Not only CO2 and the anti-climax: the fight against methane emissions is an additional challenge for the oil industry in the wake of COP26 | Vinson & Elkins LLP

Energy Intelligence – February 7, 2022

[ co-author: Adam Fenby]

The Global Methane Pledge (GMP) was one of the few pledges announced at COP26. The response to the GMP indicates that tackling methane emissions is now firmly on the oil industry’s agenda. Although non-binding, 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 growing focus on reducing methane emissions, on the one hand, and the growing global demand for natural gas and its role as a transitional fuel, on the other, will be interesting to watch as governments seek to reconcile climate ambitions with energy security policy. and economic reality. But what is certain is that the reduction of methane emissions will be a key theme for the oil industry after GMP.

Announced by the EU and US ahead of COP26, GMP signatories commit to reducing global methane emissions by at least 30% (compared to 2020 levels) by 2030 and agree on standards more stringent declarations. 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 funding. At the time of writing, 111 countries have signed up to the GMP, which together account for more than 70% of global GDP. These include major oil producers – Saudi Arabia, Canada, Iraq, United Arab Emirates, Nigeria, Brazil and Norway have all signed.

Despite the COP26 rhetoric, the GMP ultimately remains voluntary – its objectives are not binding and there is no enforcement mechanism. A number of large methane emitters have also refused 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 United States at COP26, 2021 saw the inauguration of the China Oil and Gas Methane Alliance, a body that includes CNPC, Sinopac and CNOOC, among others from Chinese upstream and downstream sectors. It also has a broader motive to increase Chinese influence in global climate governance.

Joining the chorus of climate protesters unhappy with the outcome of COP26, the Russian climate envoy also went so far as to suggest that Western financial sanctions imposed on Gazprom, as well as trade restrictions on the supply of goods and services oil-related projects, could hamper Russia’s efforts to reduce its methane emissions. Russia was notably 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 the opportunities

Figures from the United Nations Environment Program suggest that the oil industry and coal mining contribute about 35% of man-made methane emissions, mostly from fugitive emissions, venting and incomplete flaring. According to the International Energy Agency (IEA), most emissions occur in onshore conventional oil and gas activities (the main source of which is flaring), followed by downstream gas (the main source of which is fugitive emissions from pipelines).

The IEA says it may be possible to reduce global methane emissions from oil operations by around 75%, using pre-existing technology and that emissions could be reduced by 40% to 50% simply by implementing approaches that have no net cost – solutions include leak detection, repair requirements, restrictions on non-emergency flaring and venting, and reducing the use of natural gas for operations through the electrification. The IEA estimates that around $13 billion in annual investment is needed to implement all measures to reduce methane emissions in the oil industry and suggests (perhaps boldly) that, based on prices natural gas averages from 2017 to 2021, this amount is less than the total value of captured methane that could be sold – potentially resulting in net savings for the industry.

The scope and scale of the challenge is likely to vary significantly from basin to basin. Monitoring and reducing emissions from hundreds of thousands of onshore wells across the US will inevitably look very different from the UK, where the vast majority of wells are located offshore and have just over 8,000 wells drilled at this day (only a fraction produced). Smaller, less well-capitalized players will inevitably face a greater challenge than larger IOCs without government support, which in turn may be subject to 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, created in 2014 to improve methane data collection and to develop and deploy methane management technology. In 2020, its members 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 engages producers and governments to end routine flaring by 2030. And since 2017, a group of 25 IOCs, NOCs and petroleum service companies have signed up to a set of “Methane Guiding Principles”, collaborating to share best practices , with the support of organizations such as the World Bank, the IEA and the trade association Oil & Gas UK.

Sticks and carrots

Although GMP objectives are not binding, some signatory governments introduce guidelines and derived incentives at the national level, and even go so far as to introduce or complement existing legislation. Recently announced guidelines and legislative proposals include:

  • In the UK, as with many other signatories, existing legislation requires operators to have permits in place for flaring and production venting 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 50% reduction in methane emissions above GMP by 2030 (compared to a 2018 baseline), zero routine flaring by 2030 and requiring operators to develop individual methane action plans for each individual asset by 2023;
  • The US administration presented its action plan to reduce methane emissions in the fourth quarter of 2021. A landmark policy, $4.7 billion is allocated to a well plugging program to remedy the 1.6 million wells of oil and an estimated 380,000 gas wells that are disconnected and which would be responsible for 263,000 metric wells. tonnes of methane in 2019 alone. At the heart of the initiative are a series of regulations introduced by the EPA under the Clean Air Act, including guidelines that could eventually require the implementation of detection and repairing leaks (LDAR) and transporting associated gas from oil wells to sales.
  • In the fourth quarter of 2020, the European Commission also presented a European Methane Strategy, which proposes legislative and non-legislative measures in the petroleum (as well as agriculture and waste) sectors, including measurement and reporting mandatory for all petroleum-related emissions, LDAR programs for both upstream and downstream sectors, and the elimination of routine venting and

Other governments may also consider introducing new measures to reduce methane emissions at the national level. These could be legislative or non-legislative in nature, and even extend to incentives such as tax credits or other state subsidies.

And after?

After COP26, and the launch of the GMP in particular, it is likely that governments, and by extension the oil industry, will be under pressure to reduce methane emissions and to define exactly how the reductions will be achieved, even if the Oil industry will have to wait and see how the legislative landscape evolves in response. The focus on methane emissions may well intensify in 2022 and progress is expected to be reviewed at COP27 in Egypt later this year.

Increased oversight and stricter requirements will inevitably encourage technological innovation, particularly in relation to methane measurement, reduction and capture, and potentially even financial benefits in the case of the latter if methane can be monetized. or tapped new sources of capital.

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*Adam Fenby is a Trainee Solicitor at Vinson & Elkins London.

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