Market Intelligence and BKV on responsibly sourced gas

MARKET INTELLIGENCE ‘Responsibly sourced’ tag could shift from bonus to necessity for gas drillers Published by Bill Holland at 12:50 p.m. ET on December 9, 2021

Shale gas drillers face increasing market pressure to have their product certified as “responsibly sourced,” even though gas awarded the designation might not fetch a premium price. “The paradigm shift is going to be: if your gas is not certified in one way or another, you may not be able to sell it,” Jennifer Stewart, principal adviser to nonprofit Equitable Origin Inc., told an audience of shale executives Dec. 8 at Hart Energy’s DUG East conference. Equitable Origin has a set of environmental, social and governance standards for producers desiring certification as responsibly sourced natural gas. Industry players have begun responding to concerns over greenhouse gas emissions in the natural gas supply chain by competing to offer the cleanest supplies, and certification offers a way to assure buyers that drillers are limiting methane emissions at their production and gathering operations. Two private Appalachian shale gas drillers used the conference to roll out announcements they are seeking certification from Project Canary Inc., a widely used auditor of methane emissions. Tug Hill Operating LLC, backed by private equity firm Quantum Energy Partners LLC, and Blackstone Inc.- backed Olympus Energy LLC are joining their larger, publicly traded peers in pursuing certification, which could help them market to overseas LNG buyers who have been uneasy over the amount of methane emitted in the production and transportation of the gas. Gas traders are “blowing our phones up” with questions about certified low-emission natural gas, Stewart said. “I think we’ve had a call almost every day this week from various trading shops wanting to know about certified gas — 'how do we buy your certified gas, and who do we buy it from?'” Due to the opacity of bilateral gas trades, though, it is not clear those buyers are willing to pay a premium for the certified gas. Stewart said when she worked at Southwestern Energy Co., the shale gas producer closed four separate deals for responsibly sourced gas, and all received a premium price. Regulatory agencies such as the U.S. Environmental Protection Agency and the U.S. Department of Energy have expressed interest in the standards and process for getting certified, Stewart said, but the market will decide what the value, if any, of a “responsibly sourced” tag will be.

1

To venture capitalist Chris Kalnin, the certification debate misses the point. Kalnin’s fund, Kalnin Ventures LLC, with the backing of Thai energy company Banpu Public Co. Ltd., hopes to create the “energy company of the future” with its BKV Corp., using technology and M&A to control the product from start to finish. “You need to go to end consumers and help them help you pay for some of your ESG efforts, just like organic food in the grocery store,” Kalnin told executives at the conference. “I don’t believe that you’re going to go out in the market and be able to charge a premium for renewable gas or responsible gas.” BKV’s ambitious goal is to have net-zero emissions across all scopes by the end of this decade, offsetting all its carbon emissions from natural gas by injecting CO2 back into the earth while marketing to consumers through its own combined-cycle power plants. BKV owns upstream operations in Texas’ Barnett Shale and Pennsylvania’s Marcellus Shale and a combined-cycle power plant in Texas. Kalnin said it will make a final investment decision in early 2022 on a carbon capture use and storage project in Texas. “The people that are going to pay you the money are people who are in homes, who want to make sure that you are doing something about [climate change], and will pay you extra,” Kalnin said. “They are the end consumers.” Injecting carbon dioxide back into the ground “solves the problem that everyone has with natural gas, which is that it’s adding to global warming — even if it’s cleaner, it’s still adding to global warming,” Kalnin said. “We’re going to start injecting CO2 and an equivalent amount to what we’re consuming and burning. So that when you consume our natural gas, potentially as electricity, it’s completely net-zero.” Tug Hill, with operations principally in West Virginia, said its certification will cover all its 800 MMcf/d of gas production. Olympus, previously Huntley & Huntley Energy Exploration LLC, with operations in southwest Pennsylvania, reported nearly 160 MMcf/d of production in September to the Pennsylvania Department of Environmental Protection.

Chris Kalnin Chief Executive Officer

2