Not Green LNG, but Grey

At a time when many suggest that the global LNG business has settled on the sunlit uplands, dark clouds are moving swiftly, and gathering.

Meeting the requirements of net zero by 2050 will require the decarbonisation of LNG.  The current status of natural gas as the cleanest of the fossil fuels is unlikely to see LNG receiving special treatment for much longer as attention moves to the carbon intensity of LNG by reference to its supply line/life-cycle rather than by reference to the point of combustion.  Commitments to reducing greenhouse gas emissions by removal or off-setting are being advanced at a time when many of the current, fixed arrangements of LNG developments and LNG trading arrangements are set to continue beyond the delivery date of those commitments.

Some companies are changing their strategies, and indeed their very businesses, to make them appropriate for participation in the energy transition in tandem with continued petroleum operations.  But hopes of carrying on existing LNG business behind enhanced advocacy and confidentiality commitments seem forlorn as disclosures of credible emissions data become irresistible in the context of growing demands for measurement, reporting and verification to certified standards.  And collaborative working is coming to the fore in relation to climate change – the benefit of the greater good is coming to challenge individual gain in the circumstances of increasingly stringent environmental, social and governance requirements.

Early responses from those in the global LNG business include “carbon-neutral” or “green” LNG.  So far, these expressions seem to owe more to advocacy and marketing than to empirical data or objective information.  At a time when hydrogen with its rainbow of colours is showing increasing promise, LNG’s offering of green is at best grey.  In the absence of certified information concerning the nature and extent of claimed removal and off-setting, can regulators and investors entrust the global LNG business with a leadership role in effecting the transition?

LNG is an international business with long supply chains and operations in individual nations.  There may be few authorities capable of verifying the traditional LNG supply chain but early integration is developing in relation to petroleum production regulations, maritime vessel authorities, distribution regulators and the institutions of climate change.  But without credible and transparent pricing of carbon and LNG derivatives, how can business-like decisions be made and behaviours adapted accordingly?

And whereas some contemporary LNG developments and sale and purchase arrangements are changing to recognise the writing that is currently on the wall, many of the existing arrangements on which today’s global LNG business is based are fixed in their terms for decades to come.  These terms date from before the energy transition – and, typically, they deny revisiting unless the parties agree to do so.

The experiences of Europe and now Asia suggest that the LNG industry’s favoured response in circumstances of market and regulatory discord has been reference to international arbitration.  These references have been shown to entail an adversarial testing of the fittest in the context of the continuing operation of long-term contractual arrangements and a deteriorating (but necessarily continuing) long-term relationship.

In the quickly-changing circumstances of the global LNG business and the threats presented to it by the energy transition, it is timely to consider the periodic and consensual re-making of existing LNG arrangements.  And to do so in a way that is consistent with the aims of the energy transition and the long-term interests of the parties rather than simply submitting to an adversarial testing of fixed arrangements from times past in front of international arbitral tribunals.

 

This note is based on a detailed paper, Energy Transition and the Re-making of Liquefied Natural Gas, to be published in early 2021 as part of the University of Dundee’s Extractive Hubs initiative.

 

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