Energy buyers are shelling out for natural gas cargoes paired with offsets and branded as “carbon neutral”, in a growing trend that market participants hope will burnish their green credentials but critics say is a false solution.
About 30 liquefied natural gas offset deals have been agreed since 2019, with BP, Total and Gazprom among companies to have sold cargoes. The cost of buying enough carbon offsets to cover the emissions from the production, transport and use of one LNG cargo rose from about $1.1m in July to $1.8m in September as offset prices rose, according to S&P data.
“Those costs get noticed in the trading world,” said Geir Robinson, co-founder of certification group Climate Neutral Commodity and the former chief risk officer of integrated supply and trading at BP. “The traders will nickel and dime [overcharge by small amounts] for a couple of cents.”
The energy sector is under growing pressure to make the transition to cleaner business models and phase out fossil fuels. Many companies are looking to make polluting activities more palatable by coupling them with carbon capture technology or carbon offsets. But critics say this perpetuates the use of fossil fuels and slows their replacement with cleaner alternatives.
Each offset, generated by projects such as planting trees, is supposed to represent a tonne of carbon that has been permanently avoided or removed from the atmosphere. The nascent trend of pairing them with LNG cargoes comes amid rising scepticism about the role of natural gas in the energy transition — although it generates lower emissions than coal or oil, it remains highly carbon intensive.
While LNG was seen a few years ago “as the future of hydrocarbons . . . that’s very much changed in the past 18 months,” according to Ciaran Roe, global director of LNG pricing at S&P Global Platts. He said the industry was “having to play catch-up”, including by offsetting the fuel.
A gas crunch in recent weeks has prompted a surge in LNG prices, with the cost of a cargo to Asia rising from about $51m at the end of July to $110m by the end of September, data compiled by S&P shows.
Offsetting shipments is also becoming more expensive per unit of fuel, according to S&P, which tracks the cost of credits bought to compensate for cargoes on the world’s busiest LNG trade route, between Australia and North Asia.
Environmental groups dismiss carbon-offset cargoes as a form of greenwashing. The industry is “pushing this as a lifeline for many of the fossil fuel companies that see their business models threatened”, according to Gilles Dufrasne of Carbon Market Watch.
He said companies should reduce their emissions as much as possible before looking to offsets to compensate for any residual pollution.
The trend appears to be evolving. Shell’s announcement in July that it would supply PetroChina with an undisclosed quantity of carbon-neutral LNG over five years marked the first long-term agreement.
The phenomenon is also extending beyond gas. Oil refiner Sinopec last month announced China’s first carbon neutral oil shipment. The company said it would launch carbon neutral gasoline and diesel this year, and supply offset jet fuel to China Eastern Airlines under an agreement to achieve “carbon neutral flights”.
Demand has come predominantly from Asia, where countries including China and Japan recently set net zero targets. In March, 15 Japanese companies — including Tokyo Gas, Toshiba and property group Mitsubishi Estate — launched the Carbon Neutral LNG Buyers Alliance to promote the practice.
Japan’s ministry of economy, trade and industry told the FT that carbon neutral LNG was being introduced by “multiple gas companies,” and that it was interested in discussing the use of the fuel “in co-operation with related ministries and agencies.”
However, analysts point to a lack of detail about carbon offset fuel deals.
There is a “general lack of transparency” in the trades, said Frank Harris, head of global LNG consulting at Wood Mackenzie. “Ultimately, the industry has to measure, report and verify its LNG-related emissions so that everybody can see,” but “It’s really difficult to get people to talk about who actually pays for what.”
Companies do not typically disclose information such as how many offsets were bought, what they cost, where they came from or who paid for them — the buyer or seller of the gas.
BP and Shell declined to comment on the cost of offsets in recent deals. Those that commodities trader Vitol pairs with LNG shipments typically cost about $5. Vitol owns several offset-generating projects and aims to profit from the sale of both the gas and the offsets.
The emissions associated with a cargo also tend not to be disclosed. Estimates can vary considerably, and are complex to work out. In some deals, only the emissions prior to combustion — the most carbon intensive stage — are offset.
Offset purchase records suggest that companies often use a UK government estimate that an average LNG cargo emits about 240,000 tonnes of carbon.
Russia’s Gazprom, Japan’s Toho Gas and the China National Offshore Oil Corporation used about 246,000, 230,000 and 218,000 offsets respectively for recent cargoes, according to the records. Most of these offsets came from forestry projects.
Toho Gas declined to provide details about emissions estimates, methodologies or who paid for the offsets, citing “confidentiality reasons”. Gazprom also declined to comment while Cnooc did not respond to a request for comment.
Harris said the fossil fuel industry might do more to reduce LNG emissions as offset prices rose. These cargoes are “a first step along the road. Where the industry needs to get to is making much tougher decisions . . . actually reducing emissions rather than just offsetting them”.
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