Curbing methane emissions is a climate opportunity for national oil companies

By Ratnika Prasad

The energy transition is accelerating, as social, political and economic pressures build on political and corporate leaders to meet the Paris goal of limiting global temperature rise to well below two degrees Celsius.

While carbon dioxide is often the focus, at least a quarter of today’s warming is caused by methane emissions from human sources. Methane is 84 times more potent than carbon dioxide in the first two decades after its release, making methane reductions especially useful in slowing the rate of warming.

As a major source of global methane emissions, the oil and gas industry bears a special responsibility for urgent action to bring methane leakage and flaring under control. Some operators are embracing the challenge. However, barring a few exceptions, national oil companies — those that are fully or majority-owned by a national government — have largely lagged behind their privately owned counterparts.

A new report by Carbon Limits explores the critical role NOCs can play in mitigation of methane emissions. Over half of total global oil and gas production comes from NOCs, with an estimated 75% of industry’s methane emissions stemming from the countries they operate in, according to IEA data. This outsized relationship between emissions and production underscores the need for concerted action by NOCs to curb methane emissions.

Competition for cleaner fuels heats up

In a highly competitive energy sector, a fuel’s climate performance is becoming an increasingly important metric for decision-makers, as much as access, flexibility and cost.

Case in point: French utility Engie recently cancelled a $7 billion dollar LNG deal due to excessive methane value chain emissions from U.S. suppliers. Engie’s decision comes as the European Commission introduced a strategy that, among other things, considers applying a performance standard for gas used or sold in the EU. As climate pressure escalates, regional demands for natural gas may hinge on the demonstration of adequate methane management and zero routine flaring in the supply chain.

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NOCs face similar competitive pressures through their development partnerships with publicly traded companies. As firms such as BP, Total and Equinor set targets and practices to achieve net-zero emissions across their asset portfolios, climate risk hidden behind joint venture partnerships will need to be actively managed. NOCs with robust methane reduction programs could be seen as preferred partners.

Through initiatives such as the Oil and Gas Methane Partnership’s reporting framework (OGMP 2.0), NOCs and their publicly traded partners, can comprehensively manage and credibly report their emissions performance in a standardized way to better inform global customers and regulators.

Threat of carbon constrained capital

With growing pressure in financial markets for the oil and gas industry to disclose greenhouse gas emissions and address climate risks, companies’ cost of capital may be sensitive to their GHG profile and pathway to decarbonization. For instance, the Financial Times noted in 2020 there was a widening gap in the cost of capital, with rates of up to 20% for oil and gas investments compared to 3-5% for renewables.

While NOCs are primarily state-owned, they have increasingly been engaged in international capital markets through stakes in subsidiary businesses, financing for oil and gas asset sales and raising project financing for new activity. As major investors turn their attention to net-zero, a strategy for aligning methane and greenhouse gas emissions with net-zero will increasingly be the norm. NOCs can minimize the impacts of a climate-conscious capital crunch if methane reductions can be credibly demonstrated.

Bending the emissions curve ahead of COP26

Methane mitigation is often one of the most cost-efficient options NOCs can deploy to help their countries meet national emission reduction targets. The IEA estimates that 75% of low-cost methane mitigation opportunities are concentrated in 15 countries with NOCs, including Nigeria, Kuwait and Kazakhstan.

Meaningful methane mitigation in these producer countries is an opportunity to embed rapid, near-term climate action in new nationally determined contributions to be announced ahead of the UNFCCC’s COP26 later this year, where global leaders will be looking for credible and ambitious greenhouse gas reduction targets. With a new age of satellite technology about to realize a paradigm shift in methane emissions transparency and accountability, it is prime time to take proactive steps.

As governments and markets alike continue to focus on bringing energy systems in line with Paris commitments, methane management offers NOCs and their patron countries a cost-effective and timely first step towards deeper decarbonization.

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