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Breathing Room

Cutting out methane emissions was billed as an easy win for the oil and gas sector, but a lack of visibility is complicating the issue. 

The connection between the agriculture sector and methane emissions is well understood. Livestock farming and other activities produce around 145 million tonnes (Mt) of methane emissions per annum. According to a 2020 International Energy Agency (IEA) report, the energy sector isn’t too far behind, producing 134 Mt of methane emissions a year, the lion’s share from oil and gas.  

The Intergovernmental Panel on Climate Change’s (IPCC) Sixth Assessment Report from Working Group III further emphasised the need for “deep reductions” in all greenhouse gas (GHG) emissions alongside CO2 – particularly methane, which it said accounted for around 18% of global GHG emissions from energy supplies.  

Earlier this month, IEA Executive Director Fatih Birol also urged oil and gas firms to tackle methane emissions as a matter of priority. 

By focusing on reducing its methane emissions, the oil and gas sector can give the world “breathing room” to address CO2 emissions in the longer term, notes Steven Heim, Managing Director at Boston Common Asset Management.  

Yet the IEA reported that global methane emissions from fossil fuel operations increased in 2022, reaching 135 Mt, the equivalent of 40% of total emissions of the gas attributed to human activity (anthropogenic) during a 12-month period. 

The industry’s methane emissions typically fall into two buckets: those associated with equipment processes, such as pneumatic controllers that release methane by design, and those associated with malfunctions, such as a hatch being left open. 

Solutions include replacing old equipment with zero-emission alternatives and implementing a robust leak detection system that can identify the worst methane leaks in infrastructure using technology like satellites and fixed sensors.  

Methane is in many ways an “ideal issue” for investors, Andrew Logan, Senior Director of Oil and Gas at US investor network Ceres, tells ESG Investor 

“Addressing methane emissions is feasible with existing technology, there is a strong financial case for doing so, and limiting methane emissions is one of the fastest, most cost-effective means of addressing near-term climate change.  

“The obstacles are really the willingness of companies to prioritise the issue, and that is something that investors can impact,” Logan says.  

In contrast to the challenges surrounding reducing methane emissions in agriculture, the solutions for oil and gas are clear and simple, agrees Dominic Watson, Senior Manager for Energy Transition at NGO Environmental Defense Fund (EDF).  

“Methane is step one in the sector’s energy transition,” Watson says. 

“If oil and gas firms are unable to demonstrate that they can effectively tackle methane, then how are investors going to be able to trust that these companies can tackle longer-term energy transition issues that are both more complicated and more costly?” he asks.  

Capturing the invisible  

There is a lot of work to be done if oil and gas firms are to be aligned with the IEA’s Net Zero 2050 pathway.  

The roadmap calls for total methane emissions from fossil fuel operations to fall by 75% between 2020-30, which will require an annual investment of around US$11 billion to mobilise all methane abatement measures in the oil and gas sub-sectors. This is less than the total value of the captured methane that could be sold, thus potentially resulting in an overall saving for the industry, the IEA said.  

The agency’s Global Methane Tracker Data Explorer highlights the importance of improved consistency. If all methane-producing countries were to match the current emissions intensity of Norway, for example, global methane emissions from oil and gas operations would fall by more than 90%, it noted. 

However, these forecasts are based on methane emissions companies are aware of and tracking. 

“Improved data coverage, data accuracy and transparency are key,” says Olivia Gull, Governance and Stewardship Analyst at Janus Henderson Investors, adding that methane emissions are currently disclosed with “little visibility of where this comes from” – whether from onshore or offshore assets, operated versus non-operated assets, or whether emissions are generated through flaring, venting or fugitive means.  

One of the biggest barriers facing oil and gas companies is “the lack of real-world measurement of methane”, EDF’s Watson says. 

Oil and gas companies’ typical top line number of reported methane emissions “in almost all cases is currently based on desktop-based estimations”, which is a far cry from the amount of methane actually being emitted, he says.  

“We have had plenty of conversations [with companies and investors] where we highlight the discrepancy between reported numbers and what they are in reality, and we get some surprised faces,” Watson adds.  

“If investors are to properly assess methane-related risk within their portfolios, they need accurate numbers.”  

There is increased investor awareness around this issue, Watson says. 

Recognising the need to improve standardised disclosures on methane, a group of financial institutions representing more than US$4.2 trillion in AuM published a letter to the International Sustainability Standards Board (ISSB) which called on the standard-setter to ensure its reporting standards provide “comparable, company-specific, and decision-useful information for investors” on oil and gas methane emissions.  

Public-private collaboration will play an important role in solving the data issue, Gull from Janus Henderson adds, pointing to TotalEnergies partnering with Colorado State University to establish a protocol of quantification for methane measurement.  

Technological innovation is also of paramount importance, notes Watson.  

EDF has plans to launch MethaneSAT later this year, a satellite built to measure methane emissions from global operations around the world. The data it gathers will be published in near real time. 

“Oil and gas companies will have nowhere to hide,” says Watson.  

Willingness to change  

Oil and gas companies are increasingly being challenged to improve the visibility of, and transparency on, their methane emissions. 

As investors, we see a strong societal and financial case for companies to invest in eliminating methane leakage,” says Aarti Ramachandran, Environmental Thematic Engagement Lead at UBS Asset Management.  

“We have engaged the sector on methane reductions as part of our long-standing climate engagement programme, which focuses on high-emitting sectors including oil and gas companies. We have seen progress as more companies set methane reduction targets, invest in state-of-the-art leak detection systems, and join collaborative initiatives to systematise quantification.” 

Methane-focused shareholder resolutions are seeing a huge amount of support from shareholders, which EDF’s Watson argues shows the “exceptionally strong business case for addressing methane emissions”. 

In May last year, 98% of Chevron investors voted in favour of a proposal calling for the oil and gas major to report on the reliability of its methane disclosures.  

This year, on 31 May, a similar shareholder proposal has been filed at ExxonMobil, calling for the company to reduce its methane emissions and improve the reliability of its emissions disclosures.

There is growing investor support for the Oil and Gas Methane Partnership (OGMP) 2.0 as a market-led initiative attempting to help companies reduce their methane emissions through a standardised methodology.  

“OGMP 2.0 offers a strong platform for companies to improve measurement, reporting and verification on methane,” says Ramachandran. 

Members are expected to report under OGMP 2.0’s reporting framework and submit an implementation plan describing how they will achieve the ‘gold standard’ of reporting within three years of joining for operated assets and five years for non-operated assets. Required targets include a 45% emissions reduction in methane emissions from estimated 2015 levels by 2025 and a 60-75% reduction by 2030. 

Over 100 companies representing 35% of the world’s oil and gas production, 70% of LNG flows, 25% of global natural gas transmission and distribution pipelines, and 10% of global gas storage capacity have joined OGMP 2.0, including Shell and BP.  

The Institutional Investors Group on Climate Change’s (IIGCC) recently published net zero standard for oil and gas refers to the OGMP 2.0 framework within its guidance.  

Further, the Net Zero Asset Owner Alliance (NZAOA) has outlined its support for the initiative in its position paper on the oil and gas sector, with a spokesperson telling ESG Investor that it considers OGMP 2.0 as “best practice for detection, measurement and reporting of methane emissions”. 

The Climate and Clean Air Coalition, a voluntary partnership of governments, intergovernmental organisations, businesses, scientific institutions and civil society organisations, further noted that the average cost of methane per tonne in the oil and gas sector could fall by US$520 should companies install leakage solutions. These include replacing gas-powered pneumatic devices with electric motors and replacing pressurised gas pumps and controllers with electric or air systems.  

Making the rules  

Investors have recognised that voluntary industry action on methane will “never be sufficient” without “strong, common-sense regulation”, says Logan at Ceres. 

At COP26, 112 countries signed the Global Methane Pledge, committing to reducing global methane emissions by at least 30% by 2030. Since the pledge, some jurisdictions have been leading the way by implementing new regulations to ensure this overarching goal comes to fruition.

Last month, European lawmakers voted to extend the EU’s proposed methane emissions rules to cover gas imports from 2026. The legislation was first proposed by the European Commission in December 2021, with the latest iteration agreed in the European Parliament outlining rules for monitoring emissions, as well as stringent leak detection and repair requirements for leaks in fossil fuel infrastructure, with companies required to check for leaks every two months and to fix any issues within five days of detection. The decision to include oil and gas imports under the scope of these rules means the EU’s methane regulation will have a more global impact.  

Meanwhile, as part of the US Inflation Reduction Act (IRA), the Biden administration earmarked US$1.5 billion in incentives for methane monitoring and mitigation, as well as penalties for high methane emissions.  

Additionally, the US Environmental Protection Agency (EPA) published a proposal in 2021 which would require oil and gas operators to detect and repair methane leaks at the 300,000 largest well sites. It would also ban the venting of methane produced as a byproduct of crude oil into the atmosphere. The proposal is targeting a 75% reduction in methane emissions from oil and gas operations from 2005 by 2035.  

In 2022, the EPA upped its ambition by further extending the required monitoring from 300,000 to one million well sites, forcing methane emissions reductions from flaring equipment, and creating a system to detect leaks from “super-emitter” sites more quickly. This would increase the US oil and gas industry’s 2035 methane reduction target to 87%, but it has generated some concern from the US oil industry.  

Logan says this increased ambition is in line with investor expectations.  

We are pleased that the EPA seems to be moving to finalise the first ever national rules to regulate methane emissions across the US oil and gas sector,” he says. “We expect the final rule to be released this summer, but implementation will likely not occur in earnest until 2028 so it will remain critical to engage the industry in the meantime.” 

While other signatories of the Global Methane Pledge are proving slower to introduce the policy needed to fulfil their commitments, Heim from Boston Common Asset Management points out that some of the world’s biggest GHG emitters are not part of the pledge.  

China isn’t yet part of the pledge,” he points out, urging investors to “think about how we can pressure more countries to participate”.  

William Atwell, Director of Climate Risk and Sustainable Finance at Sustainable Fitch, adds that many of the biggest methane-emitting assets are in emerging markets and developing economies (EMDEs) where regulation is “generally looser” and often “less investment in modern flaring-reduction technologies and maintenance to reduce leaks”.  

“Some of the largest methane-emitting countries are EMDEs that have not signed the Global Methane Pledge, like Russia and Turkmenistan,” he tells ESG Investor. 

However, some EMDEs are making progress. In November 2022, Nigeria became the first African country to regulate methane emissions from its oil and gas sector.  

Achieving low methane emissions is “absolutely possible” for the global oil and gas industry, Logan from Ceres says – provided “companies choose to prioritise it”.  

“But it is also clear that many companies will not move until they are forced – whether by regulators or by the financial sector. 

“Reducing methane emissions is simple, but not easy.”  

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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