US reverses course on methane emissions from oil and gas [Gas in Transition]
The US is changing course on regulating methane emissions generated by the oil and gas industry. This is part of a broader pivot on environmental issues under US President Joe Biden, who took office in January.
The country is currently in the process of reinstating oil and gas industry regulations that were brought in during former US President Barack Obama’s term in office but rolled back by his successor, Donald Trump. Indeed, the Trump administration dismantled over 100 regulations related to climate change, seeing them as a hindrance to the growth of oil and gas and other industries. Now, the new administration is bringing previous rules back. And given Biden’s recent adoption of a new target to reduce US greenhouse gas (GHG) emissions by 50-52% by 2030, further and stricter regulations are likely to follow.
In late April the Senate – the upper house of US Congress – passed a bill to reinstate the 2012 and 2016 Oil and Natural Gas New Source Performance Standards set by the Obama administration, which govern oil and gas production and processing. Democratic Senate Majority Leader Chuck Schumer described the 52-42 vote as the “first of many important steps” the Senate would take in pursuit of Biden's climate goals.
The measure still needs to be passed by the House of Representatives before being signed into law by Biden, but this is expected to happen, marking another step forward for the administration’s climate change agenda. It also appears to be a sign of things to come for the country’s oil and gas industry.
“The industry should definitely be ready for more stringent methane regulations,” Wood Mackenzie’s Americas vice chair, Ed Crooks, tells NGW. “On his first day in office, President Joe Biden promised to bring forward ‘new regulations to establish comprehensive standards of performance and emission guidelines for methane and volatile organic compound emissions from existing operations in the oil and gas sector, including the exploration and production, transmission, processing, and storage segments’, by September 2021.”
The rules in the process of being reinstated now target methane leakage from oil and gas infrastructure, such as wells and pipelines, in particular. Anna Mikulska, a non-resident fellow in energy studies for the Center for Energy Studies at Rice University's Baker Institute for Public Policy, tells NGW that such methane leaks are the “low-hanging fruit” within the bigger picture of GHG emissions reduction efforts. This is in comparison with carbon dioxide (CO2) emissions, for example, tackling which will require considerably more investment and technological solutions such as carbon capture and storage (CCS).
Nonetheless, addressing fugitive methane emissions will be a step forward – and one that will be welcomed by investors that are increasingly concerned about oil and gas companies’ environmental credentials.
“The largest US gas producers are under pressure from investors and increasingly from customers to curb their methane leakage, and many have made commitments to reduce their emissions,” says Crooks. “New regulations may mean little or no additional burden of compliance on top of costs they would have incurred anyway, and will help level the playing field in competition against smaller operators that are less likely to have made those commitments.”
Given the growing number of oil and gas companies setting new emissions goals, the return of Obama-era regulations is expected to be supported by at least some industry players. This is nothing new, though, and was already evident during Obama’s time in office.
“Large producers including ExxonMobil and Royal Dutch Shell supported the Obama-era rules, and thought the move towards deregulation under the Trump administration was a step in the wrong direction,” said Crooks. “However, groups such as the Independent Petroleum Association of America, representing smaller producers, had opposed the Obama administration’s rules, particularly the 2016 changes which added new source performance standards for methane.”
This was echoed by Mikulska, who says that larger players have the funding and economies of scale to address methane leakage with relative ease, while smaller players struggled with this and were therefore more likely to oppose additional regulatory burdens. And with the shale industry initially dominated by smaller independent producers, it is not surprising that such players lobbied against Obama’s regulations.
Now, though, the composition of the shale industry has changed compared with its early days.
“What you've seen in recent years, particularly 2020 and 2021, also within the US shale patch – you've seen a huge amount of consolidation,” Mikulska says. “So those companies that had already been hurting, that could not afford any type of methane leakage monitoring or prevention, they are probably gone at this time. They've probably been absorbed by larger companies.”
Mikulska added that mergers and acquisitions can help to free up capital as companies achieve cost savings and synergies while minimising inefficiencies.
“Fewer people are now working and the companies are more efficient. It frees up capital for efforts like decarbonisation,” she says.
In line with these trends, various large producers have already voiced their support for a return to methane regulation for the industry. Crooks cited the example of EQT, the largest gas producer in the US, which issued a statement backing a return to the Obama-era rules last month. The company said it was committed to working with governments and regulators, among others, “to establish sound environmental policies that promote increased access to clean and affordable energy sources”.
This illustrates a desire among the industry to participate in the development of regulations rather than being excluded from the process because a given company opposes the measures being brought in.
“That's probably what we're seeing, for the industry, that it's better to be in the room than outside it,” Mikulska says.
As well as EQT, Occidental Petroleum has been prominent in its recent support of a return to methane regulation.
“We need to have regulations in place to ensure that we have adequate controls throughout the industry,” Occidental’s president and CEO, Vicki Hollub, told the Senate Committee on Energy and Natural Resources during a hearing in late April. She told the committee that Occidental supported the direct regulation of methane.
As well as individual companies, industry organisations are also starting to embrace methane regulation.
“Significantly, the American Petroleum Institute [API], the most influential industry group, has said it ‘supports cost-effective policies and direct regulation that achieve methane emission reductions from new and existing sources across the supply chain’,” said Crooks.
It is worth noting that France’s Total withdrew from the API at the start of 2021, having found that the group’s climate positions were only “partially aligned” with its own. Then, in early May, BP announced that it had decided to remain a member of the API after the group had made certain policy shifts, including choosing to support the federal regulation of methane emissions.
Despite this, industry support for the return of methane emissions regulations will not be universal, with Crooks saying he expected the industry to be divided again, “as it was over the Trump administration’s deregulation strategy, with support for new regulations from larger producers but opposition from some smaller companies and their representatives”. Nonetheless, industry consolidation is ongoing, investor pressure on producers over environmental targets is rising and a growing number of companies supports the new rules. Given all of this, even with some resistance from pockets of the industry, there is ever-growing momentum behind the new regulations.