An International Shift Towards Voluntary Methane Reductions Has Implications for Canadian Industry

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Methane emissions from the oil and gas (O&G) industry have become a hot topic. Natural gas, which consists mostly of methane, is flammable and a safety hazard when leaked. As a greenhouse gas, it also heats the atmosphere ~25-36 times more than carbon dioxide over a 100-year time horizon.1 When conserved, natural gas is a commodity that can be sold. Whether for the bottom line or the environment, most people agree: preventing methane leakage makes sense — sometimes.

If avoiding methane emissions always made sense, we might not have a problem. Yet Canada’s O&G sector accounts for nearly half of all anthropogenic methane emissions in the country. Upstream O&G companies release natural gas to the atmosphere for a number of reasons. For sites that produce oil, associated gas is a by-product, and gathering lines are not always available to transport the gas to market. At remote sites without access to grid electricity, natural gas is used to power pneumatic devices and engines. Fugitive emissions — when methane is leaked unintentionally — are also common. Research has consistently shown that a small number of these leaks comprise the majority of overall emissions, but that even big leaks are unpredictable and can be difficult to locate.

What drives a producer to reduce their methane emissions? In Canada, regulators have promulgated some of the world’s most stringent methane policies. In January 2020, new regulations — designed to achieve methane reductions of up to 45 per cent by 2025 — were implemented both federally and provincially. According to the Government of Canada, implementation of their regulations is expected to cost industry $3.9 billion by 2035.

This cost of compliance is not trivial, especially at a time of depressed oil prices, low investor appetite, and regulatory turmoil. Many Canadian operators may struggle to justify allocating resources towards voluntary methane reductions that go “above and beyond” regulatory requirements. For many, no obvious reason exists to invest further in such efforts.

South of the border, regulatory efforts to reduce O&G methane emissions have had a slow start. Federal methane rules were introduced during the Obama administration but were later rolled back in 2020. The federal rules and some state rules indirectly regulate methane through regulation of co-emitted hydrocarbons, and a few states regulate methane directly. Colorado, for example, leads the regulatory front in the U.S. with strong methane rules that have been on the books for years. Overall, however, there has been little co-ordination and even less consistency among jurisdictions.

The rise of voluntary reductions

Despite a patchwork of U.S. regulations, O&G majors are announcing voluntary commitments to significantly lower greenhouse gas emissions, often targeting net-zero emissions by 2050. To complement individual corporate pledges, many companies have joined industry coalitions like ONE Future, which seeks to reduce emissions to below one per cent of production — across the entire value chain — by 2025. The Oil and Gas Climate Initiative (OGCI), a US$1 billion-plus decarbonization investment fund, explicitly supports the Paris Agreement and has an ambitious 2025 methane emissions target of 0.25 per cent of production (upstream only). Member companies of OGCI are responsible for some 30 per cent of global O&G production.

Federal U.S. regulations could change soon. On his first day in office, President Biden signed an executive order to rejoin the Paris Agreement and revisit methane regulations — signalling an extension beyond previous “new source” regulations to cover all existing facilities across the country. Regardless of new rules, voluntary actions are unlikely to wane, and may continue to outpace regulatory efforts.

Across the pond, O&G majors are no strangers to voluntary commitments. In November 2020, version 2.0 of the Oil and Gas Methane Partnership was released, a voluntary reporting framework with 60-plus members. Through unprecedented commitments to detailed inventories, multi-scale measurement, and transparent reporting, member companies are targeting methane reductions of 60-75 per cent by 2030.

Yet some 80 per cent of global oil production occurs beyond the borders of Europe and the U.S. In the Middle East, South America, Russia, Asia Pacific and Africa, methane regulations are often underdeveloped or poorly enforced. Nevertheless, new voluntary initiatives like OGMP 2.0 are targeting non-operated joint ventures (NOJVs). This could lead to massive methane reductions; OGMP member companies like Shell, Repsol, Eni and Total receive more than 50 per cent of their production from NOJVs. Meanwhile, the European Commission released a new methane strategy in 2020 outlining plans to regulate measurement, reporting and verification for imported fuels. The EU is the world’s largest importer of fossil fuels.

Reduction catalysts

What is driving the sudden upsurge of voluntary methane reduction commitments? Loss of narrative control is one factor. Until recently, methane emissions — which are invisible and odourless in most upstream settings — could be emitted without drawing attention.

Today, groups like the Environmental Defense Fund (EDF) are conducting large-scale offsite measurement campaigns, democratizing emissions data using aircraft and passenger vehicles equipped with sophisticated instrumentation. They report observed methane plumes on a public website, often within a week of measurement. That’s just the beginning. In November 2020, the Bezos Earth Fund announced a US$100 million grant to help the EDF build and launch MethaneSAT — a high-resolution satellite with global coverage. MethaneSAT is scheduled for launch next year and, yes, all of the data will be public.

Narrative control is shifting to the public sphere, and major O&G companies recognize the impact this shift could have for social license to operate. Further, ESG metrics are increasingly being used by investors that have not yet fled the O&G industry for Tesla and Shopify. Investors are right to be spooked. In October, a US$7-billion Permian LNG deal was canceled due to concerns that O&G operations in Texas emit too much methane. Two weeks ago, New York City’s largest pension fund divested US$4 billion from fossil fuels. BlackRock, which controls ~US$9 trillion in assets, is making even bigger waves.

Another reason for the shift to voluntary actions, at least in the U.S., is the challenge of managing assets across numerous jurisdictions with inconsistent and ever-changing regulations. In some cases, adopting voluntary efforts that go beyond all sets of regulations could mean lower risk and lower uncertainty. Such a standardized — yet rigorous — approach may lower long-term compliance costs from repeated equipment upgrades and changing measurement, data management and reporting requirements. The goal of cost-effectively reducing methane emissions might not be so lofty — for big companies that can afford to do it right the first time. While small producers scramble, larger companies may see an opportunity. Widespread mergers are already underway.

Meanwhile, Back at the Ranch

Voluntary initiatives in Europe and the U.S. often go above and beyond Canada’s regulations. Will there be implications for Canadian industry? In most regards, the future is uncertain. A safe bet would be for Canada’s energy industry to continue to demonstrate leadership in this space, create policy transfer potential, remain competitive, and transparently demonstrate our social and environmental license to operate.

The dichotomy presented here — that domestic efforts are driven by regulations and that international efforts are voluntary — is far from clear cut. While many O&G majors are developing big commitments, most small- and medium-sized producers in the U.S., like those in Canada, are struggling to keep up with changing regulations, low oil prices and ESG pressures. These companies are falling behind — governments must help them transition.

Canada also has domestic examples of companies going above and beyond — and being rewarded. In addition to regulatory obligations, Canada has numerous opportunities, including offset credits and incentive programs. Progress is accelerating towards certification programs for responsibly sourced gas. Canada should see opportunity in differentiated O&G markets — they are a chance to leverage our longstanding commitment to strong social and environmental performance.

Should Canadian O&G producers go above and beyond in their methane reduction efforts? It depends on whether they trust the regulator to prepare them for a future of increased measurement, accountability, detailed reporting, digitalization, new technology, carbon markets and certified products. The world’s biggest energy companies are rushing to clean up their methane emissions. Whatever their reasons, the consensus is clear.

1 General consensus exists that methane is both (1) much more potent that carbon dioxide and (2) has a much shorter residence time in the atmosphere. However, the precise magnitude of methane’s warming effect relative to carbon dioxide is contested.

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