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New methane rules could cut key risk for oil, gas sector amid energy transition


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New methane rules could cut key risk for oil, gas sector amid energy transition

SNL Image

Pumpjacks extract oil in the Permian Basin.
Source: Richard Eden/Moment via Getty images

As the oil and gas industry faces increased pressure to curb its climate impacts, the Biden administration is preparing to issue new methane emissions rules that some industry observers say could better position the sector in a decarbonizing world.

President Joe Biden has announced plans to curb methane emissions from the oil and gas industry, including under new regulations through the U.S. Environmental Protection Agency, in the coming years to help meet his climate goals. Methane is a greenhouse gas with a much higher atmospheric-warming potential than carbon dioxide, though it remains in the atmosphere for a significantly shorter period of time.

Reducing methane emissions from oil and gas operations would give the industry an opportunity to make gains in addressing climate change, according to Frank Maisano, a senior principal with the Policy Resolutions Group at the Bracewell LLP law and government relations firm, which has clients across the energy sector.

"I look at this rule as a good opportunity where there will be a first real chance for all stakeholders to engage in the type of discussion that can produce a meaningful solution [while] at the same time protect those jobs and those regional economies that are supported by oil and gas," Maisano said.

Rules' role

Methane restrictions have historically been a lightning rod for legal fights. But such standards will be an "inevitable part of the energy transition, and the oil and gas industry is really going to need to get on top of this," said Sasha Mackler, director of the Bipartisan Policy Center's Energy Project.

"Over time, this is going to be a cost of doing business here in the U.S.," Mackler said. "There's really no question that these regulations are coming and that they're needed, and so we may see some consternation and some shuffling amongst the players in the industry, but I really do think that it's unavoidable."

The oil and gas sector recognizes that curbing emissions is important to its social license to operate and that "addressing the narrative around methane is critical for our industry and our long-term viability moving forward," Anne Bradbury, CEO of the American Exploration and Production Council, said. "From that perspective, if methane regulation moves us in that direction to improve our social license to operate ... then that's something that will benefit the industry as a whole," Bradbury said.

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The Obama and Trump administrations issued, repealed and rewrote methane emissions rules for the sector, fighting through multiple industry and environmental court challenges along the way. Now, as the U.S. works to hit emissions-reduction commitment under the Paris climate accord, methane is one area where the nation can make significant progress with near-term impacts.

In January, the president directed the EPA to publish a proposed rule suspending, revising or rescinding the Trump-era methane rule rollback by September. The Trump administration rescinded the Obama-era EPA methane regulations in 2020, scrapping requirements for companies to monitor their upstream and midstream facilities for methane leaks.

Given methane's high potency, significant near-term emission reductions could pay dividends in the climate fight in the coming years. The oil and gas industry has implemented various voluntary initiatives aimed at reducing methane emissions in recent years and been increasingly supportive of federal methane regulations.

Methane emissions from U.S. oil and gas systems actually increased from 2018 to 2019 but were still down considerably from nearly 30 years ago, dropping about 20% for petroleum systems and 15.7% for natural gas systems over roughly three decades, according to the latest federal data.

In the production segment specifically, methane releases increased for both gas and petroleum systems, rising about 3.2% and 5%, respectively, from 2018 to 2019, according to the EPA's inventory. Natural gas systems' transmission and storage segments also saw a 6.3% uptick in methane emissions year over year.

New regulations may not actually have much of an impact on the bulk of oil and gas companies since many of them, particularly the larger entities, already adjusted their operations to comply with the Obama-era standards, according to Pavel Molchanov, an energy analyst at Raymond James.

Molchanov said he does not expect the Biden administration's regulations to be "vastly different" than the Obama-era parameters, which many companies have already met. Investor influence has also played a significant role.

"Government policy is one thing to consider, but even when there was no regulation or mild regulation, pressure from shareholders can be much more powerful for publicly traded companies," Molchanov said.

The American Petroleum Institute has committed to working with the Biden administration on rules to address methane emissions from both new and existing sources.

The strength and ultimate scope of the Biden administration's rules governing methane could have a significant impact on the volume of methane released. If Obama-era new source performance standards were brought back into effect and extended to existing methane sources in the industry, that would reduce emissions 22%, according to the Clean Air Task Force. Stricter rules that take advantage of existing technology and established precedents could curb methane emissions by 65%, according to the group.

Industry priorities

Overall, the industry is less concerned that the Biden administration might institute stricter methane regulations than the Obama administration and more focused on improving the Obama-era rules, according to American Exploration and Production Council's Bradbury. The trade group sees an opportunity for the EPA to draft regulations that could better reduce emissions in a way that builds on the industry's efforts, Bradbury said.

Some industry representatives are hoping the Biden administration will finalize EPA regulations that offer the industry flexibility on the technologies needed to monitor methane emissions and exempt low-producing wells from some requirements. The Obama-era rules had required the industry to use less-effective and more expensive technology to monitor for methane leaks, according to Lee Fuller, executive vice president of the Independent Petroleum Association of America. His members want the EPA to allow companies to use methane-specific sensor technologies that can find emission hot spots faster and more cheaply than optical sensors used under prior rules.

"It's not whether you regulate, but when you regulate you target those regulations appropriately," Fuller said.

The industry has for years expressed concern that regulations might disproportionally affect low-producing oil and gas wells. Should the EPA institute leak detection standards across the entire industry, such requirements could make lower-producing wells uneconomic and force companies to close down operations, said Kathleen Sgamma, president of the Western Energy Alliance. The federal agency could implement a regulation on existing methane sources that offered an "off-ramp" for low-producing and low-emitting wells, exempting them from such leak detection standards, she said.

"It would be helpful if regulators would understand that the best way to regulate is to set a standard and then let industry innovate," Sgamma said.