David Root
Head of Client Engagement
FFI Solutions
The 28th Conference of the Parties (COP28) meeting in Dubai marked a critical juncture in global climate discourse. Amidst the urgency to limit global temperature rise to 1.5°C, methane emissions from the oil and gas industry were in the crosshairs. Methane (CH4), the primary component of natural gas and 80 times more potent than carbon dioxide (CO2) over a 20-year cycle, is responsible for more than a third of global warming. Yet, despite the flurry of activity and methane reduction pledges at COP28, the final conference text offered up a loophole to the oil and gas industry by recognizing that lower-carbon fuels “can play a role in facilitating the energy transition while ensuring energy security.”
U.S. Liquified Natural Gas (LNG) capacity grew exponentially following the shale gas revolution of the late 2010s and, through the first half of this year, it regained its title as the world’s top LNG exporter. For its part, Qatar has been busy expanding multiple large LNG projects. European oil and gas majors, in particular, have been quick to secure the new Qatari supply. Shell plc, TotalEnergies SE, and Eni S.p.A have each inked long-term deals this year.
In the face of both demand and capacity growth, the world is starting to recognize and take action to reduce methane emissions. Just prior to the COP28 opening, the U.S. Environmental Protection Agency (EPA) released much-anticipated rules regarding methane emissions for the oil and gas sector. The rules recognize and encourage innovation in methane detection technology and expand options for using advanced methane detection technologies, like satellite monitoring, to find leaks.
Further, at COP28, the oil & gas industry, with input from the Environmental Defense Fund, announced the creation of the Oil & Gas Decarbonization Charter (OGDC). The initiative’s intent is to help companies implement and accelerate climate actions to virtually eliminate all methane emissions and routine flaring by 2030, and also achieve net zero emissions from oil and gas operations by 2050. While announced with much fanfare, the announcement was also met with accusations of greenwashing.
Investors, financiers and insurers should pay close attention to what oil and gas companies are doing to detect, report and remediate methane emissions. To date, most oil and gas companies report methane emissions using an inventory method – which allows for the estimation of methane based on an average leakage rate per wellhead. Such estimation methods have been shown to dramatically understate the actual emissions resulting from oil and, particularly, natural gas production.
All of this is about to change. The Inflation Reduction Act (IRA) includes a fee on methane emissions from active wells – $900 per metric ton of methane emissions in 2024, increasing to $1,500 in 2026. Importantly, methane emissions must now be calculated using “empirical data” (actual field measurements) rather than through the inventory method. Research from our partners at Geofinancial Analytics indicates that the use of empirical data could result in substantial additional fees for the top 25 producers in the US – estimated to be approximately $4.6B for the years 2024-2026. Empirical data collection can now be performed using advanced remote sensing (e.g., satellite imagery and machine learning). This technology, already superior to the inventory method, will become increasingly more precise as the resolution from satellite imagery improves and machine learning models learn.
“Managing down the current high levels of methane emissions is widely viewed as the simplest and best strategy to dampen the projected near-term rise in global temperature and greenhouse gas levels in the atmosphere,” said Mark Kriss. “But it begins with real transparency as to the extent of the problem.”
Mark Kriss, CEO & Co-Founder, Geofinancial Analytics
The US Pipeline and Hazardous Materials Safety Administration (PHMSA) also will be proposing a rule next year to strengthen standards for LNG facilities. The proposed rule aims to prevent large-scale incidents and to reduce the risk of low probability/high consequence incidents, such as an LNG storage tank failure. Such tanks can contain as much as 69,000 metric tons of methane.
Last month, we conducted a webinar on the topic of measuring and attributing methane emissions using satellite technology. We expect that the use of such technology will both increase transparency and serve to catalyze reductions in methane emissions.
Unfortunately, the latest US rules, the COP28 pledges, and the IRA may not be enough to eliminate methane emissions. In the wake of their COP28 lobbying efforts, “The American Petroleum Institute (API) is adamant that oil and gas will continue to be at the heart of energy security with LNG further entrenching its role as the top transition fuel,” reports Offshore Energy.
Thanks to science-driven policy changes, capital markets are coming to recognize the risks and costs associated with continued investment in fossil fuel production, transmission, and storage. We expect that as these risks and costs become more transparent, investors will begin to think twice about natural gas, and LNG in particular, as a transition fuel.
While divestment is a reasonable strategy for some market participants to avoid these risks altogether, it’s not always the optimal or practical approach. More transparent data (via satellites) provides institutional investors, lenders and insurers with the ability to identify the leaders and laggards on methane management within the natural gas supply chain.