Natural gas that has been produced in accordance with defined and measured practices that meet the standards of certain third-party certifying entities can be designated as “responsibly sourced gas,” or RSG. RSG is sometimes also referred to as “Certified Low Emissions Gas” or as “Certified Gas.”
RSG is a relatively new certification for midstream developers and end users, such as utilities, liquid natural gas (LNG) exporters, industrial facilities, certain agencies, and blue-hydrogen developers who are seeing a greater need to aspire towards or enact net-zero emission goals.
The resulting RSG product is not chemically different from conventional natural gas. What makes RSG different than standard natural gas is the culmination of practices that were utilized to minimize greenhouse gases (GHG) emissions during production, storage, and distribution of the gas.
The emerging market for RSG provides natural gas producers with an opportunity to realize a premium price on a differentiated, responsibly produced commodity, and meet increasing demands from investors, regulators, and buyers.
Fossil fuel opponents, both domestic and international, continue to doubt and counter claim the climate benefits advocated by natural gas and LNG industries. By turning to RSG, these companies have an opportunity to support the virtues of gas for climate action concerns through data and metrics.
The main GHG that is produced, and thus minimized during the production of RSG, is methane. Methane, which can be from 80 to 120 times more harmful than carbon dioxide in warming the planet, is a major contributor to GHG emissions and a major emission that leaks from the steps involved in the production, storage, and distribution of natural gas.
Emissions of methane from the livestock industry, the oil and gas sector, and other human-related activity is responsible for about 30% of the global rise in temperature in the modern era. It has been estimated by the International Energy Agency that it is technically feasible to prevent more than 70% of current methane emissions from oil and gas operations. And, depending on market prices at any given time, approximately 45% of methane emissions could be avoided at no net cost because the value of the captured gas is higher than the cost of the abatement measures, using current market prices.
RSG is natural gas that is sourced from production sources that have less than the average number of methane leaks during normal production as RSG producers take extra steps to reduce their carbon footprint, mitigate emissions, and minimize environmental and social impacts.
There are no federal regulations of methane emissions from the oil and gas sector. Gas producers must volunteer themselves to review if they wish to obtain the RSG certification for their products.
RSG is natural gas that an independent third party has verified as meeting the highest standards and practices to minimize the environmental footprint. These standards and practices are not regulated but rather are created, maintained, amended, and applied by the certifying party itself.
RSG assessment criteria are generally focused on methane emissions, but often consider additional qualities, such as other non-methane GHG air emissions, water use, water quality, land use, and community engagement.
The certification process for RSG is different to other voluntary initiatives and commitments, as it provides an explicit declaration of achievement by an administering organization. Operators are awarded a rating or grade based on their performance, verified by a third party. There are three primary certification programs that are designed to reward producers that meet their standards and employ best practices in methane reduction. These three programs include:
(Source: U.S. Gain)
Investors want their energy firm investments to reduce their carbon footprints. Along with these pressures, natural gas producers who account for approximately 11% of the gas production in the U.S. have embraced the attainment of an RSG rating to appeal to their biggest customers, chiefly natural gas utilities. Currently, firms such as EQT Resources, Northeast Natural Energy, Chesapeake Energy, Seneca Resources, Cheniere Energy, NextDecade Corp., and Southwestern Energy have all announced their participation in at least one of these RSG standards.1
In addition to the advancement of RSG, there has also been the development of The ONE Future Coalition. ONE Future (onefuture.us) is a voluntary group of over 50 natural gas related companies that participate in production, gathering and boosting, processing, transportation and storage, and distribution that are committed to reducing methane emissions to under 1% across the entire natural gas supply chain by 2025 to ensure that natural gas is around for several decades to come. This growing coalition has been able to beat this goal for four years running from 2017 through 2020.
Natural gas certified as "responsibly produced" can demand prices up to 5% above market prices, or at current natural gas spot prices, up to 20 to 25 cents per thousand cubic feet (mcf), according to some sources. However, AEGIS sees this RSG market premium to be more in the range of 2 to 5 cents, and potentially as high as 10 cents, which although is much smaller than some market sources report, is nevertheless sufficient to cover the estimated cost of 1 to 2 cents per mcf to monitor, measure, and certify this gas.
The increased price of RSG is not always the motivation for the certification of this gas. The motivation in some cases, such as the sale to European LNG buyers, is the increased environmental value of the natural gas, as these foreign purchasers are raising their quality bar.
In one recent example in October 2020, LNG developer NextDecade decided to sign up with one of the RSG certifiers (Project Canary) after it lost a major sale of gas to a French utility, Engie SA, over environmental concerns. This would have been a $7 billion, 20-year contract if it wasn’t struck down by the French government, a part owner in Engie.
In the U.S., utilities would need regulators to approve higher rates for responsibly sourced gas, which is a politically complicated process. So far, no utilities have built low-emissions sources into routine gas purchases although some, including Sempra Energy's Southern California Gas (SoCalGas) unit, Xcel Energy Inc., and New Jersey Natural Gas have purchased cleaner gas for small portions of their operations. SoCalGas wants to source 5% of the gas it sells from renewable natural gas by 2022 and 20% by 2030, according to its chief environmental officer. However, legislation that would allow the utility to buy the fuel has not yet passed.
RSG should not be confused with renewable natural gas (RNG), which is often referred to as “green gas”.
RNG produced from sources such as livestock and landfill-related methane sells at a premium to market rates. Supplies of this niche fuel are much more limited than conventional natural gas, or “brown gas”, and is relatively more costly. This premium depends on how green this gas is, as measured by its carbon intensity (CI), or a measurement of how much greenhouse gas is emitted from the use of this gas. The lower the CI, the more green this RNG is considered, and hence the higher the premium.
RNG can demand between $15 to $100 per mcf, depending on its CI and on the level of contracted volumes.2 But it can pay for itself, as using RNG for an amount as small as 20% of needed gas supplies can potentially be enough to completely offset a utility’s total carbon emissions.3
Questions? Contact our team for more information: environmental@aegis-hedging.com
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