Will Biden’s climate bill really reduce LNG emissions?

By Benjamin Storrow | 08/16/2022 06:21 AM EDT

The measure includes new penalties for methane leaks — rising to $1,500 per ton in 2026. But exemptions could blunt their impact.

The Excelsior arriving at the Freeport liquefied natural gas terminal near Houston in 2008.

The Excelsior arriving at the Freeport liquefied natural gas terminal in Houston in 2008. AP Photo/Houston Chronicle, Steve Campbell, File

The climate bill that President Joe Biden is expected to sign into law today will increase pressure on U.S. liquefied natural gas exporters to reduce methane emissions. But the extent of those reductions is an open question, thanks to a series of exemptions in the bill that could allow LNG facilities to skirt a new fee on methane leaks.

The stakes for the U.S. LNG industry are enormous. The new fee, coupled with proposed EPA methane regulations, could help the industry counteract Europe’s new tax on carbon-intensive goods and secure a long-term market for the fuel. At the same time, it also could add new costs to U.S. natural gas supplies, potentially making exports more expensive.

Either way, the industry must first figure out how the new fee will be implemented. Basic questions surrounding issues such as emissions reporting need to be resolved before the impact of the fee can be truly assessed, analysts said. Answering those questions will fall to EPA as it finalizes new methane regulations for oil and gas facilities.


“I think the challenge is that no one knows what it means and where they stand right now,” said Arvind Ravikumar, a professor at the University of Texas, Austin, who studies methane emissions from oil and gas operations.

The bill’s passage comes amid a U.S. LNG boom. The United States overtook Qatar as the world’s top LNG exporter during the first half of 2022, boosted by a series of terminal expansions and new facilities. The spike in American LNG shipments has been well timed for Europe, which is scrambling to find alternatives to Russian imports following Moscow’s invasion of Ukraine. Europe bought nearly two-thirds of U.S. LNG cargos during the first five months of the year, according to the Energy Information Administration.

Fear of a fuel shortage this winter has pushed European concerns over methane emissions into the background. But U.S. LNG exports face long-term skepticism over the environmental profile of their fuel. In 2020, a French utility canceled a multibillion LNG deal over worries about flaring and leaky gas field equipment.

Europe will institute a new carbon border adjustment beginning next year. The fee on carbon intense imports does not currently include LNG, but it is expected to expand over time to encompass oil and gas imports.

The European Union currently is negotiating a proposal that would require domestic oil, gas and coal facilities to measure and report their methane emissions, detect and repair methane leaks and ban natural gas venting and flaring — a routine practice at oil wells that releases methane.

It also aims to reduce emissions from imported gas by requiring importers to report on how the countries and companies where they source the fuel are working to measure and reduce emissions from their operations.

Analysts said they don’t expect new regulations on both sides of the Atlantic Ocean to temper trade volumes between the United States and the European Union but rather help in getting methane leaks better controlled.

“Between the fees and the closing of export markets for companies with higher leak rates, there would be a huge incentive for companies to achieve low leak rates,” said Drew Shindell, a climate scientist at Duke University’s Nicholas School of the Environment and chair of the Climate and Clean Air Coalition.

Methane is a powerful greenhouse gas that can trap heat in the atmosphere at roughly 85 times the rate of carbon dioxide over a 20-year period. It is also the chief component of natural gas.

The oil and gas sector is the second-largest source of methane emissions in the United States after agriculture, according to EPA data.

Climate efforts in recent years have become increasingly focused on reducing leaks from gas infrastructure. Last year, 121 countries — including the United States — formed the Global Methane Pledge with the goal of reducing methane emissions 30 percent of 2020 levels by 2030.

The “Inflation Reduction Act,” as the U.S. climate legislation is known, would add heft to the country’s pledge by imposing a fee of $900 per ton of fugitive methane emissions. The fee would rise to $1,200 per ton in 2025 and reach $1,500 per ton in 2026.

But there is considerable uncertainty in how the new fee will be implemented. Facilities in compliance with EPA’s new methane rules would not be subject to the penalty. Other eligibility requirements in the bill could exempt LNG facilities from paying the fee.

Take the example of Cheniere Energy Inc.’s Sabine Pass liquefaction facility, the country’s largest LNG terminal by volume.
Sabine Pass reported methane emissions equivalent of nearly 30,000 tons of carbon dioxide in 2020, according to the most recent EPA data. At first glance, the Southwestern Louisiana terminal would appear to be subject to the fee, which would only apply to facilities with annual emissions in excess of 25,000 tons.

But a second provision could potentially allow the Sabine Pass to avoid paying a penalty. Only LNG facilities with a leakage rate in excess of .05 percent of total gas sales are subject to the fee. (The bill establishes separate leakage rates for other gas infrastructure such as wellheads and pipelines.)

A Cheniere spokesperson said the company believed Sabine Pass’s emissions were lower than .05 percent. The company declined further comment.

Whether Sabine Pass is an outlier or part of an industrywide trend is difficult to gauge. Of the country’s seven operating LNG terminals, Sempra Infrastructure’s Cameron LNG facility was the only other LNG facility with emissions above the 25,000-ton threshold in 2020. EPA does not break out leakage rates for individual LNG facilities.

LNG cargoes were significantly affected by the Covid-19 pandemic in 2020, and the industry has grown considerably since. Five LNG facilities have expanded their capacity since 2020, while a sixth shipped its inaugural cargo this year. That raises the possibility that LNG emissions have increased, potentially subjecting other terminals to the fee.

But even if LNG terminals themselves avoid paying the fee, the new requirement could drive widespread changes in the gas system that supplies the terminals, analysts say. Flaring or leaky compressor stations, which push gas along pipelines, suddenly would become an expensive proposition for companies. They likely would respond by reducing flaring and moving quickly to patch leaks, industry observers say.

‘Another spoke in the wheel’

The fee’s passage also comes at a time when companies are under increasing pressure from investors to address emissions from their operations, said Ravikumar, the Texas professor.

“The methane fee is another spoke in the wheel that will put further pressure on companies to differentiate themselves, to show they have lower emissions than other companies,” he said.

Companies will also have a vested financial interest in seeing EPA’s methane regulations completed, as compliance with the new rules will exempt them from paying the fee, Ravikumar noted.

But whether it leads to actual emission reductions is a separate question, he said. The methane fee will put renewed focus on EPA’s greenhouse gas reporting program. Today, most companies self-report their emissions to the agency based on estimates of how much their equipment leaks.

Yet the establishment of a fee raises the stakes surrounding the agency’s reporting. Improvements in satellite monitoring and direct on-the-ground measurements make it possible to more precisely calculate methane emissions.

But how often those measurements are taken and by what means will need to be spelled out by EPA. The “Inflation Reduction Act” requires the agency to update is reporting program within two years.

Kevin Book, a managing director at ClearView Energy Partners LLC, said that assessing the economic impacts of the fee on the LNG industry is difficult. On the one hand, EPA regulations and the fee leave U.S. importers well-positioned to sell to Europe as the continent’s climate regulations tighten.

But the fee also is likely to create regulatory costs for producers and suppliers, which could result in particularly leaky wells being shut down.

That would restrict supplies and put upward pressure on natural gas prices. Yet any inflationary pressure on gas prices also is likely to be counteracted by a reduction in domestic gas demand, with clean energy tax credits in the bill leading to a decrease in the amount of natural gas used in electricity generation.

“I think it’s probably more good than bad” for the industry, Book said. “There are some operators that are going to lose and conclude they cannot affordably meet the requirements in nonmaintenance capital expenditures … But for people selling U.S. LNG overseas, though, it might make it more expensive — and thus, less competitive. It also helps it look greener.”

Reporter Sara Schonhardt contributed.

This story also appears in Energywire.