METHANE MOVES CHALLENGE PETROLEUM INDUSTRY
Alex Msimang, Steven Wilson, Adam Fenby, London - Feb 4, 2021
The Global Methane Pledge (GMP) was one of the few headline commitments announced at COP26. The response to the GMP indicates that tackling methane emissions is now firmly on the agenda for the petroleum industry. Although nonbinding, the GMP puts signatory governments under pressure to take action on methane ahead of COP27 in Egypt and COP28 in the United Arab Emirates. The interplay between the increasing focus on reducing methane emissions, on one hand, and increasing global demand for natural gas and its role as a transition fuel, on the other, will be interesting to watch as governments look to reconcile climate ambitions with energy security policy and economic reality. But what is certain is that reducing methane emissions will be a key theme for the petroleum industry post GMP.
Announced by the EU and US ahead of COP26, signatories to the GMP pledge to reduce global methane emissions by at least 30% (from 2020 levels) by 2030 and agree to more robust reporting standards. The European Bank for Reconstruction and Development, the European Investment Bank and the Green Climate Fund have agreed to support the GMP through technical assistance and project finance. At the time of writing, 111 countries have signed the GMP, which together represent over 70% of global GDP. Among these are significant petroleum producers — Saudi Arabia, Canada, Iraq, the UAE, Nigeria, Brazil and Norway have all signed up.
Despite the rhetoric at COP26, the GMP is still ultimately voluntary — its targets are nonbinding and there is no enforcement mechanism. A number of major methane emitters have also declined to sign the GMP, including Australia, China, India, Iran and Russia. China has launched its own initiative. In addition to a bilateral agreement with the US at COP26, 2021 saw the inauguration of the China Oil and Gas Methane Alliance, a body that includes China National Petroleum Corp., Sinopec and China National Offshore Oil Corp., among others from the Chinese upstream and downstream sectors. This has a broader motive, too, of increasing Chinese influence in global climate governance.
Joining the chorus of climate protesters unhappy with the outcome of COP26, Russia’s climate envoy also went as far as to suggest that Western financial sanctions imposed against Gazprom, as well as trade restrictions on the provision of petroleum-related goods and services to certain projects, could hamper Russia’s efforts to mitigate its methane emissions. Notably, Russia was responsible for one of the world’s largest methane leaks in recent years when a pipeline owned by Gazprom released around 2.7 million cubic meters during emergency repairs in 2019.
The Challenge and Opportunities
UN Environment Programme figures suggest that the petroleum industry and coal mining contribute around 35% of man-made methane emissions, principally from fugitive emissions, venting and incomplete flaring. According to the International Energy Agency (IEA), most emissions occur in onshore conventional oil and gas activities (where the main source is flaring), followed by downstream gas (where the main source is fugitive emissions from pipelines).
The IEA says it may be possible to reduce global methane emissions from petroleum operations by roughly 75%, using pre-existing technology and emissions could be reduced by 40%-50% just by implementing approaches that have no net cost. Solutions include leak detection, repair requirements, restrictions on nonemergency flaring and venting, and reducing the use of natural gas for operations through electrification. The IEA estimates that around $13 billion of annual investment is required to implement all methane emission abatement measures in the petroleum industry and suggests (perhaps boldly) that, based on average natural gas prices from 2017 to 2021, this amount is less than the total value of the captured methane that could be sold — potentially resulting in net savings to industry.
The scope and scale of the challenge is likely to vary significantly from basin to basin. Monitoring and abating emissions from hundreds of thousands of onshore wells across the US will inevitably be very different to the UK, where the vast majority of wells are located offshore and number just over 8,000 wells drilled to date (only a fraction of which are producing). Smaller, less well-capitalized, players will inevitably face a greater challenge than large international oil companies (IOCs) without government support, which in turn may face greater scrutiny from shareholders and other stakeholders.
The GMP also builds on a succession of initiatives aimed at reducing methane emissions. These include the industry-led Oil and Gas Climate Initiative, established in 2014 to improve methane data collection and to develop and deploy methane management technology. In 2020, its membership agreed to reduce the collective average methane intensity of their aggregated upstream operations to 0.2% by 2025. Launched in 2017, the World Bank’s zero routine flaring initiative also commits producers and governments to end routine flaring by 2030. And since 2017, a group of 25 IOCs, national oil companies and oil-field services companies have subscribed to a set of “Methane Guiding Principles,” collaborating to share best practices, with the support of organizations including the World Bank, the IEA and trade association, Oil & Gas UK.
Sticks and Carrots
Although the GMP targets are nonbinding, some signatory governments are introducing derivative guidelines and incentives at the national level, and even moving to introduce or supplement existing legislation. Recently announced guidelines and legislative proposals include:
- In the UK, as with many other signatories, existing legislation requires operators to have consents in place for flaring and venting from production operations. Perhaps encouraged by its COP presidency, the UK has also introduced a Methane Action Plan, agreed between industry and the UK government, which includes a GMP-beating 50% reduction in methane emissions by 2030 (against a 2018 baseline), zero routine flaring by 2030, and a requirement for operators to develop individual methane action plans for each individual asset by 2023;
- The US administration introduced its Methane Emissions Reduction Action Plan in fourth-quarter 2021. A landmark policy, $4.7 billion is allocated to a well-plugging program to remediate the estimated 1.6 million oil and 380,000 gas wells that are unplugged and estimated to be responsible for 263,000 metric tons of methane in 2019 alone. At the core of the initiative is a suite of regulations introduced by the Environmental Protection Agency under the Clean Air Act, including guidelines that may ultimately require the implementation of leak detection and repair (LDAR) and the routing of associated gas from oil wells to sales lines;
- In the fourth quarter of 2020, the European Commission also presented an EU Methane Strategy, which proposes legislative and nonlegislative measures in the petroleum (as well as agriculture and waste sectors), including compulsory measurement and reporting for all petroleum-related emissions, LDAR programs for the upstream and downstream sectors, and the elimination of routine venting and flaring.
Other governments might also now look to introduce new measures with a view to reducing methane emissions at a national level. These could be legislative or nonlegislative in nature, or even extend to incentives such as tax credits or other state subsidies.
Following COP26, and the launch of the GMP specifically, it is likely that governments, and by extension the petroleum industry, will be under pressure to reduce methane emissions and to set out exactly how reductions will be achieved — although the industry will have to wait and see how the legislative landscape develops in response. The focus on methane emissions may well intensify in 2022 and progress is likely to be scrutinized at COP27 in Egypt later this year.
More scrutiny and tougher requirements will inevitably encourage technological innovation, particularly in respect of methane measurement, abatement and capture, and potentially even financial upside in the case of the latter if methane can be monetized or new sources of capital tapped.
Alex Msimang is a partner, Steven Wilson, a senior associate, and Adam Fenby, a trainee solicitor, at Vinson & Elkins in London.