Methane, the main component of natural gas, is a potent greenhouse gas with a global warming potential over 25 times greater than carbon dioxide over 100 years. This makes reducing methane emissions a cost-effective way to slow down global warming.   

The United States Environmental Protection Agency (EPA) has introduced new regulations on methane emissions, effective May 7th, 2024. These regulations, stemming from the Inflation Reduction Act (IRA), mandate stricter controls on methane leaks from oil and gas (O&G) infrastructure. The rules require timely leak repairs, advanced monitoring technologies, and introduce a methane tax.

The EPA projects a reduction of 58 million tons of methane, or 1.6 billion tons of CO2 equivalent, between 2024 and 2038. The new EPA regulations aim to address this by enforcing stricter controls and incentivizing reductions. This report analyzes these regulations, examines the operational and financial impacts on the O&G industry, and discusses the broader political and global context.

Analysis of New EPA Regulations

The IRA aims to achieve its  goals through a set of tax incentives and direct subsidies. Focusing on methane specifically, the IRA has three major goals. Firstly, to deploy methane reduction technologies. So far, the IRA has authorized over $1 billion in funding to support the deployment of methane reduction technologies across O&G facilities. Secondly, to reduce methane emissions, particularly by mitigating methane leaks. Thirdly, to improve monitoring. Multiple independent NGO watchdog sources, including EDF and CATF, have analyzed that thus far there has been a massive underestimation of methane emissions in the O&G industry due to gaps in monitoring methods and standardization.

Key Provisions of the New Regulations

• Leak Repair Mandates The new regulations require oil and gas companies to repair leaks within 15-30 days of detection. This necessitates the adoption of more efficient and reliable leak detection and repair (LDAR) technologies.

• Site-Specific Monitoring The EPA has shifted from using emissions factors to site-specific monitoring for more accurate methane measurements. This approach addresses previous underestimations of methane emissions, ensuring more precise reporting.

• Third-Party Reporting The introduction of third-party reporting allows for external parties to report "super-emitter" events. 

• Methane Tax The reporting program initiates a methane tax, starting at $900 per ton of released methane and rising to $1,500 per ton by 2026. The tax applies to O&G facilities emitting over 25,000 metric tons of CO2 equivalent per year. This pioneering climate regulation incentivizes significant upgrades and modifications to existing O&G infrastructure.

Implications for the Oil and Gas Industry

Operational Impact Compliance with the new regulations will necessitate significant operational changes. The methane tax mandates that O&G operators either mitigate their methane emissions or incur charges for excess pollution. Additionally, Congress has instructed the EPA to update the industry's reporting requirements under the greenhouse gas reporting program to improve the accuracy of these calculations. Consequently, companies must now invest in advanced monitoring technologies and enhance their leak detection and repair protocols. These upgrades could be particularly costly and time-consuming, especially for smaller operators.

Strategic Adjustments and Opportunities The new regulations create opportunities for innovation in methane monitoring and abatement technologies. The customer base for methane emission information is expanding beyond watchdogs to include the emitters themselves and asset managers, as the substantial penalties for over-emitting constitute a considerable risk factor. 

These regulations also complement international efforts, aligning US policies with global standards and voluntary commitments such as the UN-backed Oil & Gas Methane Partnership 2.0 (OGMP 2.0). The European Commission has established industry methane measurement, reporting, and verification (MRV) rules, and plans to hold gas imports to methane intensity standards by 2027. China, Japan, and South Korea are considering similar measures. Over 130 companies have joined OGMP 2.0, and more than 50 companies pledged at COP28 to eliminate routine flaring by 2030.

Effective methane management has, therefore, increased domestic competitiveness in the global market. For instance, a major French utility withdrew from a $7 billion US liquid natural gas import deal due to concerns over emissions. As European and other international buyers increasingly differentiate between cleaner and dirtier gas sources, it becomes commercially advantageous for American industries to adopt the most effective methane and flaring standards, thereby ensuring the marketability and competitiveness of their products.

Other industries, such as landfills, wastewater, and cattle production, also contribute significantly to methane emissions. Enhanced monitoring technologies developed for the O&G industry could create a spillover effect, revealing previously underestimated emissions and driving broader environmental improvements.

Political Risks

1. Regulatory Trajectory and Political Context The Biden administration’s climate regulations are often weakened from their initial proposals due to political considerations and the upcoming election. However, the methane rule is an exception, having been strengthened between the proposal and final versions. This likely reflects the relatively low political cost of cutting methane emissions, supported by bipartisan consensus and backing from the private sector, including O&G companies.

2. Legal Challenges and Industry Response The new EPA regulations are facing legal challenges from over 20 Republican-led states. Interestingly, major O&G companies have not joined these lawsuits, possibly due to their commitments to international standards like OGMP 2.0 or a strategic acceptance of the regulatory shift. However, since there is a disparity in cost-effectiveness between large and small operators, with smaller facilities facing higher per-unit costs for monitoring and modifications, states with many small operators, such as Texas, are more likely to challenge the regulations in court.

3. Potential Price Shocks of Oil The industry warns that these costs could significantly drive up consumer prices. One estimate shows that O&G producers face $400 million in taxes based on their own reporting data, but recent satellite monitoring data suggests this could rise to $4.8 billion. However, the IEA refutes the industry's claim, suggesting that up to 60% of methane emissions reductions can be implemented without net cost. While this cost is unevenly distributed between large and small operators, it is not expected to significantly impact oil or natural gas prices beyond their usual fluctuations.

Source: IEA

Stakeholder Analysis

1. Corporate Executives Prior to the new regulations, there was a significant disparity in methane emissions practices among companies. A recent report revealed a nearly 32-fold difference in emissions between the highest and lowest quartiles of natural gas producers, indicating a substantial knowledge gap between laggers and frontrunners in the industry.

With the new regulations, corporate executives must acknowledge that inaction is no longer an option. They need to navigate compliance complexities while maintaining profitability, which includes investing in advanced monitoring technologies and adapting operational practices to meet stringent standards. Proactive measures are essential, as the costs of non-compliance are high, both financially and reputationally.

New technology options make monitoring cheaper and more accurate, with flares being monitored in near real-time. With the robust data, the regulator will effectively punish violators while pushing companies to retrofit their facilities. Executives should ensure their companies are compliant and leaders in adopting best practices for methane management, turning regulatory challenges into opportunities for innovation and competitive advantage.

1. Investors Investors face new risks and opportunities under the new EPA regulations. Companies that comply may benefit from enhanced reputations and potentially higher valuations, while non-compliant firms could see their stocks suffer due to penalties and increased scrutiny.

Moreover, rapidly advancing monitoring technologies are set to deliver unprecedented transparency and accountability on financed emissions, increasing reputational risks. Even during the climate-hostile Trump administration, firms supporting federal methane regulation managed assets exceeding $5 trillion. This number is expected to rise under Biden, as the world's largest asset managers face increasing scrutiny on how they leverage their votes, voices, and investments to accelerate climate action.

Conclusion

The new EPA methane regulations represent a significant advancement in US climate policy. These regulations are part of President Biden’s signature policy, the Build Back Better Plan, now known as the Inflation Reduction Act (IRA). However, like its evolving name, the IRA and related climate regulations have often lacked the consistency needed to fully achieve their political or climate goals. Combined with the rise of populism domestically and internationally, the limited climate progress under the Biden administration risks significant backlash in upcoming election cycles. Nevertheless, the push for enhanced methane emissions monitoring and data scrutiny has laid the groundwork for broader public awareness and oversight. Corporate and financial stakeholders must recognize this momentum and act proactively rather than remain passive.