Oil major Shell has signed a 5-year contract with PetroChina to supply the Chinese company with carbon-neutral liquefied natural gas (LNG) cargos.

As the world is embracing clean energy, oil and gas producers and users are ramping efforts to reduce emissions via carbon-neutral LNG cargoes.

Carbon neutrality refers to achieving net-zero carbon dioxide emissions. It can be done by balancing carbon dioxide emissions with its removal. Or by eliminating emissions from the environment.

And LNG reduces green house gas emissions better than other fossil fuels. In fact, LNG releases 45 percent less than carbon dioxide than coal.

But, carbon-neutral LNG cargoes themselves do not lower emissions.

Carbon-neutral LNG offsets carbon emissions from LNG supply chain via carbon offsets. Emission reduction schemes such as reforestation also help in offsetting the emissions.

A carbon offset is a reduction in emissions of carbon dioxide to compensate for emissions made elsewhere. Offsets are a certificate representing the reduction of one metric ton of emissions.

How do carbon-neutral LNG cargoes work?

For each carbon-neutral cargo Shell delivers, the companies cooperate to offset carbon dioxide emissions generated across the LNG value chain. Companies use high-quality carbon credits from the nature-based projects for offsetting.

Reforestation, protecting, transforming, or restoring land and enabling nature to add oxygen and absorb carbon dioxide emissions are all a part of nature-based offset projects.

The first carbon neutral LNG cargo was traded in 2019. At the time, Tokyo Gas and GS Energy bought a carbon-neutral energy LNG cargo from Shell.

Shell had committed to remove carbon emissions generated from the entire LNG value chain. It promised to cover scope I, II, and III types of emissions.

Scope 1 emission are direct greenhouse gas emissions. These are owned and controlled by the company. For example, emissions for combustions, furnaces, boilers, vehicles, etc.

The scope 2 emissions account for emissions from the generation of buy electricity consumed by a company.

Scope 3 emissions are a consequence of the activities of the company. But they occur from sources not under its ownership or control. For example, extraction and production of buy materials, transportation of purchased fuel, etc.

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The carbon-neutral LNG market

To date, carbon-neutral LNG represents a tiny part of the LNG market. Since that first deal in 2019, only 14 such cargoes have been delivered.

Asian players are major buyers of LNG cargoes. Maybe because Europe's power and industrial sector have stronger regulations over emissions. These regulations include the incentives for consumers to pursue extra voluntary offsetting.

In Asia, companies see LNG imports as way to replace coal in the power sector. But, their emissions reductions targets are yet to mature as those in Europe. This makes carbon-neutral LNG supplies an attractive alternative for Asian players.

Challenges to scale the LNG Market

Many environmental groups are skeptical about the use of carbon offsets. They warn, a company's ability to pay for carbon offsets could prolong the use of fossil fuels blamed for climate change.

On an average, 1.75 lakh cubic meter LNG cargo produces 2.5-2.7 lakh carbon dioxide. This much carbon dioxide needs 2.4 lakh trees to offset. While this is achievable for few cargoes, it is not across the industry. Now, the amount of offset can also vary depending on various factors. Some factors are source of LNG, the type of technology and vessel used to transport the LNG, or the equipment or procedures in place at the regasification terminal.

Several environmental groups believe the growth in carbon neutral transactions will depend on the demands of the buyers who will have to bear the cost.

Is this achievable across the entire LNG industry?

As LNG demand grows, so will the number of cargoes, and carbon offsets and trees will also be required to grow. So this is a beginning of a long journey but it is certain that carbon consciousness is not going away.

Steps to promote the development of the market

According to a study conducted by Columbia University's Center on Global Energy Policy, improved transparency about climate-warming emissions by buyers and sellers will be a key to develop this market.

One way to do this is establishing an independent third-party organization. The organisation could set global standards for the accounting of LNG emissions and offsets.

The study also said buyers and sellers should disclose cost premiums related to purchasing carbon-neutral LNG supplies. The cost premium must include the cost of offsetting emissions and the dealers' share.

Not sharing the data "prevents the market from evaluating the necessary data points that could help spur future deals," the authors of the story said.

Watch the accompanying video of CNBC-TV18’s Sonal Bhutra for more details.

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(Edited by : Yashi Gupta)

First Published:Jul 13, 2021 4:02 PM IST