What Climate Week’s principles of responsible investing means for decarbonising the global natural gas supply chain

A thought-piece by Capterio | 727 words | Reading time: 2 minutes 54 seconds.

This week in New York has been Climate Week. Among the announcements and policy initiatives, one of the most interesting moves has been the banking community’s “Principles for Responsible Banking”. This could be game-changing for the oil and gas industry.

These principles “help any bank… to align its business strategy with society’s goals [including the UN’s] Sustainable Development Goals and the Paris Climate Agreement.” With the energy transition underway, starving the oil and gas industry of capital could have major ramifications.  Players that cannot demonstrate that they are decarbonising their portfolios will see their financing options shrinking, and this will raise their cost of capital and negatively impact shareholder returns.

According to the Energy Transitions Commission (ETC), oil and natural gas will continue to play a significant role for the next 2-3 decades.  Whist natural gas will peak later than oil it is still likely to provide material volumes in 2050 (Shell’s Sky scenario puts consumption at 115 Exajoules (EJ, vs 136 today) and the ETC ranges between 77 and 118 EJ).

Yet some of the largest oil-producing nations have a clear, investable route to accelerate decarbonisation and create value. This route can also improve (or at least sustain) their attractiveness as investors set higher benchmarks on sustainability and societal goals. 

It’s around minimising wasted natural gas in the oil and gas supply chain.

Our research, supported by data from the World Bank and the IEA, has highlighted that globally 257 BCM of natural gas is wasted per year through flaring, venting and leaking. This equates to $39 billion dollars’ worth: some 15% of global gas production.  Whilst, the industry has talked about this gas wastage for over a decade, the figures, however, continue to head in the wrong direction.

The claim that gas is a low carbon fossil fuel is supportable when end-use emissions are accounted for – some 7 billion tonnes of CO2 per year. However, when wasted natural gas is added factored in (noting that some of it is in the form of CO2 and some in the more environmentally potent form of CH4), an additional 7 billion tonnes of CO2-equivalent emissions per year result, which doubles the carbon intensity of the natural gas industry.  This reduces the greenhouse gas (GHG) advantage of gas over coal to be questionable at best.  No wonder a leading oil and gas company acknowledged publicly, a year ago, that “gas may not even be a transition fuel, let alone a destination fuel, unless the problem of methane [wasted gas] is solved”.

Yet fixing this waste is technically possible and, as the IEA indicates, largely feasible at zero (or less) net cost. At Climate Week, the CEO of a leading oil and gas company described flaring as one of the sector’s biggest issues: “It’s a waste and bad for the industry’s reputation… [and] we can do something about it”.

To reduce the flaring of natural gas, our research suggests that, as an industry, we need to:

1. Improve transparency and awareness of the issues around flaring, venting and leaking gas;
2. Improve the commercial incentive for change – addressing questions around pricing, fiscal terms, and technology at the right price point;
3. Bring new approaches, especially in challenging countries, bringing in new players, new business and operating models, new technologies and new sources of funding.

By embracing the challenge of flaring, venting and leaking – and by investing in the available solutions – the industry has a measurable opportunity to accelerate the energy transition, create value and drive economic growth. Most importantly, the industry can materially decarbonise its portfolio and its customers’ supply chains.

This ‘triple win’  –  for asset owners, for governments and society, and for the planet – is compelling, and would be a major step towards industry decarbonisation and the commensurate improvement in the environment and animal and human health. A purist might suggest that these interventions are not progressive enough (after all, they relate to the fossil fuel industry).  But we take perhaps a pragmatic view, that it is a must-win battle, not least because it is of the most effective deployments of capital per unit of CO2-equivalent emissions abatement. 

And that’s what we call responsible investing.