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Beware of the Optics

Clim8 Investment Team

02 November 2021 Cop26

At the Opening Ceremony on Monday, PM Johnson declared on stage “it’s one minute to midnight on that doomsday clock and we need to act now”. US President Joe Biden was apparently very eager to act, promoting an initiative that aims at reducing global methane emissions by 30% by 2030.

Methane emissions have multiple sources. According to the US EPA, 30% of methane emissions can be attributed to oil and natural gas value chains (the focus of this blog). Other large methane sources include enteric fermentation (27%, think of cattle digestive activity), landfills (17%) and coal mining (7% – all 2019 figures). 

The oil and gas industry is the largest source of methane emissions in the US. According to the IEA, world oil and gas methane emissions in 2020, if converted into CO2 equivalents (30x multiplier effect due to its heat absorption properties), would represent the total CO2 energy-related emissions of the EU. Unsurprisingly the top 2 methane emitters are also the largest oil and gas producers (US and Russia), followed by a surprising third, Turkmenistan (gas pipes must be leaking a lot!). Reaching net zero notably requires oil and gas methane emissions to drop by a factor of 4x by 2030 (from 2019 levels). Playing with the numbers, if oil and gas companies operating on US soil manage to cut methane emissions by a factor 4x by 2030, the rest of US methane emissions would only have to be reduced by 10%, placing the US in an advantaged position to reach the goals set in the initiative they promoted. 

The largest publicly-listed oil and gas companies that have formed the OGCI – Oil and Gas Climate Initiative – have already reduced their absolute methane emissions by 35% since 2017. Companies in the OGCI account for 30% of global oil and gas production and barring a few exceptions, are the ones under growing investors’ scrutiny. Technology already helped the most advanced oil and gas companies to get tangible results. Indeed, methane leak detection using satellites is no longer niche, and if applied at scale, this could critically enhance the fight against climate change. 

While there are tangible signs that the US Bipartisan Infrastructure Act and the Build Back Better Act, both of which contain provisions for the renewable energy transition, are gaining momentum in Congress (it will be the largest investment into the effort to fight climate change in U.S. history, totalling $555 billion), we should not forget that the U.S. government currently subsidises fossil fuel production to the tune of $20 billion a year in tax breaks, unclosed loopholes, and research grants (Source: Fact Sheet | Fossil Fuel Subsidies: A Closer Look at Tax Breaks and Societal Costs | White Papers | EESI). There has been some effort to combat this through the introduction of the End Polluter Welfare Act, however the bill has stalled in the House and is expected to meet fierce opposition in the Senate. 

Whether Biden succeeds with his methane pledge in the US may not be because of politics or policies, but we believe due to the oil and gas private sector responding to mounting investors’ pressures. 

Besides, Biden’s methane ambition hasn’t received the support of Russia, China, or India. This is not really surprising since Chinese President Xi Jinping and Russian President Vladimir Putin haven’t deemed it necessary to travel to Glasgow. And we can’t blame Indian PM Modi following his bold move announcing net zero emissions by 2070 on not focussing on methane just yet, reminding everyone that India is “17% of the world population but only 5% of the global GHG emissions”. 

Optics matter to politicians as they can transform quick and easy wins obtained on the international stage into large achievements at home. History has a name for this: a pyrrhic victory. 

For more announcements from November 2nd, take a look here