The Fuse

U.S. Set to Tighten Methane Rules as International Pressure Grows

by Nick Cunningham | January 29, 2021

The oil industry is now supporting U.S. federal methane regulations, after having opposed them in the past.

Methane is a powerful greenhouse gas, and emissions have climbed over the past two decades as oil and gas production continued to rise. Now, global efforts to rein in methane pollution are receiving increased attention as the climate crisis worsens.

Global call for methane reduction
The oil and gas sector emitted around 70 Mt of methane into the atmosphere in 2020, which is roughly equivalent to the entire energy-related CO2 emissions from the entire European Union. Emissions were actually down sharply in 2020 due to the pandemic-related decline in drilling activity.

The International Energy Agency said that methane emissions need to fall by 70% by 2030.

In a recently published report, the International Energy Agency said that methane emissions need to fall by 70 percent by 2030, a level that it says is technically possible. “Reducing methane emissions from oil and gas operations is among the most cost effective and impactful actions that governments can take to achieve global climate goals,” the IEA said. Much of those reductions can be achieved at no cost because the captured gas can be sold.

On his first day in office, President Joe Biden signed an executive order to revisit methane regulations, which had been rolled back during the Trump administration. Several oil majors including ExxonMobil, Royal Dutch Shell, and BP advised the Trump administration not to roll back methane, although the American Petroleum Institute (API) favored the deregulatory effort. For years the industry argued that voluntary measures were sufficient and that regulation would negatively impact drilling.

API has since switched its position, favoring new methane regulations. On January 28, ExxonMobil publicly reiterated its position in favor of such limits. The oil industry seemingly recognizes that cleaning up methane emissions might be necessary to head off more blowback from investors and policymakers. Morgan Stanley wrote in a note to clients on January 28 that federal regulation is “constructive” for the industry because it is necessary for their “social license to operate.”

The U.S. oil and gas industry has been tainted by rampant flaring and venting in places like the Bakken and the Permian.

The U.S. oil and gas industry has been tainted by rampant flaring and venting in places like the Bakken and the Permian. Late last year, Engie, a French utility backed out of an LNG deal with NextDecade Corp., which has plans to build an LNG export terminal on the Gulf Coast of Texas. The project was “not aligned with France’s environmental project and environmental vision,” a source told Reuters in October. More specifically, the blackeye of flaring and fugitive methane in the Permian resulted in the deal falling through.

A similar development occurred in January, when the Port of Cork in Ireland let a memorandum for understanding for U.S. LNG expire. At issue was the same export project by NextDecade Corp., and again, the issue was over the climate impact of the facility.

National and international efforts
The dust up presages a larger fight over carbon emissions from energy trade. According to ClearView Energy Partners, a DC-based consultancy, one big issue between the U.S. and the European Union that could unfold in the coming years is the possibility of a carbon border adjustment mechanism (CBAM).

The European Council endorsed such a move late last year, which, if enacted, would presumably slap a fee on American energy products. The logic is that while the EU is tightening its climate policy, the U.S. has gone in the other direction, rolling back regulations and efforts to cut emissions. The CBAM would prevent “leakage” of emissions – industries or economic activity relocating from the EU to the U.S. due to looser policies. The endorsement of a CBAM by Europe “reassures” its own industries and constituents that it won’t be unduly penalized and it also puts the U.S. “on notice” that it will hold counterparties accountable, ClearView Energy Partners wrote in a December report.

Against that backdrop, the Biden administration is looking to impose limits on methane from oil and gas operations. President Biden’s recent executive order suggests “Biden may want to equip his climate negotiators with demonstrations of newfound U.S. methane rectitude ahead of the G-7 Summit” scheduled for June in Cornwall, England, ClearView Energy Partners wrote in a January 20 note to clients. “A proposal to regulate existing sources by September could perform a similar function” ahead of the international climate summit in Glasgow, Scotland in November, the firm added.

The new policies from the Biden administration’s EPA and/or Bureau of Land Management will take time to formulate and put into practice, and also needs to withstand legal scrutiny. Last year, a federal judge shot down Obama-era methane rules on oil and gas operations (a decision that occurred separately from the Trump administration’s rollback).

But unlike in years past, the pressure to curtail methane is coming not just from environmental groups, but also from investors and shareholders. Reluctantly, the oil industry appears willing to sign on, although the devil will be in the details.