U.S. oil production remains about 2 million bpd lower than its pre-pandemic levels. Still, methane emissions are already back to their levels from before the coronavirus. Worrying as this is in itself, it could also threaten energy companies’ long-term growth prospects because investors’ priorities are changing. What investors want from oil and gas now is not just stable returns but a lower carbon—and methane—footprint.
The Financial Times reported recently, citing data from the Environmental Defense Fund, that methane emissions in the U.S. shale patch had rebounded to pre-pandemic levels already, after dropping sharply as oil and gas production dropped last year amid the pandemic. Methane is a much more powerful greenhouse gas than carbon dioxide, although it dissipates faster in the atmosphere and has recently been garnering growing attention from regulators, environmentalists, and, now, shareholders.
“The investor community that stuck with [the shale industry] is the steady ones, that want discipline, that want predictability,” Regina Mayor, global head of energy at accounting major KPMG, recently told Forbes in an interview. “That’s the investor base they are all pandering to now. The growth investors are gone.”
But it’s not just predictability and discipline that investors expect from oil and gas companies. They also want a lower environmental footprint. The environmental, social, and governance, or ESG, investing fad is quickly turning into a global trend that is already dictating long-term strategies in many industries. It is also coming to oil gas. Related: Goldman Sachs Sees Large Oil Demand Rebound This Summer
Politicians are also active in trying to reduce methane emissions. The FT notes an initiative by a New Mexico senator, Martin Heinrich, for “swift action to reinstate and strengthen responsible methane emission standards, which is critical to confronting the climate crisis and reducing the air pollution harming communities in New Mexico.”
In Washington, Democratic senators are planning to vote this month to bring back Obama-era rules on methane emissions that were rolled back during the Trump presidency. Senator Heinrich is the lead sponsor of the resolution about the reinstatement of the Obama regulations.
“It’s a very serious public health issue,” Heinrich said during an online event in late March, as quoted by Bloomberg Law. “In addition, it’s a huge waste of a valuable resource. There’s a reason the best-in-class producers don’t lose nearly as much methane because they’re investing, they want to keep that, that’s their product, that’s what they sell.”
It’s a lot of product, too: “Operators in the Permian have historically produced more gas than the region’s facilities – including both upstream and midstream – can manage, straining the system and resulting in the highest emissions observed from any U.S. oil and gas basin,” Bloomberg quoted EDF as saying in a statement.
Last year when the pandemic hit, methane emissions slumped by as much as 60 percent as drillers curbed production. Now, as drilling begins to recover, emissions are recovering, too, and at a much faster rate. So if production ever reaches pre-pandemic levels, methane emissions could hit a new record in the absence of regulatory and voluntary action. Related: Record High COVID Cases Could Stall India’s Oil Imports
There is good reason for voluntary action: as New Mexico’s Senator Heinrich points out, methane emission capture is the capture of a resource that could cost billions in lost profits annually on a global scale. Yet capturing it also costs money, and many would rather save this money. Interestingly enough, it’s not even private companies that are the worst offenders. It’s national, state-owned, oil and gas companies.
The EDF recently reported that the home countries of national oil companies, which account for over half of the world’s oil and gas output account for as much as 75 percent of methane pollution globally. This should put even greater pressure on NOCs to address the methane problem and, according to the EDF, it is already putting this pressure on them.
“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,” the organization said in a recent report, adding that the supermajors will become pickier when they choose NOC partners for their new ventures, preferring ones that actively tackle methane emissions.
The pressure facing U.S. shale drillers and national oil companies is basically the same sort: manage your methane emissions or lose shareholders or partners. But this pressure could ultimately lead to a positive outcome for the oil and gas players: more methane captured means more gas to be sold in a world that will continue to need gas for the observable future and beyond.
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Investing in flaring reduction and methane leak detection and capture may not be at the top of U.S. shale drillers’ agenda right now, with still high debt piles to be paid down—and more production and more flaring—but it will be put there by regulators, by the look of it. Ultimately, regulators may be doing the industry a favor with the more stringent rules on methane emissions.
By Irina Slav for Oilprice.com
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This is so because first there is no evidence from any sources of rising US shale oil production. And second because current oil prices are almost equal to the shale oil breakeven price and therefore aren’t conducive to shale oil production particularly that investors are demanding disciplined and profitable production before they offer any more funds to shale oil drillers.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London