How Deep Is Oil and Gas Industry Commitment To Cut Methane Leaks?

This piece was first published in Forbes on October 31, 2018. It is reprinted with their permission.

Social cost of carbon is one of the most challenging concepts to wrap one’s head around when talking about climate change. SCC, for short, is inherently nebulous, an effort to assign a current dollar value to the damage that a warming climate will bring to everything from coastal infrastructure to agricultural land and, ultimately, to human wellbeing. Most damages will occur well into the future, which makes their precise value impossible to pinpoint. And, while we know that there will be victims of climate change, we cannot know in many cases who or what they will be.

We do know the cause of future damage, however. In 2016, the Environmental Protection Agency published its most recent estimates of the value of damages linked the production and burning of fossil fuels. EPA provides a range of estimates, but middle-of-the-road figures peg the SCC of carbon dioxide emissions at $36 per ton. Each ton of the much more potent greenhouse gas methane, or natural gas, will drive $1000 in climate-related damages. The accepted value of the SCC has been a focus of attention by the Trump administration, which has sought to lower the value by altering the discount rate used in its calculation.

Most recently, the administration introduced new regulations that would ease the oil and gas industry’s responsibility for detecting and fixing methane leaks and overwrite Obama-era rules aimed at lowering methane emissions by 45%. In September, the Department of the Interior’s Bureau of Land Management finalized its rule, applicable to oil and gas activity on federal and tribal lands, while similarly loosened regulation from the EPA is nearing the end of its 60-day public comment period prior to implementation.

All of which brings the oil and gas industry to a certain moment of truth. Recently, the industry has repeatedly and publicly stated its intent to address the problem of methane leaks, which arise from wells, pipelines and processing plants. Methane is just a fraction of total greenhouse gasses, but accounts for 25% of climate warming. And the economic rationale for plugging leaks is clear. Escaped natural gas, enough to heat 10 million American homes, costs the US industry an estimated $2 billion in foregone sales each year.

In November 2017, eight oil and gas companies including ExxonMobil, Chevron, BP, Shell and Equinor, all members of the Climate and Clean Air Coalition, signed a pledge called Guiding Principles on Reducing Methane Emissions across the Natural Gas Value Chain. Within are stated commitments “to continually reduce methane emissions” and “advocate for sound policies and regulations on methane emissions.”

Many of these companies are also members of the Oil and Gas Climate Initiative, a consortium of energy producers that has pledged to reduce its methane intensity to a quarter of a percent of product volume by 2025, with the blessing of environmental groups including the Environmental Defense Fund.

And the industry has in fact made significant strides in reducing leaks. The American Petroleum Institute touts a 14% decrease in methane emissions since 1990 even as natural gas production has increased.

Yet in same press release the API, which counts as members many of the same companies that pledged to plug natural gas leaks, welcomed the Bureau of Land Management’s watered down methane rules.

API’s support for the new BLM regulation is at odds with some of its members’ publicly stated support for methane leak reduction and rules that would require it. As natural gas production is forecast to grow 45% in the largest US natural gas play, the Marcellus, the implications for climate change are stark (particularly given that methane emissions may be 60% greater than the EPA has estimated).

Will industry follow its word, as put forth in the various methane pledges? Its reputation as a cleaner energy source is also on the line.

“For natural gas to deliver immediate climate benefits relative to coal, leakage rate from value chain need to be 2.8% or less,” says Ben Ratner of the Environmental Defense Fund in Washington DC. “Scientific study shows it’s well over 2%.”

Which gets back to the fundamental question of whether the industry can police itself on the issue of methane leaks, and whether its own priorities align with those of society at large and current estimates of future climate damages – the social costs of carbon and methane.

Breaking down the earlier mentioned $1000 per ton social cost of methane to a number that’s familiar in industry and residential gas bills, each thousand cubic feet of leaked natural gas causes $27 of climate damage. Yet the value of the same volume of leaked gas to industry is, depending on current market prices, in the vicinity of $3. How to bridge the gap?

“You hear the line a lot that the financial incentive is there because it’s the product,” says Catherine Hausman, an expert on environmental and energy economics at the University of Michigan. “That’s partly true, but it’s only a very small part of the total costs that we need to think about. The industry’s incentives just aren’t fully there.”

“Econ 101 tells us that when that’s the case you need regulation,” says Hausman.

Such regulation isn’t likely in the near future. Industry’s performance in the coming years, as the Trump administration removes environmental protections, will tell if it is spinning its own economic interest – the limiting of product losses – to burnish its image, or if its climate commitment is something deeper.

Andy Stone

Energy Policy Now Host and Producer

Andy Stone is producer and host of Energy Policy Now, the Kleinman Center’s podcast series. He previously worked in business planning with PJM Interconnection and was a senior energy reporter at Forbes Magazine.