Analysis: Can Mozambique LNG survive the fossil fuel phase out?

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Mozambique’s plans for massive LNG expansion rest on the assumption that LNG will have a key role to play in a green energy future – but this is not necessarily the case. Zitamar News looks at the likely greenhouse gas (GHG) emission intensity of Mozambique’s LNG projects, what the operators are doing to measure and mitigate them – and whether a second phase of LNG development in Mozambique can be assumed, as the world transitions away from fossil fuels.

The narrative of the oil and gas industry is that gas consumption will continue to rise, even in a low carbon world, because it is the cleanest fossil fuel and a useful back-up to intermittent renewable power.  But differences in the composition of natural gas, and how it is produced, processed, and transported, means the life-cycle GHG of gas-fired power can vary enormously – and in some cases can be as dirty as coal.

Natural gas is mostly made up of methane, a potent GHG with a global warming potential around 85 times more powerful than carbon dioxide over a 20-year time frame, and between 28-36 times more powerful over 100 years. If methane leaks during gas production exceed 3.1% over a 20-year period, LNG lifecycle emissions become comparable to those of locally mined coal, according to a 2019 report by the US energy department.

As governments – likely led by Europe, but later in other parts of the world, such as Asia – introduce stricter regulations on controlling GHG emissions, individual LNG projects will need to prove they are taking steps to monitor and reduce these emissions, or risk their cargoes losing value in these high-value markets.

Mozambique, which is depending on an LNG boom to transform its economy, doesn’t have a strategy on how it will manage emissions – and even potentially decarbonise its gas – and could be at risk of overestimating potential revenues from its projects beyond 2030.

LNG operators Total and ExxonMobil say they are committed to reducing their GHG emissions generally – but do not say how this will specifically apply to their projects in Mozambique.

“Our performance in reducing methane emissions is among the industry’s best,” a spokesperson from Total told Zitamar. The company said it has already reduced its methane emissions to less than 0.25% of the commercial gas its produces – and plans to bring it below 0.2% by 2025, when the Mozambique LNG plant comes on stream.

However, former project operator Anadarko said the GHG emissions from the construction and operation of the Mozambique LNG plant could account for nearly 10% of Mozambique’s annual national emissions, with the impact expected to be of “major significance” to the country, even with good practices in place. Anadarko said it would put in place a plan to “reduce project-related GHG emissions” and would develop “compensation measures.” But these plans have not been articulated.

Total, which bought the project from Anadarko in September 2019, said it is “studying how to further improve energy efficiency and reduce the Carbon footprint of the project,” but did not give more details.

Pressure to act quickly

Attitudes to addressing climate change are changing rapidly.

There is an increasing push for the European Union to set standards for the upstream carbon intensity of gas, with a strategy on methane expected later this year. Regulations will be well advanced by the time Mozambique’s LNG plants start operations in 2025.

Jonathan Stern, a Distinguished Research Fellow of the Natural Gas Research Programme at the Oxford Institute of Energy Studies, expects that limits could be placed on sales of “unabated LNG” — LNG which has not had any form of carbon offsets or decarbonisation applied to it — in carbon-sensitive countries, particularly in the high wholesale price markets of Europe, and possibly some in Asia, as soon as the late 2020s.

While Mozambique is unprepared for a zero – or even a low – carbon future, its LNG projects still have a head start on some of its competitors: in terms of scope 1 and 2 emissions – emissions resulting from the process of producing and liquefying the gas – because Mozambique’s plants are likely to be relatively less carbon intensive than other new projects coming on-stream.

This is firstly because the gas in the Rovuma Basin has a negligible carbon dioxide content. Carbon dioxide needs to be removed before the gas can be liquefied. In countries where carbon content is high – in some cases up to 10% –  the CO2 is usually vented, or, less frequently, contained using carbon capture and storage, as with Chevron’s Gorgon LNG project in Australia.

In terms of methane leaks, the new LNG projects in the US are coming under the most scrutiny because of the way shale gas is produced. Unconventional wells have very disseminated production over hundreds of acres, and each individual well needs energy to operate. “In the US they use the pneumatic pressure from the wells themselves to operate devices such as controllers and pumps.  The natural gas utilised for this equipment is subsequently released into the atmosphere ,” said Gavin Law, Wood Mackenzie’s senior vice president of gas and LNG. “but now methane is becoming a bigger issue, producers will need to resolve this.”

In the US, wells often lose 2% of gas they produce – although some research suggests this figure can be as high as 8%. In comparison gas production in the Rovuma Basin, which will be concentrated around ten to fifteen wells for each project, all producing to one platform, methane leaks should be well below 0.2%.

As Mozambique’s LNG plants will be using the latest technology, gas consumption during the liquefaction process should also be relatively low, at 9%, or potentially less – compared with plants that have been operating for 20 years, where fuel consumption during the liquefaction process can be as high as 13%.

Steps needed to measure emissions

As stricter regulations come in it will not be enough for Mozambique LNG operators to claim their plants emit less, or that their company-wide emissions are reducing – they will need to back it up with certified data on carbon and methane emissions along the full value chain of individual projects, from exploration and production to transmission, liquefaction, shipping, and regasification.

Common standards, measurement methodologies, and transparent data sources for emissions from the LNG industry are still lacking, but policy-makers are working to address this, and satellite technology is making it easier for regulators to monitor emissions remotely.

As these standards are introduced, cargoes which do not have value chain certification by accredited authorities, or which fail to meet defined emission standards, “run the risk of progressively being deemed to have a lower commercial value (because they will require buyers to purchase emission offsets of various types), and eventually being excluded from jurisdictions with the strictest standards,” Stern wrote in a recent report on the challenges facing the LNG industry.

It is also in the interests of the Mozambique government and operators to measure — and reduce – any methane leaks, as any wasted gas means lower project revenues.

Steps to reduce emissions

Even if decarbonisation requirements have not yet been introduced, it is not too early for LNG operators to start planning for them, according to Stern, because it is “highly likely that emission constraints will be introduced during the life of all projects which will continue operating post-2030.”

Building potential decarbonisation options into development plans now will be cheaper than having to retrofit them later.

There are relatively simple ways for Mozambique’s LNG operators to offset and reduce plant emissions: for example, by planting forests; by using electric-driven compressors, rather than gas-fired compressors at the facilities; using renewable energy on site; and introducing systems to capture and reuse excess gas, instead of venting or flaring it — as is being proposed by Annova LNG, which is developing an export terminal in Texas.

Decarbonising LNG will be more complicated, but the likelihood is that by the 2030s the high price markets of Europe – and potentially some Asian countries — “will progressively require the decarbonisation of natural gas or its replacement by low or zero carbon gas (biogas/biomethane, or hydrogen sourced from renewable energy or reformed natural gas with CCS),” said Stern.

The requirement to decarbonise regasified LNG to produce hydrogen — by means of steam- or auto-thermal reforming — and the use of carbon capture utilisation and storage (CCUS) in either the exporting or importing country, “would substantially impact project economics, and the affordability of LNG relative to other energy choices,” he added.

The LNG operators – and Mozambique government — should start factoring these potential costs into their revenue models for the LNG plants now because decarbonisation requirements are likely to start impacting the plants after the first five years of operation.

Beyond 2030, there are also real questions if there will be strong demand for Mozambique LNG.

“Having a lower carbon intensity of production might buy you some time as climate regulations kick in, but frankly not much,” according Jonathan Gaventa, Senior Associate at E3G.

“The bigger issue is that climate policy will increasingly reduce gas demand overall. What matters more for new projects is the speed and cost of production. Are you sure you can make your money back before climate policies kick in? And are your costs low enough to compete in an already-oversupplied market?” Gaventa said

Asian spot prices plummeted to $4/MMBtu in January, the lowest in a decade.  The question is how long they will stay there.

The LNG industry is betting on the oversupply being cyclical, and the market tightening again in a few years – but there is the possibility, as the world heads to a zero-carbon future, that these prices are structural.

“If you look at the International Energy Agency’s (IEA) sustainable development scenario (SDS) – the scenario which should hold global warming below 2 degrees – there is still demand for gas for a long time so there is going to be a requirement for existing gas to keep producing, and for new gas to come onstream,” said Law. 

“Depending on how dramatic the energy transition is, gas demand could peak in the 2030s, but we see gas prices as robust for the next 20+ years and the market will still need projects like Mozambique LNG to keep producing,” he added.

In its latest outlook, Total estimates that LNG demand is going to grow by 10% per year and the low price environment and climate policies are favourable to gas. “To meet the future demand, new projects will be needed and the oversupplied market is only for short term,” a spokesperson told Zitamar.

To a certain extent, Total’s Mozambique LNG will be protected either way – 90% of the offtake from Trains 1&2 has been sold under long-term contracts — it is just a question of how profitable the project will be.

The future is less certain for LNG expansions in Mozambique.

In its recent analysis, “Breaking the Habit”, UK think-tank Carbon Tracker which researches the impact of climate change on the financial markets, assumed that under the IEA’s SDS scenario, Area 1 Trains 1&2 , and Area 4 Trains 1&2 will go ahead — but further trains beyond that would not deliver adequate returns in a carbon-constrained world.

But if global targets become even more ambitious — with the UN urging governments now to aim for global warming of just 1.6℃ — Carbon Tracker estimates that even Trains 1&2 could be outcompeted by other lower cost projects, and run the risk of being left stranded.

© 2020, ZITAMAR NEWS. All rights reserved.

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