Methane rises on investors’ risk radar
Methane emissions are forming an important part of investors' broader climate change strategy
Energy investors are ratcheting up pressure on the oil and gas industry to take action over climate change, and methane emissions from production and refining activities are increasingly in their sights.
In the past three years, nearly 40 methane shareholder resolutions have been filed calling on energy firms to improve their methane management. This year's shareholder season included 11 methane issue resolutions, eight of which were withdrawn - meaning the companies took action on their own without a vote.
Underlining the momentum, on May 30, Chevron shareholders generated a 45 percent vote in favor of a methane resolution. Earlier this year, Range Resources' resolution passed with a majority vote, while Kinder Morgan garnered a strong 38 percent shareholder vote.
Meanwhile, Norges, one of the largest funds in the world with $1 trillion in assets, publicly said in May that it expects companies in its portfolio to address methane as part of their broader climate change strategy. "We expect companies engaged in activities with large greenhouse gas emissions, including methane emissions, to have a strategy for the transition to a low-emission energy system and a framework to monitor and report on emissions."
Adding to the pressure are questions over the future environmental viability of natural gas, which is made up primarily of methane—a greenhouse gas scientists have said is responsible for nearly a quarter of the warming the planet is experiencing today.
While natural gas usage is growing globally, just last month the International Energy Agency (IEA) stated that in order for natural gas to continue to prosper in the future, methane emissions must be reduced. Currently, the industry emits 75 million metric tons of methane a year.
Uncontrolled methane emissions from the oil and gas value chain sharply decreases the climate benefit of natural gas, and will undercut the ability of natural gas to compete in an increasingly cleaner energy economy.
Despite the environmental risks, investors also view improved methane management as a potential revenue source.
This is because improved management lessens losses of the leaked, vented and flared resource, as well as emissions. The global oil and gas industry loses $34 billion a year in leaked, vented and flared methane. Unmanaged methane also undoubtedly leads to regulatory scrutiny, especially as more countries and U.S. states develop methane regulations to support climate goals.
Investors also look at methane management as a proxy for how well companies can manage climate risk more broadly. Methane is a lot less complex of a problem to tackle than some of the carbon scenario analysis work companies are conducting. It's a problem with near-term, cost-effective solutions that save product by keeping pipes tight. If oil and gas companies can't solve this simple of a problem, how will they be able to solve more complex low-carbon obstacles in the future?
As investors shift their portfolios towards companies who better manage these issues, some companies are already improving in an area known as Environmental, Social, and Governance (ESG).
Firstly, firms looking to improve ESG can improve transparency through good reporting. Transparent reporting demonstrates to investors how a company is managing methane risk. A useful resource is the Investor's Guide to Methane, a joint report by EDF and UNPRI detailing the types of information investors want companies to report.
Methane targets are also an important tool. Companies can establish ambitious, but achievable emissions reduction targets. Absolute emissions reduction targets are best since they guarantee environmental outcomes, and a recent IEA analysis suggest a 75% reduction is technically feasible. Italian operator ENI has set a target to reduce upstream fugitive emissions by 80% by 2025.
In addition to the currently available technologies cited in the IEA analysis, there is a dynamic emerging market for new technologies, such as continuous monitors and mobile monitoring technologies, which support companies to reduce emissions faster and more cheaply. Leveraging machine learning algorithms is another opportunity to fix leaks faster, as demonstrated by BP.
As investors continue to prioritize methane management in the future, companies who implement reduction measures early on have the potential to gain an edge over competitors, as the effort demonstrates to company stakeholders that management is working to improve operational efficiencies, reduce the loss of wasted product, and make strategic change in their business to better compete in an emerging low-carbon energy economy.
Sean Wright is Senior Manager at Environmental Defense Fund