Engie halts talks over US LNG supply contract amid French ending export guarantees for shale hydrocarbons

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From a sustainability standpoint, the past few weeks saw major developments in the energy sector with Engie halting talks with US LG developer NextDecade over a 20-year supply agreement worth $6.9bn (€5.9bn) to import liquefied natural gas (LNG).

This contract had apparently been a bone of contention between Engie and the French government, which had sided with environmentalists, in particular Les Amis de la Terre. At the end of September, in the midst of the stock market battle between Suez and Veolia, the Engie Board of Directors was to have examined the terms of this supply agreement, but the French State (which is Engie’s largest shareholder with 23.6% of the capital) made clear its opposition, as the intention was to supply shale gas extracted using hydraulic fracturing, a practice that is banned in France. The French government went a step further a few weeks later when it announced the introduction of an exit path from fossil fuel financing abroad. As part of the various measures unveiled during the Climate finance day held in Paris last October 29, as of January 1, 2021, the French State will no longer grant export guarantees for projects to exploit extra-heavy oils and so-called "unconventional" hydrocarbons. From 2025, this exclusion will be extended to projects for the exploitation of new oil fields. Finally, French exporters positioning themselves on new gas development projects will cease to be eligible for public export support by 2035 (see our article this month for an in depth review of this new climate policiy).

NextDecade’s Rio Grande LNG has from the onset been opposed by environmentalists given increasing concerns over methane leaks at oil and gas installations, notably in the United States, where fracking is most widely used for oil and gas extraction. There is an increasing consensus amongst scientists concerning the importance of fugitive methane emissions due to this technology, bearing in mind this greenhouse gas has an impact on climate change that is 25x to 30x that of carbon dioxide over a century. Our recently published research (see Is green in the pipe ? Sensing natural gas’ potential contribution to climate change mitigation) features an analysis of the gas life cycle. This highlights in particular the climate externalities of fracking, which is often conducted concomitantly with the production of oil-associated gases. With the emission of methane and, to a lesser extent, carbon dioxide, these externalities continue to fuel the debate over the net climate benefits of gas and its role in energy transition as a substitute for oil and coal, two fossil fuels emitting more carbon dioxide during their combustion (30% and 45% more, respectively) than natural gas. The IEA estimates that  “indirect[1]”  (scope 1 and 2) methane emissions from the gas industry account for nearly 4% of worldwide CO2 emissions.  

These developments in France are illustrative of the growing political and societal pressure around the production and marketing of hydrocarbons. However, the abovementioned study on gas highlights the real climate benefit that the molecule and related infrastructures can bring in the fight against climate change (in particular when the molecule displaces coal in power generation and industrial processes and when related infrastructures support the development of low-carbon gases[2]), but also the key role natural gas plays in the modernization of fast-growing economies such as China and India. It is very likely that the world will need more gas during the decade which has just opened. In its recently-released World Energy Outlook 2020, the IEA anticipates a swift recovery of gas demand once the pandemic is over and a level of aggregate demand nearly 15% higher in 2030 than in 2019.

For gas companies, the rise in obstacles to setting up new projects calls for two types of response.

The first, as mentioned in the aforementioned study, is based on industry players improving their environmental performance across the entire value chain (production and transport to the point of final consumption). This is in particular the purpose of the Oil and Gas Climate Initiative (OGCI). Established in 2014, the OGCI is international industry-led organization which includes 12 member companies from the oil and gas industry: BP, Chevron, CNPC, Eni, Equinor, ExxonMobil, Occidental, Petrobras, Repsol, Saudi Aramco, Shell and Total. It has a mandate to work together to "accelerate the reduction of greenhouse gas emissions" in full support of the Paris Agreement. Among the action levers identified by the Organization to contribute to the fight against climate change, is the climate impact (CO2 and methane emissions) of upstream activities. In this perspective, OGCI members have set themselves the objective of reducing their upstream carbon intensity by 9-13% over 2018-2025 (from 23 kgCO2e / boe in 2017 to 20-21 kgCO2e / boe in 2025), this with a clear focus on methane emissions.

In addition, the growing obstacles in the development of gas projects should encourage the strengthening of large vertically integrated players, sufficiently diversified to finance new projects through internal cash generation and sufficiently integrated to do without intermediaries in the sale of natural gas to end customers, a role traditionally assigned to gas utilities. European majors (BP, Eni, Repsol Shell and Total) gradually aligning their business model on that of power and gas utilities through increased footprint in the production of electricity from gas, the supply of electricity and gas responds to these sectoral changes.

Report to the Parliament on a climate strategy for export credit (October 2020): https://www.tresor.economie.gouv.fr/Articles/c6a1851e-e102-40e6-9d59-96661357bc5f/files/6287e5a5-6d7a-4a80-bc51-c9150fc42d9b & https://www.tresor.economie.gouv.fr/Articles/c6a1851e-e102-40e6-9d59-96661357bc5f/files/a358ddf0-4303-4216-acc4-6c91bed7af43