The ESG perspective: The methane problem

There has been significant emphasis on methane by the EPA lately. Simultaneously, there are many groups filing applications asking for the Supreme Court to intervene and stop some of these new rules. This adds a new level of complexity to the issue of measuring, monitoring, quantifying and reporting of methane emissions. So, let’s talk about some of this complexity. 

Background to methane rules. But first, let’s back up a bit and describe some of these new regulations. The EPA issued a final rule in December 2023 to reduce methane emissions and other harmful air pollution from new and existing oil and gas operations. Additionally, the EPA is in the process of implementing requirements that were part of the Inflation Reduction Act’s Methane Emissions Reduction Program (MERP). These changes include updating reporting requirements under the Greenhouse Gas Reporting Program and implementing the Waste Emissions Charge program. Currently, this fee is $900/ton and will rise to $1500/ton by 2026, if finalized. These fees are for excess emissions over specific thresholds for specific activities. 

It’s not all stick and no carrot: the EPA is working with the U.S. Department of Energy to use provisions in the Inflation Reduction Act to provide over $1 billion dollars in financial and technical assistance to accelerate the transition to technologies that reduce methane emissions. 

This all requires some significant investment to create or supplement existing monitoring and measurement of methane. The leak detection methods that will help identify leaks and other unmonitored methane emissions may identify leaks but not measure or quantify the actual amount of methane, requiring another layer of quantification of methane from leaks or other unmonitored emissions. Of course, all this quantification will be required to accurately report emissions and determine if you exceed the threshold for the Waste Emissions Charge. 

Supreme Court challenges. With potential challenges being heard by the Supreme Court, do you make this investment, or do you delay and wait? The EPA’s track record with the Supreme Court has not been very good lately, but their missteps have been exceeding their jurisdiction. In the case of these new rules, they’ve gone through the legislative process and, personally, are less likely to be overturned, but let’s see. 

In any case, we have seen many of the oil and gas super majors preparing for these rules or, at least, increasing their efforts towards methane detection and monitoring. 

Responsibly Sourced Gas (RSG). A related topic here is RSG. Essentially, RSG requires you to monitor and quantify your methane emissions, and if those emissions are under an industry average, you can certify your gas as RSG. As a result of this, a number of certifying groups have emerged to provide third party certification; these companies include Project Canary, MiQ and others. These monitoring and reporting requirements are somewhat consistent with some of the new regulatory requirements. But also, a motivating factor is the potential to sell RSG for a premium—an idea that was influenced by Southwestern Energy, when in 2018, they entered into an agreement with a New Jersey utility to sell RSG for a premium over index prices. There appears to be a demand for RSG but a lack of supply, as the certification process is rather new and as oil and gas operators scramble to develop their methane measurement and reporting programs. Another consideration for RSG is that as more companies begin their monitoring and reporting, the industry average thresholds will continue to change, potentially requiring that this certification become ongoing. As methane mitigation programs reduce methane, the averages will drop, making it more difficult in time and requiring more mitigation to achieve the RSG certification. 

European Green Deal and REPowerEU. The first-ever EU rules to curb methane emissions from the oil and gas sector in Europe and across the globe have recently been enacted. This marks progress towards the implementation of the European Green Deal and REPowerEU.  

The new regulation obligates the gas, oil and coal industry in Europe to measure, monitor, report and verify their methane emissions, according to the highest monitoring standards, and to take action to reduce them. It also requires EU gas, oil and coal operators to stop avoidable and routine flaring and to reduce flaring. 

These requirements also apply to gas imports. The regulation will introduce more stringent requirements to ensure that importers gradually apply the same monitoring, reporting and verification obligations as EU operators. 

I mention these new EU requirements, as many U.S. operators are looking to the EU market to sell LNG as more and more LNG capacity comes online. And if they are going to participate, they will have to comply with similar standards being proposed or already enacted here in the U.S. 

So back to the potential Supreme Court challenges. With some companies considering pausing or delaying their Methane monitoring and reporting programs, it becomes clear why others have embraced Methane monitoring and reporting programs, as there are other incentives like RSG or selling LNG to the EU. 

But there remains the problem of converging and yet still different regulatory requirements. In other words, complying with RSG and getting certified can put you very close to complying with most of the new EPA requirements and EU requirements, but they aren’t 100% identical. Then there is the added complexity of potential Supreme Court challenges and how those challenges can affect the new regulations. A very dynamic problem indeed. 

What about CO₂ vs CO_2e? One of the concerns is what cost the industry will bear for these new programs and how will they affect natural gas prices. What will the premium be for RSG and is it sustainable? As more operators pursue this process, supply will increase, outpace demand and undermine the concept of receiving a premium. There are many questions, and I have a solution. 

Concerns over the cost of methane reduction are primary concerns for those opposed to these rules. However, we have an existing program that has been around since 2008 that I have discussed before, and that is the 45Q tax credit. Currently, the tax credit only applies to CO₂, but in provisions for Hydrogen, under the Inflation Reduction Act, are similar tax credits that apply to CO_2e. The difference is that CO₂ applies only to CO₂ and CO_2e applies to CO₂, methane and other greenhouse gases. With a little lobbying and some language changes, we can create a tax credit that applies to the reduction of methane and not just CO₂, which provides financial incentives to offset the cost of methane reduction and not impact the cost of natural gas. I understand concerns that tax credits will reduce government tax revenues, but we have already witnessed that tax breaks, when imposed, have not impacted the year after year growth in tax revenues, because the savings in taxes get reinvested and the economy grows. In the same way, the tax credit will spur investment in methane reduction, while not increasing the cost of methane. The investment in methane reduction will grow other industries revenues, which will offset the tax credit. A win-win. 

I continue to see a complicated path forward for methane reduction, but the abundance of related requirements leaves me feeling there is some certainty in the regulation of methane for many reasons, like certifying as RSG or selling LNG into the EU. Even so, financial incentives, like a tax credit, will be the missing element to get wider approval of these programs. 

About the Authors

Mark Patton

Hydrozonix

Mark Patton is president of Hydrozonix and has more than 30 years of experience developing water and waste treatment systems for the oil and gas industry. This includes design, permitting and operation of commercial and private treatment systems, both nationally and internationally. He has seven produced water patents and two patents pending. He earned his B.S. in chemical engineering from the University of Southern California (USC) in 1985.