Wednesday

24th Jan 2018

Opinion

Tackling methane could be substantial climate fix

  • Methane leakage from gas pipelines is a major problem, but can be easily fixed, says Tim Goodman (Photo: Bilfinger SE)

As we reach the two-year mark of the Paris Agreement, climate change is evolving from a social and political challenge to a business and financial one.

Away from the lights and cameras, whole industries are sorting out how to meet new obligations. No surprise then that investor influence on climate took centre stage this past week at French President Emanuel Macron's second anniversary climate summit.

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Financial markets are watching carefully as energy companies in particular are quietly racing to stake out competitive advantage in a field that most of them dismissed for years.

Even as they grapple with long term efforts to reduce fossil fuel use and carbon emissions, another challenge – and new opportunity – has emerged in the form of methane, an extremely potent greenhouse gas responsible for a quarter of the warming we see today.

Scientists say we need to reduce both.

But while carbon reductions involve systematic long-term transformation of whole sectors, methane solutions in the oil and gas sector are quick and easy by comparison, and they don't cost much to implement (methane from agriculture is another, more complicated matter).

This makes it possible for oil and natural gas companies to differentiate themselves not just in their policy rhetoric, but through concrete and measurable practices.

And it's not just about legal compliance or public reputation. Methane, which is the main ingredient in natural gas, is itself a commodity, which means there are direct operational benefits to reducing emissions.

Some solutions are simple

The global oil and gas industry emits 76 million metric tons of methane into the atmosphere each year, everywhere from remote wellheads to the gas mains under your street. Some solutions require new infrastructure or drilling practices, but many are simple plumbing issues: Tightening pipes, closing valves, sealing up storage facilities.

In its closely watched annual World Energy Outlook, the International Energy Agency estimated last month that companies can cut global methane emissions 75 percent with existing technologies, and that about two-thirds of those savings can be achieved at zero net cost, largely because the methane can be sold instead of wasted in the form of valuable natural gas.

Just the reductions at no net cost would have the same climate benefit in 2100 as immediately closing all of the coal plants in China.

The impact of methane and its potential role as a near-term complement to carbon reductions has only come into focus in the past few years.

But it's no wonder that as the reality of Paris sinks in, investors are zeroing in fast on methane and methane strategy as key performance metrics. Now the trend is taking off.

Earlier this year, investors from 36 global institutional firms overseeing $4.2 trillion (€3.6 trillion) in assets launched a major oil and gas methane initiative providing specific guidelines for investors to engage with oil and gas companies on methane management and disclosure.

Eight months in, it appears that the oil and gas industry is on the brink of making considerable operational shifts in how it manages methane.

Last spring, close to 40 percent of ExxonMobil shareholders voted for the company to increase transparency on methane management, while 60 percent voted for greater transparency on climate risks across the board.

The vote happened thanks to pressure that asset managers were getting from their own clients, who have a long-term perspective and see climate change as a risk to their funds.

Since then, Exxon rolled out a methane reduction program for its subsidiary XTO. Meanwhile, Shell deployed a continuous methane tech pilot program, similar to projects run by Statoil and Pacific Gas & Electric Company.

In October, 10 oil and gas companies responsible for 20 percent of global production pledged to move towards near zero methane emissions as part of the Oil and Gas Climate Initiative.

Less than a month later, BP, Shell, Exxon and five other energy companies pushed further with a pledge to continually reduce methane emissions across the entire natural gas supply chain, aligned under a set of guiding principles, including advocating for regulations, developed collaboratively by industry and civil society stakeholders, including an environmental defence fund.

The direct financial opportunity is obvious: the industry emits $34 billion (€29bn) worth of methane each year. But there are other big considerations.

Laggards on methane are more likely to be considered as an irresponsible partner both commercially and within their local communities.

EU to the rescue?

EU policy on methane appears to be gaining ground, as well. Last week, the European Parliament moved a step closer to directing the Commission to develop a methane policy after a key industry and environment committee vote.

The market signals are obvious to what's coming, but more awareness of the risks and financial opportunities for operators is needed to help make change happen faster.

And global leaders implementing the Paris Agreement must factor methane into the overall strategy, and encourage the oil and gas industry to make this timely and feasible fix.

Tim Goodman is director of engagement at Hermes Investment Management. The views and opinions are his own.

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