Reducing the emissions from natural gas

It is one of the great ironies of President Joe Biden’s term in office that while he has been more focused on tackling climate change than any of his predecessors, he has also presided over a rise in US oil and gas production to record highs. Since he entered the White House in January 2021, US crude production has risen by 17%, and natural gas production has risen by 15%. LNG exports have risen by 27%.

That production growth can be reconciled with climate policy on the grounds that, for as long as the world still has demand for hydrocarbons, it makes sense for the US to supply them, to strengthen its national security, global influence and economic development.

Increased natural gas consumption can also have benefits, as the recent report on natural gas and emissions from the US government’s advisory National Petroleum Council points out. The report, titled ‘Charting the course – reducing GHG emissions from the US natural gas supply chain’, notes that the substitution of gas for coal in power generation accounted for 65% of the total reduction in US carbon dioxide emissions from 2005 to 2019.

Gas is also associated with 40% less nitrogen oxide, and 44% less sulphur dioxide than coal, per megawatt hour of electricity generated.

However, with both production and consumption of gas continuing to rise, curbing the industry’s associated greenhouse gas emissions is becoming an increasingly urgent issue for US efforts to tackle climate change.

Curbs on emissions may well be eased in the short term. A Republican administration would be very likely to roll back the regulations on emissions from oil and gas operations that were finalised in December, and the methane reporting requirements published last week. But in the longer term, pressure from governments, investors and customers is likely to push the industry towards doing more to reduce the carbon intensity of its production.

The NPC report on natural gas is a companion study to the council’s study of low-carbon hydrogen, which I wrote about a couple of weeks ago. Like that report, it includes a wealth of detail, and offers some valuable new perspectives on how the industry’s emissions can be measured and managed.

One important insight from the NPC study is that although much of the focus in discussions of the gas industry has been on methane venting and leakage, carbon dioxide emissions are also important. Using a 100-year measure of global warming potential for methane, which is lower than shorter-run measures because the gas breaks down in the atmosphere over time, carbon dioxide is a more important component in the total emissions from the natural gas supply chain.

Those carbon dioxide emissions are mostly created by the fuel used in upstream production and in transporting the gas. Taking them properly into account can change assessments of the GHG emissions intensity of different sources of natural gas supply.

Many US oil and gas companies are already focused on ways to reduce methane leakage, and the NPC report estimates that with only existing and proposed federal policies in place, the industry’s methane emissions would drop 59% from 2020 levels by 2050. However, in that scenario, the industry’s carbon dioxide emissions would rise 25% over the same period. The report notes that “to have more meaningful GHG emissions reductions, we’ll need to do more”.

One potentially important mechanism for reducing the carbon intensity of US supply is certified natural gas, independently verified as complying with emissions standards. The aim is to give buyers confidence in the emissions of the gas they are using, to help them meet their own climate goals.

Certification has caught on rapidly. Since the start of 2022, the volume of US gas production that is certified has more than tripled to about 29 billion cubic feet per day, representing more than a quarter of the nation’s total output.

However, supply has run ahead of demand from customers prepared to pay a premium for low-emissions gas. The percentage of total US supply taken by buyers of certified gas, including LNG exporters, utilities and industrial users, is in the single digits. Price premiums for certified gas typically run into only a cent or two per million British thermal units, less than 1% of the current benchmark Henry Hub price of about US$2.30/mmBTU.

Prospects for growth in demand for certified gas have taken a knock recently, because of questions about the quality and credibility of certification. In February, seven Democratic senators wrote to the Federal Trade Commission, arguing that “too often these green claims [for certified gas] are false or misleading due to opaque methodology, unreliable technology, and unacknowledged downstream climate effects of gas combustion”.

Eunji Oh, Wood Mackenzie’s senior research analyst for certified gas, says there are also questions over the scope of the emissions that are monitored. The focus for certification has typically been on methane emissions, as they are considered a more near-term priority. But the criteria used for certified gas, as well as regulations and industry efforts, will also need to include carbon dioxide to cut emissions from the entire supply chain.

“There is a growing need for full lifecycle analysis of natural gas supplies,” Oh says. “We need to know about emissions not just for methane, but for all greenhouse gases, including carbon dioxide.”

The NPC report includes several recommendations for improving the quality of that information. It calls for the Department of Energy to help in deploying the latest technologies for measuring emissions, and for the industry to harmonise full lifecycle assessments of emissions.

The report argues that gas, as the largest source of primary energy supply in the US today, “will continue to play a crucial role in energy security and an important role in economic security beyond 2050” in any of the scenarios for future demand considered by the US Energy Information Administration.

Putting the industry on a pathway towards a steep reduction in total emissions, including a decline in carbon dioxide, “requires a large infrastructure build out for electrification, carbon capture and sequestration and hydrogen production’” it adds.

It urges the government to work with the industry to design durable emissions policies that can attract a broad consensus of support across the political spectrum, to provide “a stable and predictable environment to enable long-term investments”.

Wood Mackenzie agrees that gas is likely to play a key role in the energy system for decades to come. In our base case forecast, US gas consumption is projected to keep growing for many years, reaching a plateau in the early 2040s. But even as demand for gas continues to rise, the calls to reduce emissions from the industry are likely to rise, too. And that will mean more rigorous and comprehensive measurement, reporting and verification of carbon intensity.

“Over time, there is going to be stricter scrutiny of the emissions of natural gas,” Wood Mackenzie’s Oh says. “There is a growing appetite for cleaner fuel.”

In brief

The US plans to impose a new 100% tariff on imports of electric vehicles from China, several news outlets reported. The planned tariffs are a response to the threat of competition from Chinese EVs, which in some markets are priced well below the cost of similar models sold in the US. Chinese batteries and solar modules are also expected to be hit with increased tariffs. Janet Yellen, the US Treasury secretary, said last week: “We don’t think the playing field is level… And we think China is massively subsidising investment in this set of industries that they have targeted as critical to their growth prospects.”

Microsoft is investing US$3.3 billion to build a new data centre in Wisconsin to support cloud computing and AI applications. To help power the facility, Microsoft has an agreement with National Grid to build a new 250-megawatt solar project in the state, which will bring its total generation capacity on the local grid to 4 gigawatts by 2027. The announcement of the investment was hailed by the White House as evidence that “President Biden is delivering on his promise to create good jobs that will have a lasting impact on communities and families”.

Sultan al-Jaber, president of the COP28 climate talks, is planning to call the heads of the world’s largest energy and information technology companies for discussions in Abu Dhabi shortly before COP29 in November. “My message to the tech sector is this: AI needs energy and energy needs AI,” the Financial Times reported. “Let’s collaborate to drive down the emissions of the conventional energy you will still need, and on ways that AI can drive energy efficiency.”

Siemens Energy has launched a streamlining plan to improve performance at its troubled Siemens Gamesa wind turbine division. Announcing its earnings for the second quarter, the company said it had appointed a new chief executive for the division, and planned an unspecified number of job cuts. It plans to restart sales activity for its 4.X turbine, one of its models that has been hit by reliability issues, in Europe by the end of the year.

Wood Mackenzie has a new chief executive. Jason Liu has more than 25 years of experience leading growth-oriented, private equity-backed companies in the software and data industries. He most recently served as CEO of Zywave, a prominent provider of software, data and analytics in the insurance technology industry.

Other views

How higher interest rates could hold up energy transition investment – Simon Flowers and others

Upstream investment in Africa: what does the future hold as new investment hotspots replace legacy producers? – Martijn Murphy

Green steel: challenging the status quo – Isha Chaudhary, Charvi Trivedi and Priyanka Agrawal

E-fuels: frequently asked questions – Ozzy Jegunma

What new reforms to capacity accreditation mean for US power markets – Patrick Huang

Are EU NECPs missing the mark on REPowerEU targets? – Brian Gaylord

The challenge of growing electricity demand in the US and the shortage of critical electrical equipment – Benjamin Boucher

World’s top climate scientists expect global heating to blast past 1.5 C target – Damian Carrington

The make-or-break projects of the energy transition – Matthew Zeitlin and Emily Pontecorvo

Stop trying to make "IRA 2.0" happen – Alex Trembath

Did I make the right decision when I installed a solar+storage system at my house three years ago? – Ahmad Faruqui

Making room for solar pays off

Thousands of old wind turbine blades pile up in west Texas – Russell Gold

I went to China and drove a dozen electric cars. Western automakers are cooked – Kevin Williams

Quote of the week

“With low carbon energy in the doldrums right now, now is the time to go countercyclical. That's why we're doing Lightsource BP at a countercyclical moment in time. And watch this space: we may do some more things over the coming years, in a countercyclical environment. On the oil side, with oil at $85 or $90, I'm not sure it's the right time to be buying oil.”

Murray Auchincloss, chief executive of BP, suggested that the company would be more interested in adding to its low-carbon energy portfolio than in acquiring more oil assets. BP last November agreed to buy the remaining 50.03% stake that it does not already own in Lightsource, one of the world’s leading developers and operators of utility-scale solar and battery storage assets. Auchinclosss was speaking as the company reported first quarter earnings, with underlying profits of US$2.7 billion, down 45% on the same quarter of 2023.

Chart of the week

This comes from a presentation that Wood Mackenzie analysts gave at the Cleanpower conference in Minneapolis last week. It is a chart that is often shown by my colleague Chris Seiple, Wood Mackenzie’s vice-chairman for the energy transition, power and renewables. It shows total US electricity demand since 1950, plotted against gross domestic product over the same period. As you can see, there was a close relationship through the second half of the 20^th century, which broke down in the 2000s.

Since 2005 or so there has been very little growth in US electricity demand, even as the economy has continued to expand. With new demand coming for data centres, manufacturing facilities and the electrification of transport and heating, it looks as though that period of stagnation is coming to an end, which will mean unfamiliar market dynamics for many in the industry. Younger people now working in the US power industry have only known sluggish demand growth for their entire careers.

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