The French government's decision late last year to block a $ 7 billion deal between Engie, a French, partially state-owned energy company, and NextDecade, a U.S. liquefied natural gas (LNG) company, is just the latest setback for U.S. American producers struggling to find their booth. It could also be the one that changes the oil and gas industry forever.
The French government rejected the deal because the gas is "too dirty" and reiterated environmental concerns about the role oil and gas will play in a low-carbon energy future. With the European market tightly interconnected and Engie positioning itself as a natural gas broker for other countries, France decided it could not risk its reputation for the "environmental impact and controversy" associated with US oil and gas.
These doubts do not come at a good time for the industry, which has recently seen declines in oil and gas prices, significant layoffs and bankruptcies, regulatory changes, investment challenges, and strong social and shareholder pressures to adapt to global climate goals. This latest hit is particularly devastating for at least two reasons: It has a significant impact on the environment. and it could quickly transform the energy security landscape.
On the environmental side, natural gas can claim significant credit in many places for reducing carbon dioxide emissions from power generation. It has replaced coal as the fuel of choice in the energy sector and helped diversify US energy sources. On the foreign policy side, many in the Senate and White House have touted the export of LNG, especially to Europe, to compete with Russian and Middle Eastern pipe gas. They even referred to LNG as "freedom gas," the next big American export.
Now that Ireland and Germany also overturn US LNG interests, it is not clear how bright the future is.
For years, environmentalists have challenged the long-term viability of natural gas as a low-carbon fuel due to the methane emissions associated with its production and distribution. Through various measures, methane is 28 to 84 times worse than carbon dioxide – the greenhouse gas that is mainly responsible for climate change. Since liquefied natural gas also consists of 85 to 95 percent methane, environmentalists didn't have to be very creative with their arguments. Despite these facts, the campaign to make natural gas an important part of the US energy mix was well established under former US President Barack Obama, who described it as "the bridging fuel that can power our economy" during a speech on the state of the Union passed numerous regulations to ensure that it withstands growing environmental standards.
In 2017, just two months after taking office, his successor, outgoing President Donald Trump, issued an executive order to remove all regulatory "burdens" on oil and gas exploration. The contract was an aggressive attempt to reverse many of the environmental regulations set by the previous government, particularly the requirement to monitor and fix methane leaks. The move took time to complete and its effects on production are relatively unknown. However, it made a very clear announcement of the United States' position on environmental protection and called attention to its fidgety policies. Other policymakers, and even some of the world's largest energy companies, opposed this move, knowing the environmental impact would be dramatic and ultimately damage the reputation of US energy producers. You have been ignored.
In response, some states have taken measures into their own hands. Even before Trump changed federal environmental requirements, Colorado implemented its own methane regulations to show that it took the problem seriously. The state recently tried to ban routine flaring – the process by which methane is released and burned at fracking sites – in an attempt to move the oil and gas industry further into the 21st century. Many other states have also begun to limit flaring and venting when trying to regulate the oil and gas industry, but since each has their own set of goals, it's no easy task.
Texas, for example, the largest producer of crude oil and natural gas, has no strict regulations. The state has numerous exemptions for flaring and direct releases of methane and other toxic gases into the atmosphere. Nearly 7,000 flaring and venting waivers were issued in 2019, and a natural gas flaring application has never been denied in its history, even if, in one case, a company was already hooked up to a system that could not purge the gas it into the atmosphere.
The torchlight practices in Texas may have been the cause of the French government's decision. Although not specifically mentioned, the report states that flaring has "become a major source of negative attention for gas production worldwide, and particularly for Perm oil producers". The Permian River is also known as the West Texas Basin, and the incredible volume of gas burned – visible from space – has moved the United States from fourth to third among the top criminals in the world, after Russia and Iran.
As Biden prepares for office, he is likely looking for ways to reverse some of Trump's actions and get the industry back on track. The progressive wing of the Democratic Party has asked him to ban fracking entirely, but this is nearly impossible from a legal point of view and short-circuited from a political point of view. The global demand for natural gas is not expected to increase until the coming years. With oil and gas production already accounting for 1 percent of the US economy, it is not known whether renewables can fill this gap immediately.
Even banning fracking on public land (Biden's current plan) appears to be more of a political move than a move aimed at addressing the development of an industry. In 2018, state oil and gas sales accounted for only 8 and 9 percent of the U.S. total. From an environmental point of view, that's just a drop in the ocean when Texas produces more oil and gas than 95 percent of the world's countries and potentially leaks more than three times more methane than it is supposed to be. Instead, the ban should be seen as a strategic move by a president who has promised climate change to a constituency that has already written off oil and gas. However, the recent move by the French government gives the skeptics a lot more ammunition, and with climate change on everyone's lips, it is clear that something needs to be done.
To keep the industry going – most energy models are expected to see a sharp increase in natural gas demand – and to ensure that coal continues to run out, the country needs to develop the concept of responsible gas.
The complexity of its supply chain made it difficult to accurately determine the real environmental impact of natural gas. U.S. natural gas production spans hundreds of thousands of wells, hundreds of processing facilities, and well over a million miles of pipeline. When combined with the 9,000 independent oil and gas producers in the US, the various corporate strategies, and all of the variables associated with government regulations, the idea of mapping the supply chain and seeing where the pollution is coming from can be daunting.
Fortunately, there are obvious starting points to address this problem. The U.S. Environmental Protection Agency examined natural gas supply chains to find that distribution, storage, and processing have reduced methane emissions by 40 to 70 percent since the 1990s. While these reductions are impressive, they have been offset by a 41 percent increase in emissions from the oil and gas companies that are actually pulling the gas out of the ground. Flaring, venting, and leaks are particularly troublesome – natural gas is colorless and odorless and difficult to see, even more so when you know there are no regulations to hold you accountable.
New surveillance equipment, including airplanes, drones, vans, satellites, and even stationary devices, can help fix leaks and identify the companies that are acting responsibly and those that are not. Indeed, technology has advanced to the point where the source of emissions can be easily verified, and these technologies will no doubt be at the forefront of the strategies of the largest U.S. naturalist companies. As the biggest players in the industry, it's hard to imagine that they're not upset about France's decision and the lack of foresight some oil and gas producers have worked with.
Once a company has the data to show they are a responsible gas producer and natural gas companies can share that information with prospective buyers, U.S. LNG may be back in good business.