CALGARY, Alberta – Zlata Sergeeva opened her remarks at the World Petroleum Congress by posing what she called a “small riddle.” Between 2019 and 2021, the delivery of carbon-neutral LNG cargoes soared. Then, in 2022, shipments abruptly plummeted.

“What happened?” Sergeeva, senior analyst for oil and gas at the King Abdullah Petroleum Studies & Research Center (KAPSARC), asked during a presentation at the World Petroleum Congress. Were “crazy” gas prices to blame or something else?

Solving the riddle starts with understanding what carbon-neutral LNG is, she said. The short answer: no one knows precisely. No commonly accepted definitions or global standards exist, beyond what some major companies have established among themselves.

But carbon-neutral LNG – or oil or any fossil fuel – remains attractive to suppliers and customers that face net-zero commitments or carbon pricing. Governments want to decarbonize as urgently as possible, she said, “but at the same time, they don’t want to put [their] energy security at risk.”

Carbon-neutral hydrocarbons were one solution. Physically, they are the same product as their carbon intensive namesakes but carry the imprimatur of being more favorable to the environment, Sergeeva said.

“Unfortunately, we do not have the established definition” for carbon-neutral LNG, “and that’s where all the problems start.”

With no rulebook or regulations, it wasn’t clear at what point were emissions being managed in the value chain – E&P, liquefaction, transportation or storage and regasification.

Tracking 64 known deliveries of carbon-neutral LNG eventually raised questions. What types of emissions were being regulated? Was it only CO2, or other greenhouse gases such as methane?

And how were they being handled? Through emissions reduction technologies? Or via carbon capture and storage (CCS)? “Spoiler: no,” Sergeeva said.

“Actually up to date, all the suppliers of carbon-neutral LNG were using carbon offsets to deal with emissions,” she said.

And once the offsets started to face scrutiny, the market started to unravel.

The problem with offsets

Most of the carbon offsets used by LNG suppliers are based in three countries: Indonesia, Peru and China.

Concerns and skepticism emerged as different experts and reporters started “seeing that producers were just trying to buy the cheapest offsets available without scrutinizing the quality,” she said.

The Guardian newspaper, for instance, reported in January that forest carbon offsets used by many major companies were “worthless” and “phantom offsets.” On Sept. 19, the newspaper published another investigative report that found the majority of carbon offset projects are “likely junk.”

“Whether the projects really exist, whether they really decrease emissions, they do not track, they do not report, and that’s how the skepticism started growing,” Sergeeva said.

One of the most prominent companies to come under fire was Verra, a leading carbon offset certifier. Following media reports, the CEO stepped down in May and the value of Verra’s carbon offsets crashed.

“This all also disrupted the trust towards carbon-neutral fuels,” she said.

KAPSARC started to track other cargoes that were delivered in 2022 and 2023, but they were just not reported using Verra’s registry of voluntary carbon offsets.

What she found was that there were many more cargoes physically supplied than had been reported. This raised the question of why companies would deliver carbon-neutral LNG but not declare it.

“And after consulting different industry representatives, we realized that there are even more cargoes that keep using carbon offsets from their own company portfolio, from their own projects, but they just do not want to report it because actually their reporting is what diminishes their reputation,” she said. “But they still want to stick to this product because they believe that it will be a part of the solution for their company portfolio by 2030 or by 2050.”

‘Here to stay’

After analyzing various aspects of the LNG value chain, KAPSARC found that nearly three-quarters of emissions come from combustion.

However, implementing solutions at the combustion stage isn’t realistic since it would require hundreds, or even thousands of end-users to curb emissions. “In terms of oil, for example, it would be the same as putting CCS on literally every car,” Sergeeva said.

But solutions for returning credibility to carbon-neutral LNG need to be found.

The task remains to make carbon-neutral LNG a feasible solution. The best option, Sergeeva said, appears to be CCS efforts combined with offsets.

However, the price of credibility is not cheap.

Between 2016 and 2020, the price of a ton of LNG ranged from $31 to $270. The maximum cost of CCS and offsets was about $85 per ton. CCS, however, doubled the cost of managing emissions in 2022, and in 2023, is 3x to 5x more expensive.

“Yes, it is expensive, but it is feasible because we saw people, we saw companies paying much more in 2022 for just regular cargoes,” she said. “Over the past two, three years, the lack of transparency, lack of standards turned a promising market into a shadow one.”

And technologies such as CCS may be the only way to bring more trust to the market and revitalize carbon-neutral LNG.

“Carbon-neutral LNG is here to stay,” she said, “because the companies are bidding on it. Companies really want it.” Governments also support it, with some including carbon-neutral LNG into long-term industry development plans.

“So that all means that the demand for this fuel will be growing,” she said. And, even under current price dynamics, decarbonization of the upstream LNG value chain is still affordable.

“More attempts are needed,” she said, “and the prices will go down.”