Methane, the primary component of natural gas, is a climate pollutant 84 times more powerful than carbon dioxide (CO2) over a 20-year period, and it is responsible for 25% of the global warming we are experiencing today.

Emissions from the oil and natural gas industry represent the largest industrial source of methane emissions globally. 2012 methane emissions were equal to 3% of total global natural gas production, and the International Energy Agency (IEA) points to such emissions as one of the five key measures for effectively addressing climate change. Appropriately addressing the environmental and economic risks associated with climate change requires action on both CO2 and methane.

The risks

Due to their climate disrupting impacts, methane emissions have drawn increasing scrutiny from the public, environmental and health groups, and global policymakers. Such scrutiny endangers the industry’s social license to operate and increases regulatory risks. While the industry can reduce emissions cost-effectively under rules, regulations pose a risk to investors for whom without better reporting it is hard to know which operators are prepared for rules and which are not. Engagement can both help prepare companies for coming rules and differentiate relative performance amongst companies.

Although natural gas is a cleaner-burning fuel than coal, the high potency of methane as a greenhouse gas (GHG) can reduce or eliminate the environmental benefit of natural gas when emitted to the atmosphere directly. Such reputational or product risk is particularly salient given that many operators have staked their futures in a carbon-constrained world on natural gas as a potentially cleaner energy source. As noted by the IEA, “the potential for natural gas to play a credible role in the transition to a decarbonised energy system fundamentally depends on minimizing these emissions.”

Emissions of methane also represent wasted saleable product where markets exist, with implications for operational efficiency and the bottom line. Although rare, methane-related disasters, such as those experienced in Aliso Canyon (see video) and San Bruno, California can incur frontpage headlines and potentially hundreds of millions in legal liability, while more common emissions violations can trigger fines.

As both pollutant and product, methane entails a series of distinct risks for oil and gas investors globally, requiring heightened scrutiny and company engagement, as well as improved disclosure. Unfortunately, voluntary reporting of methane emissions by the industry is generally lacking. For example, companies are failing to report reduction targets, and few provide details on baseline emissions or how they will lower them over time.

These practices make it challenging for investors to understand the materiality of the problem, identify leaders and laggards and manage risk. A 2016 report from Société Générale scored operators globally on methane management and disclosure performance. The top score was 48 out of 100 possible points, with many large international oil companies scoring in the single digits and teens. The report showed that there is significant room for improvement even among the current leading operators, which underscores the need for engagement.

Experts predict natural gas production and consumption are set to grow globally, and with them comes the potential for higher methane emissions. The Rhodium Group estimates that methane emissions will grow by more than 20% by 2030 vs. 2012 levels in a business-as-usual scenario. Investors should engage early and often to address this issue now before it becomes even more significant.

The opportunities 

Of course, along with these risks come opportunities for investors. Engaging with companies to better manage methane can strengthen the strategic goal of the gas business in delivering cleaner energy, lowering emissions and creating more efficient operations while putting more saleable product in the pipeline. A study estimated that globally the oil and gas industry loses $30 billion a year in methane emissions.

As poor methane management could be indicative of other latent risks, investors may consider methane management as an additional proxy for strong operational management, along with asset integrity and environmental, health and safety (EH&S) practices. Also, methane risk is carbon risk, and benchmarking methane management will help investors assess how prepared operators are for a carbon-constrained world, enabling operator management of methane risk to be considered in investor capital allocation decisions.

Better data will help not only investors, but also operators. Knowing and understanding where emissions are coming from will improve decision making and operations. Further, operators that comprehensively tackle methane risk will be better positioned to address investor concerns, engage with regulators on what works, and demonstrate responsibility to community stakeholders. 

Methane risk across the globe and natural gas supply chain

One common misunderstanding is that methane emissions are exclusively related to hydraulic fracturing, and thus are primarily a US issue. However, the IEA, as well as a series of 16 studies sponsored by EDF, have found these emissions come from all types of production and all parts of the natural gas value chain, including production, processing, transmission and storage, as well as local distribution. Methane emissions can also occur in upstream oil production where natural gas is a byproduct. Methane emissions are a potential risk to any oil and gas operator and therefore carry implications for investors globally across the entire supply chain.

The state of play on global methane regulations 

The outsized impact of methane on the climate has captured the attention of policymakers and global momentum to address the problem is building. Starting in the US, in February 2014, the state of Colorado introduced the country’s first direct regulations on methane. Since then, numerous states have followed Colorado’s lead in addressing methane, with Ohio, Wyoming and Pennsylvania putting in place rules of various scopes to limit emissions. California is on track to establish the most comprehensive and stringent methane rules in the US, likely in early 2017.

The US federal government is also working to limit emissions. In early 2015, the White House announced a national goal of reducing emissions from oil and gas by 40-45% from 2012 levels by the year 2025. This goal is achievable through adoption of readily available, cost-effective technologies and practices. An ICF study found that a 40% reduction in emissions can be achieved for $2 billion before considering the value of the methane captured and sold. Taking the first step toward meeting this goal, the US Environmental Protection Agency (EPA) finalized a rule in May 2016 to limit emissions from new and modified sources for oil and gas development. EPA is moving forward with an Information Collection Request from operators as the first step toward meeting its statutory mandate under the Clean Air Act to regulate emissions from existing sources, which contribute the vast majority of emissions from the oil and gas sector. The US Bureau of Land Management is likely to finalize a rule that will reduce the waste of natural gas and limit emissions from new and existing sources for oil and gas development on federal and tribal lands, potentially by the end of 2016.

It is not just the United States that is taking action. In 2016, both Canada (spurred by Alberta’s 2015 announcement of a 45% methane reduction goal) and Mexico agreed to reduce their oil and gas methane emissions by 40-45% by 2025. All three countries are expected to enact new regulations to meet these targets, with the U.S. having already issued some rules, while Canada has committed to releasing its draft regulations in early 2017. The IEA has noted “Outside North America, the absence of robust policy action in this area represents a major missed opportunity to tackle near-term warming.”

As a large hydrocarbon importer, user, and home to leading multinationals, Europe has an opportunity to expand its climate leadership to oil and gas methane emissions. European methane emissions are capped under the Effort Sharing Decision, but there is still a need for specific oil and gas methane emissions regulations to reduce those emissions and ensure the cap is met. All five Nordic countries have also agreed to help develop a global oil and gas methane reduction goal “by ensuring each country has developed a national methane reduction plan or otherwise identified and implemented enhanced actions to significantly reduce our overall methane emissions, and by expanding technical cooperation, where appropriate.

In Australia, some states and territories have limited regulations to control emissions. New South Wales, for example, requires leak detection and repair (LDAR) programs for all natural gas production (including coal-seam gas) as well as a required supplement to annual Environmental Protection Authority compliance reporting that summarizes the details of the program. Australia has yet to introduce federal methane standards; however, steps have been taken to capture fugitive emissions data through the National Greenhouse and Energy Reporting Scheme, introduced in 2007. While certain countries are developing rules, this does not negate the need for corporate engagement, as rules may cover only a portion of any company’s assets by geographic legal jurisdiction, require reductions but not reporting, or have insufficient requirements on accurately measuring emissions.

While some countries have or are considering methane rules, many of the largest sources globally such as Russia, Nigeria and Iraq have a significant lack of effective regulations. Given this absence, in certain ways the onus will be on large international oil companies (IOCs) to limit emissions by implementing globally consistent best practices and operational policies as they partner with state-owned companies in such jurisdictions.

The 2015 historic Paris Conference of Parties (COP) 21 agreement represented a critical turning point and unprecedented international consensus that business must incorporate a fundamental pivot toward a lower-carbon and climate-resilient world. As countries look for ways to fulfill their international greenhouse gas reduction commitments stemming from the Paris climate accord, and as certain oil and gas companies look to prove they can be part of the climate solution, leading countries and operators are looking to achieve methane reductions as a low-cost and readily available lever to reduce the rate of climate change. The emissions from the oil and gas industry are the largest industrial source, but notably, they are also associated with a singularly well-capitalized sector with a strong governance capacity. This suggests that progress can be much more rapid than in agriculture and is likely to become a strong priority for regulators.

The importance of governance in managing methane

Engagement on methane requires that investors consider related governance issues as they can be foundational to how successfully a company measures, reports and reduces their methane emissions. For example, if the board of a company does not comprise people with the relevant skills, knowledge, and experience, and/or does not have appropriate incentive structures, then a material issue like methane may not be recognized as a significant risk to the company or managed appropriately. In this respect, investors cannot engage on methane (or other environmental issues) in a vacuum, and must make sure to address the relationship between proper governance practices and addressing methane risk.

Leading operators will have governance structures in place where:

  • Company board composition contains appropriate skills and recent/relevant environmental experience to effectively manage methane emissions and associated risks.
  • Compensation structures are in place to incentivize senior management and staff for methane emissions reductions.
  • Demonstrable cultural commitment and senior leadership buy-in (e.g. tone at the top) exist to address material ESG risks, including methane.

Download the full report

  • Download report

    An investor's guide to methane

    February 2017

An investor's guide to methane: Engaging with oil and gas companies to manage a rising risk