Responsible Natural Gas: A New Market Niche?
by Christina Nagy-McKenna, Enerdynamics Facilitator
As consumers we choose to pay more for goods and services when we perceive additional value in the higher price. Sustainable, organic, and premium are in our daily vocabulary, and some buyers will pay more if products carry these tags. The natural gas industry is looking to capitalize on this consumer behavior as it finds itself in a fight for its own survival. Historically, branding has not been a part of the natural gas industry. A molecule of gas from one basin is largely the same as a molecule from another basin. Our appliances will run on natural gas from different sources as long as they meet the heating value standards set forth by our utilities. But if you could ensure that the gas flowing through your meter was responsibly sourced and had minimal environmental impact during its production, would you pay more for it? Would your utility?
As we explained in our blog Are Natural Gas Bans the Next Energy Trend? traditional natural gas production contributes to greenhouse gas emissions. Improved production technology and better industry practices can clean up natural gas production, however the industry has been slow to take the initiative to do so. This past year several cities banned construction of new natural gas infrastructure, and pipeline expansions are being held up as regulators, consumers and legislators weigh forgoing them in lieu of developing more robust renewable energy infrastructure.
In another blog post, Can Oil Companies Contribute to a Low Carbon World?, we described a number of steps that can be taken to clean up natural gas production, including reducing methane leaks and gas flaring. Creating a more responsibly produced natural gas product would improve the carbon footprint of the industry, and it could yield financial benefits to producers if enough customers were willing to pay a premium for it.
Although there is no industry standard yet, “responsible” gas produced in an environmentally friendly manner is currently being marketed to large end users. Texas company Independent Energy Standards Corporation (IES) has created a rubric that takes into account gas production impacts on water, air, land, and the community. Currently, the company is focused on evaluating methane emissions from producers. As of April, the company had inspected 2,500 natural gas wells.[1] Producers that meet their standards receive the designation TrustWell™ natural gas and can command a premium for their product. According to market research conducted by IES, 85% of the consumers they surveyed would be interested in the option to buy responsibly produced gas, which is good news for this nascent market.[2]
As the responsible gas niche grows, issues and opportunities will emerge. The foremost issue is that there is no industry standard that defines responsible gas. Robust discussion amongst all market participants must take place as companies like IES move beyond evaluating only methane production levels. The company has plans to expand into the evaluation of gas production impacts on land, water, and communities. S&P Global Platts announced in a recent industry natural gas webinar that it is developing a rubric to evaluate responsible gas and hopes to roll out the product in Q4 2020. Platts will not inspect wells, but they will develop quantifiable metrics that they can analyze to determine the premium a producer can command for its natural gas.
There will also be a distinction between physical transactions, where a producer ships gas directly to a consumer and is limited by the pipeline infrastructure that is available, and financial deals that will happen over trading platforms. The first responsible gas physical transaction took place in September 2018 when New Jersey Natural Gas purchased gas from Southwestern Energy. The first responsible gas financial transaction occurred in 2019 when Xpansiv CBL Holding Group facilitated a transaction between two parties on a trading platform owned by their affiliate, CBL Markets. The growth potential for financially based trading not tied to the existing natural gas pipeline infrastructure is substantial.
However, playing in the background amongst all of these developments is the reality of the past few weeks that has brought much of the world to a standstill. Many questions have yet to be answered including:
- What impact will the COVID-19 pandemic have upon a natural gas market that is already seeing low prices due to an abnormally warm winter?
- What about end users who are not able to produce products or serve their customers?
- Will circumstances created by the pandemic move the importance of environmentally responsible production and the willingness to pay for it to the back burner?
- Or, as we surf the internet and see pictures of clean air over Los Angeles, clean water in the canals of Venice, and wild boar roaming the streets of Barcelona, will we be even more determined to make environmental responsibility a priority and be willing to pay for it?
All of this is unknown and will be watched closely as the rest of the year unfolds. In the era of recycled denim and reusable bags, responsible gas may yet have its time to shine.
Learn more about natural gas markets and/or the future of energy with one of Enerdynamics' virtual seminars. Email us or call 866-765-5432 ext. 700 for details.
Footnotes and Bibliography
[2] Magill, Jim. "'Responsible' gas offers end-users a choice to buy environmentally friendly product." S&P Global Platts. 6 November 2019.
IEA (2020), Methane Tracker 2020, IEA, Paris.
Taylor & Francis Group. "Methane emissions reduction from oil and gas in North America examined." ScienceDaily, 12 February 2018.
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