Engaging With Stakeholders to Reduce Methane Emissions From Oil and Gas Production

At PIMCO we endeavor to use our position as a global leader in fixed income investing to engage bond issuers on ESG (environmental, social, and governance) trends that are both material to our investments and supportive of sustainable economic growth. The release of methane (a powerful greenhouse gas with up to 83 times the global warming potential of carbon dioxide^Footnote[i]) from oil and gas operations is an example of a material concern that puts both invested capital as well as the climate at risk, making it a priority topic when engaging with energy sector issuers.

PIMCO energy and ESG analysts have expanded and deepened ongoing engagements with oil and gas companies on the need to reduce methane emissions. Additionally, we have engaged policymakers on the need for a practical regulatory environment to reduce oil and gas production’s impact on the climate while preserving the competitive position of producers.

This year, the Russia-Ukraine conflict has accelerated the conversation around the role of natural gas as a potentially more significant resource in the quest for energy security. As the EU and U.S. consider this question while trying to advance their climate ambitions, emissions from oil and gas production – including methane – will come under increased scrutiny.

Methane’s substantial impact on the climate warrants reduction efforts

In aggregate, the exploration, production, and transport of fossil fuels constitute the second-largest source of anthropogenic methane emissions after agriculture, significantly contributing to methane’s profile as the second-largest cause of global warming today, according to the International Energy Agency (IEA). The Intergovernmental Panel on Climate Change (IPCC) estimates that methane emissions from all sources account for nearly a third of global warming observed to date.

These are daunting figures, but recent studies^Footnote[ii] found that existing technologies across industries potentially could cut methane emissions in half by 2030, slowing global warming by 30% and avoiding a quarter of a degree Celsius increase by midcentury. In the context of a 2-degree upper boundary for overall increase (per the Paris Agreement), reducing methane emissions could buy significant time to stabilize the global climate given the current rate of warming.

However, despite efforts from leading members of industry, voluntary measures to curb methane emissions have proven inadequate, as have existing regulations. In the oil and gas industry, methane may be released into the atmosphere intentionally (e.g., via venting and flaring of wells) or unintentionally (via leaks) as part of the exploration, production, and transportation process. Methane emissions from U.S. oil and gas operations may be high enough to undermine most of the climate benefit of using natural gas instead of burning coal to generate electricity, according to a 2018 study published in Science.

Methane emissions management can support the competitive position of U.S. natural gas

Many oil and gas operators recognize that cost-effective technology can significantly limit methane emissions via such cost-effective measures as fixing leaks and replacing pumps. According to the IEA,^{Footnote[iii]} around 40% of total oil and gas methane emissions could be avoided at no net cost. In other words, marginal abatement cost curves indicate a short to medium payback period for investing in emissions-reducing technologies, as most seek to capture methane (which can be sold as natural gas) instead of letting it escape into the atmosphere. Reducing emissions could also enable operators to remain competitive against tightening regulatory regimes outside the U.S., especially the EU. In 2019, 15% of U.S. gas exports were destined for EU countries; this grew rapidly to over 70% in the first two months of 2022 (source: U.S. Energy Information Administration).

The natural gas industry faces particular pressure to act swiftly: It must reduce methane emissions in its value chain or potentially lose its status as a cleaner energy source than coal. If not curtailed, methane emissions could limit American companies’ access to global gas export markets and jeopardize the role of natural gas in a decarbonizing economy. As an example: In 2020, a major French utility cancelled a potential $7 billion dollar gas deal due to excessive methane emissions from U.S. suppliers’ value chains. The utility’s decision came soon after the European Commission announced^Footnote[iv] it would consider applying a methane performance standard for gas used or sold in the EU. However, in May 2022 the French utility reversed its implicit ban on importing U.S. shale gas by entering into a long-term agreement with U.S. exporters that aims to reduce emissions from the project by more than 90% through various measures. Ireland also recently canceled plans to build a natural gas import terminal, in part due to environmental concerns around U.S. shale gas.

Engaging with companies in an effort to mitigate risks and catalyze change

PIMCO has been engaging extensively with more than 50 U.S. energy companies on their approach to methane emissions abatement. We have recommended setting aggressive targets, documenting emissions abatement performance, measurement-based emissions reporting (including direct and indirect emissions along the value chain), and adopting industry-leading standards for disclosure. Nearly all companies acknowledged the importance and benefits of better methane management and are assessing next steps following our discussions.

We continue to explore how capital markets may influence emissions performance by considering the role that sustainability-linked bonds may play for the sector. We hope to see future issuance underpinned by ambitious and transformational targets. We will continue to offer recommendations and feedback, monitor progress, and engage accordingly.

Advocating for a level playing field

In nearly every discussion with oil and gas producers, we ask them to go above and beyond what is required under current U.S. regulation. And we also engage the regulators, who in 2021 reviewed methane rules for oil and gas producers. The U.S. Environmental Protection Agency’s (EPA’s) new proposal would extend methane emissions standards to over 90% of currently producing oil and gas well sites, and strengthen standards for new sites constructed after 2015. This rule may have significant climate benefits in addition to creating a more fair and transparent operating environment.

PIMCO has provided input to key policymakers and engaged with oil and gas producers in advance of the EPA’s proposal. As market participants, we offered policymakers our viewpoint on both climate impact and the importance of a level playing field for companies that are voluntarily leading on methane emissions abatement.

In addition to our own high-level recommendations for policymakers, we were able to elevate feedback from companies as to what would constitute practical regulation, such as flexible considerations around measurement and abatement technology. Our discussions culminated in PIMCO submitting a letter to the EPA in January 2022 endorsing robust regulatory support for methane emissions abatement.^Footnote[v]

Expanding our issuer engagement

We will continue to focus on methane emissions abatement in our issuer engagements. Given PIMCO’s prominence as an investor in sovereign debt, in 2022 we seek to deepen the dialogue with petro states and their national oil companies (NOCs), which have tended to be less receptive to investor engagement on emissions than their public company counterparts. We will also continue to engage international oil companies (IOCs) on driving down emissions for their assets, many of which are operated by NOCs.

Russia-Ukraine implications

For many IOCs, the rationale to divest from Russian oil and gas assets from a human rights perspective is clear. Prior to the Russian invasion of Ukraine, driving down Russian NOC carbon footprints was a strategic priority for some IOCs – and an issue we had raised in our IOC engagement efforts. While the trajectory of Russian oil and gas production remains unclear, it is likely that without the efforts of counterparties – including underwriters and buyers – any future Russian production may have minimal climate considerations. Further, as international oilfield services companies pull out of the region, well degradation could drive a rise in emissions.

We are left asking ourselves: Where can we best focus efforts to reduce methane emissions in light of the war? The answer could be seen in how U.S. production ramps up to meet demand in Europe and elsewhere, and whether producers cite “energy independence” as an excuse to cast aside climate commitments. We view this as a false dichotomy: Energy independence and emissions reductions are not a zero sum game, but may be accomplished simultaneously. From what we have observed, most U.S. producers are sticking with their climate commitments, and looking to reduce methane emissions significantly while projecting production growth. There is a growing consensus that responsible climate policies enable a long-term competitive advantage, as renewable and efficient technologies gain market share.

We look forward to continued dialogue with issuers and policymakers. At its best, engagement enhances investment insight, catalyzes positive change, and delivers on client expectations.

We believe the size of bond markets and recurring nature of debt issuance make fixed income investors a meaningful force in driving sustainable change. Visit PIMCO's ESG page to learn more about our ESG capabilities and investment approach, and subscribe to upcoming ESG content here.