RCEM: Views on Energy News

The climate risk playing field is changing rapidly for the oil and gas industry.  Methane emissions management was previously a niche or emergent issue for investors and companies alike; however, only one business week into 2016, developments suggest it is becoming a mainstream issue that is capturing increasing public, investor and environmental advocacy attention.

Methane Emissions Significantly Affect Global Warming

Methane resides in the category of short-lived climate pollutants.  Climate change and global warming discussions typically focus on carbon dioxide, but recent studies have highlighted the significant short-term effects that methane emissions have on global warming.[1]  Methane traps heat in the earth’s atmosphere more effectively than carbon dioxide does, and in comparison to carbon dioxide, methane emissions are short-lived.  In fact, in the first 20 years after methane is released, it can trap up to 84 times more heat in the atmosphere.  So, while carbon dioxide stays in the atmosphere for centuries, unlike methane, the latter’s warming potential is much greater in the first two decades after emission, making it a significantly more potent greenhouse gas (GHG). 

This combination of potency and duration, relative to carbon dioxide and other GHGs, led the International Energy Agency (IEA) to include methane emissions reductions as one of five key elements of an energy “bridging strategy” to limit global temperature increases.[2]   It is also what makes reducing methane emissions a particularly attractive “quick win” opportunity for countries seeking to achieve their Paris Climate Conference pledges.

Natural gas is more than 95 percent methane, and oil and gas activities are the largest industrial sources of methane emissions worldwide.  The IEA estimates that the global energy sector currently emits about 100 million tons of methane annually.  An estimated 56 million tons of methane are emitted yearly from the global oil and gas industry,  with close to 60 percent of those emissions (32 million tons) coming from upstream oil and gas operations.[3]  It is readily apparent, then, that reducing oil and gas sector-related methane emissions is a rapid way to generate significant near-term climate progress.

A Mainstream Issue

Within the first business week of the New Year, three developments suggest that oil and gas industry methane emissions are becoming a mainstream issue.

First, on 6 January 2016, California’s Governor declared an emergency for the prolonged leak from a natural gas storage well near Los Angeles after Southern California Gas Company’s continued failure to stop a massive leak first discovered in late-October 2015.  To date (11 January), more than 82,600 metric tons of climate-damaging methane gases are estimated to have been released, and thousands of area residents have evacuated homes and schools.  (The giant methane plume is invisible to the naked eye but it can be seen by specialized infrared photography.)  Many people are characterizing the leak as the on-shore equivalent of BP’s 2010 Macondo oil spill in the Gulf of Mexico.

Second, during the first six business days of 2016, 12 methane-focused shareholder resolutions were presented to energy companies to reduce methane emissions and to address methane disclosure concerns, according to the Coalition for Environmentally Responsible Economies (CERES) website. [4]  In comparison, the same number of resolutions was presented during the whole of 2015, and only 11 during all of 2014. Five of these early-2016 resolutions were presented by the California State Teachers’ Retirement System (CalSTRS), a major public pension fund managing over $185 billion in assets. 

Energy Company Methane-focused

Shareholder Resolutions

            Year

Shareholder Filings

2016 (4-11 January)

12

2015

12

2014

11

 

And third, on 11 January 2016, the Environmental Defense Fund issued a report aimed at the investor community outlining methane emission-related investor risks and highlighting the lack of reporting transparency across the oil and gas industry.  Rising Risk: Improving Methane Disclosure in the Oil and Gas Industryemphasized the lack of voluntary methane emissions disclosure by the industry – “less than a third of reviewed companies report emissions and zero companies disclose emissions reduction targets making it challenging for investors to effectively gauge materiality, assess performance and manage risk.” [5] 

This is not the first time that the industry has been called out on methane emissions.  In 2012, for instance, three investor groups representing nearly 200 institutional investors with $20 trillion in assets issued a joint statement encouraging industry action to effectively control methane emissions.[6]  Since then, understanding of global climate risk has spread, there is a desire from many quarters to maintain the momentum achieved at the Paris Climate Summit, and finally, various factors related to methane emissions management have evolved, to include: 

  • improved science behind methane emissions
  • increasing regulatory, public and investor pressures
  • greater motivation to rapidly address climate risks (and foremost for many countries is how to meet their Paris Climate Summit pledges)
  • growing understanding that reducing oil and gas industry methane emissions is a quick way to make substantial near-term climate progress
  • widespread acknowledgement that the climate is undergoing extreme and damaging changes[7]
  • potential for “responsible sourcing” initiatives

At the same time that the global public is mandating climate progress, the world is awash with natural gas and oil, commodity prices are lower than they have been in years, the U.S. is beginning to export LNG, and new LNG facilities around the world are coming online shortly – which will put even more natural gas into international markets.  This combination presents consumers, investors, business leaders and governments options that they might not have previously considered.  Methane emissions from the oil and gas industry are now a mainstream issue, and an increasingly demanding and climate risk savvy global public is going to expect rapid, near-term emissions reductions.

James B. Seaton III works for an oil & gas company in Houston, Texas and is an international research associate at the ESCP Europe Business School Research Centre for Energy Management.  This piece is an excerpt from a forthcoming Occasional Paper.

 


[1] Intergovernmental Panel on Climate Change (IPCC), Fifth Assessment Report, 2013 http://www.ipcc.ch/pdf/assessment-report/ar5/wg1/WG1AR5_Chapter08_FINAL.pdf

[2] International Energy Agency, World Energy Outlook 2015 Special Report on Energy and Climate Change, 2015, p. 13. The other four elements of the IEA’s bridging strategy include increasing energy efficiency, reducing the use of less-efficient coal-fired power plants/banning new construction, investing in power sector renewable energy technologies, and phasing out fossil-fuel subsidies. https://www.iea.org/publications/freepublications/publication/WEO2015SpecialReportonEnergyandClimateChange.pdf

[3] International Energy Agency, World Energy Outlook 2015 Special Report on Energy and Climate Change, 2015, p. 73.
https://www.iea.org/publications/freepublications/publication/WEO2015SpecialReportonEnergyandClimateChange.pdf

[5] Environmental Defense Fund, Rising Risk: Improving Methane Disclosure in the Oil and Gas Industry, 11 January 2016 https://www.edf.org/sites/default/files/content/rising_risk_full_report.pdf

[6] “Controlling fugitive methane emissions in the oil and gas sector,” Joint statement by the Institutional Investors Group on Climate Change (IIGCC), the Investor Network on Climate Risk (INCR) and the Investors Group on Climate Change (IGCC). http://www.ceres.org/files/methane-emissions/investor-joint-statement-on-methane-emissions

[7] Despite U.S. Congressional opposition in the lead-up to the Paris Climate Summit, and that many Republican presidential candidates have eschewed acknowledgement of climate change, this does not appear to reflect prevailing American sentiments.  A 5 January 2016 Monmouth University poll found that 70% of Americans believe the climate is undergoing serious change; 64% (to include 47% of Republicans polled) believe the government should do more to reduce activities that lead to climate change and rising sea levels; and young adults, in particular, strongly endorse government action to address climate risks. http://www.monmouth.edu/assets/0/32212254770/32212254991/32212254992/32212254994/32212254995/30064771087/bbab2f4a-3eef-4772-9b82-8fbdd996452a.pdf

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