050.

On the one hand, there is overwhelming support for the ‘step in the right direction’, while on the other hand, we are seeing critics rushing to point out the vague checkpoints and shortcomings of the deal.

A similar sentiment has been surrounding LNG, which on the one hand seems to be solidifying its position on the top of the energy pyramid, especially in the context of the latest geopolitical tensions stemming from the Russia-Ukraine war.

On the other hand, although LNG emits lower carbon dioxide (CO2) and air pollutant emissions compared to traditional fossil fuels, it is still a significant source of greenhouse gas (GHG) emissions. Methane leakage throughout the LNG supply chain remains a concern, as methane is a potent GHG with a higher warming potential than CO2 over the short term.

What is more, the risk for LNG is that it may be viewed as a temporary solution that delays the transition to a fully renewable energy system. In particular, investments in the LNG infrastructure are often interpreted as hindering renewable infrastructure development.

One example is Germany. The country has traditionally relied heavily on Russian natural gas imports, and following the war in Ukraine had to reevaluate its energy supply security fast tracking the development of its LNG import infrastructure.

The build-up of its FSRU LNG import facilities has been impressive without a doubt. However, it has been criticized as LNG is not seen as a good fit for the country’s energy transition strategy which aims to part ways with fossil fuels and switch to renewable energy solutions.

One thing is certain, the DEMAND for LNG is there and growing.

Numerous companies and major players in the oil and gas industry are actively pursuing natural gas and LNG as a transitional fuel towards a low-carbon future. Shell, for instance, has announced plans to invest $13 billion per year in its Integrated Gas and Upstream businesses by 2030. Similarly, Eni, an Italian oil major, is shifting towards gas and has expanded its business by acquiring Neptune’s gas-oriented assets and operations.

Qatar and the United States are projected to maintain their positions as leaders in the LNG export market. With 40% of the global supply between them, Qatar and the U.S. have abundant low-cost gas, competitive pricing, and strong commercial partnerships. Wood Mackenzie expects their combined market share to exceed 60% by 2040. Other countries, such as Russia and Mozambique, are unlikely to make significant headway.

This week has seen a number of major developments in the LNG space.

France’s energy giant TotalEnergies and Algeria’s state-owned Sonatrach have inked a series of new deals to bolster their cooperation in more than one energy-related area, including the production of natural gas and the delivery of LNG to Europe.

In Vietnam, the Thi Vai LNG terminal has received its first LNG cargo provided by Shell International Energy Group.

PetroVietnam Gas, a subsidiary of Vietnam’s state-owned oil and gas company PetroVietnam (PVN), completed the construction of its Thi Vai LNG import terminal in May this year.

Following the milestone, the Ministry of Industry and Trade of Vietnam certified that PV Gas is eligible to be an LNG importer and exporter, making the company the first in the country to be recognized as such.

Meanwhile, U.K.-based energy company Centrica and U.S.-based LNG export infrastructure development company Delfin Midstream have signed a sale and purchase agreement for 1 million tons per annum of LNG for 15 years at the Delfin Deepwater Port, Louisiana, U.S.

The agreement will see Centrica take delivery of around 14 LNG cargoes per year and could provide enough energy to heat 5% of U.K. homes for 15 years.

According to Centrica, the deal, with a market value of $8 billion, follows a three-year supply agreement with Equinor, that is expected to heat 4.5 million U.K. homes through to 2024, and the reopening of the Rough gas storage facility in October 2022.

The strong demand signal has been a key driver for the construction of LNG carriers, which has experienced a massive wave of development in recent years. This surge in construction reflects the growing significance of LNG in the energy transition and the increased trade volumes of LNG.

Over 160 LNG carriers were ordered in 2022, compared to 99 orders placed in 2021, an increase of c.63% year on year, data from VesselsValue shows.

Market forecasts suggest 650mt of trade by 2030 and Clarksons expects the newbuild order run to continue this year, with an estimated another 100 orders, driven by a focus on energy transition and energy security.

Orders for new tonnage continue to emerge. Earlier this week, Danish shipping company Celsius Tankers and China Merchants Heavy Industries (CMHI) inked a deal for four liquified natural gas (LNG) carriers.

The 180,000 cbm LNG carrier newbuilds will be built to ABS class with Enviro+ notation for improved criteria for environmental protection and fitted with ME-GA propulsion.

The units are expected to be delivered in 2026/2027 and will be employed on long-term contracts to Clearlake Shipping.

According to the company, “LNG shipping industry continues to grow at a rapid pace”.

One of the key challenges facing LNG is its carbon footprint. Although LNG emits lower carbon dioxide and air pollutant emissions compared to traditional fossil fuels, it is still a significant source of GHG emissions. Methane leakage throughout the LNG supply chain remains a concern, as methane is a potent GHG with a higher warming potential than CO2 over the short term. As the world aims to achieve ambitious climate goals, the pressure to reduce all forms of fossil fuel emissions, including those from LNG, is mounting.

Specifically, the increased shipping of LNG in Europe, which grew 58% last year, has also increased seaborne emissions. A new analysis released earlier this week by NGO Transport & Environment (T&E) shows that pollution from LNG carriers doubled since 2018. The NGO used the data from EU MRV reporting by ship operators which was released for 2022 earlier this month.

LNG faces market volatility and uncertainty, further adding to its challenges. Fluctuations in global natural gas prices, regional demand variations, and geopolitical tensions can impact the profitability and long-term viability of LNG projects. Moreover, as countries implement stricter environmental regulations and policies to reduce carbon emissions, the regulatory landscape becomes less predictable, potentially affecting the demand for LNG and altering the market dynamics.

The rapid advancements in renewable energy technologies pose a significant hurdle for LNG. Solar and wind power, along with other renewable sources, are becoming increasingly cost-competitive and scalable, offering clean and sustainable alternatives to LNG. As renewable energy technologies continue to improve and their deployment expands, the necessity and attractiveness of LNG as a transitional fuel diminish. The risk for LNG is that it may be viewed as a temporary solution that delays the transition to a fully renewable energy system.

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LNG has played a crucial role in enhancing energy security by diversifying gas supply sources and reducing dependence on specific regions or countries. However, concerns over energy security have somewhat diminished as renewable energy technologies have become more reliable and accessible. The growing global focus on achieving energy independence through domestic renewable sources could undermine the perceived necessity of LNG as a security measure.

The long-term nature of LNG infrastructure investments creates the risk of stranded assets. With the energy transition accelerating and the possibility of more stringent climate policies, there is a chance that LNG infrastructure could become obsolete before it reaches the end of its expected lifespan. This presents a dilemma for companies investing in LNG projects, as they must carefully evaluate the long-term viability and potential financial risks associated with stranded assets.

The energy transition not only impacts the industry but also the communities and workforce dependent on the fossil fuel sector. LNG projects have provided employment opportunities and economic growth in regions rich in natural gas resources. However, the shift towards renewable energy sources may require reskilling or retraining the workforce, potentially causing disruptions and economic challenges for communities heavily reliant on LNG-related industries.

In conclusion, LNG seems to be caught between a rock and a hard place in the energy transition story. While LNG has played a significant role as a bridging fuel, its future prospects face multiple challenges, especially in the net-zero context.

To navigate this challenging landscape, stakeholders in the LNG industry will need to adapt, innovate, and collaborate with the renewable energy sector to find sustainable solutions and embrace a cleaner energy future.