(Bloomberg Opinion) -- Methane is both the energy sector’s big lost opportunity and, for some, a potential future one.
President Joe Biden on Friday confirmed he is working with the European Union on a pledge to cut global methane emissions by roughly a third by 2030. More consequentially, a $1,500-per-tonne penalty on emissions of methane forms part of the green-tinged budget package now being drafted in Congress.
The rollback of federal methane rules by the Trump administration in 2020 was the definition of a Pyrrhic victory for the U.S. oil and gas sector. Its timing meant reliance on then-President Donald Trump’s reelection to hold, which didn’t happen. And in seeking to gut the rules established by his predecessor, Trump’s actions virtually ensured a forceful response from his successor.
Most importantly, lobbyists pushing for free rein on methane were defending the indefensible — so much so that the biggest oil companies were actually lobbying in the other direction. Apart from their deleterious effect on climate and local air quality, methane emissions are just natural gas the industry hasn’t successfully contained. It’s like dairy farmers pouring their own milk down the drain. The cost of plugging leaks, especially on new projects, is minimal: Analysts at the Boston Consulting Group found “most methane emissions are negative to near zero cost to abate.”
Meanwhile, as climate commitments have been stepped up around the world, overseas buyers of natural gas increasingly demand better. French cancellation of negotiations for U.S. liquefied natural gas cargoes on these grounds provoked a spittle-flecked jeremiad from the Texas Railroad Commission earlier this year. But that same commission had long encouraged the lax approach to flaring and venting that provided an opening against the industry it nominally regulates and vigorously promotes.
If the new methane penalties are enacted as currently drafted, then they will put pressure on all producers (as well as pipeline operators and processors) but especially smaller ones. The latter tend to be less well-capitalized and, unlike the majors, have less direct exposure to overseas buyers and governments making demands on emissions.
Consider an E&P company producing 100 million cubic feet per day, of which 1.5% escapes. At a realized price of $3 per million BTU on the gas they do sell, almost 50 cents of that would be paid in fines. Besides the sharp contrast with a “negative to near zero cost to abate,” this is also not a business exactly known for minting profits, current rally notwithstanding.
Zooming out, analysts at Rystad Energy, a consultancy, calculate a methane polluter fee could cost U.S. onshore operators $5.5-$6 billion a year, swallowing more than 10% of estimated free cash flow at a $65 oil price. In mitigating that, Artem Abramov, who heads shale research at Rystad, the biggest challenge lies in the lack of standardized methane emissions reporting in the industry. For example, Pioneer Natural Resources Co.’s sustainability report, released earlier this week, shows methane emissions over the past two years that differ wildly under its own methodology versus what it reports to the EPA.
When methane rules were rolled back, a favored talking point of then-EPA administrator Andrew Wheeler, as well as the American Petroleum Institute, was that this would protect farmers and other landowners with old wells on their land from upgrade costs that might force them to shut off production that had been in their family for generations and provided income. It was an absurd position for an industry dogged by overcapacity, fighting to set itself apart from coal on emissions and with growth prospects tied to expanding exports to countries that don’t dedicate much mindshare to the preservation of old wells on American farms.
If new rules force some marginal production to close or consolidate, then that would strengthen the rest of the sector. Cooperation on standardizing and strengthening reporting as well as deploying mitigation efforts — rather than divided lobbying against them — would also spread the costs more efficiently.
Moreover, it would provide a powerful means of differentiating U.S. gas — a tricky feat with any commodity. Taken on their own, pledges like the one Biden outlined on Friday are apt to provoke a justified “meh.” But the wider context is a series of targets, pledges and actual and proposed legislation, both in the U.S. and overseas, pointing only one way.
Plus, the current energy crunch in Europe, as well California’s delicate balancing act with its grid this summer, suggest strong appetite for gas at least in the near term in markets seeking to decarbonize but lacking adequate backup for renewables. There is no shortage of gas reserves, but there is dwindling tolerance of their emissions. In an uncertain decade for fossil fuels, U.S. LNG cargoes that combine open trade with verified lower emissions could yet turn a political own goal into a grab for market share.
"Decarbonization of LNG Operations", Boston Consulting Group, December 2020.
This analysis assumes EPA data are used to calculate fugitive emissions and that any fee is in place for 2022, although "in reality it won't be effective before 2023."
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.
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