Executive summary Tackling methane emissions from oil and gas operations is one of the most important measures to limit near-term global warming. In the IEA’s Net Zero Emissions by 2050 (NZE) Scenario, energy-related methane emissions fall by around 75% to 2030 – two-thirds of which comes from reducing emissions from oil and gas operations – and this contributes more than 15% of total energy-related greenhouse gas (GHG) emissions reductions to 2030. Just over USD 75 billion in cumulative spending is required to 2030 to achieve these reductions in emissions. The required spending varies widely by geography, operator, and part of the value chain: around USD 55 billion is needed in upstream oil and gas facilities and just over USD 20 billion in downstream operations. Methane abatement in the oil and gas industry is one of the cheapest options to reduce GHG emissions anywhere in the economy. Abatement measures would generate revenues of around USD 45 billion from the sale of captured methane. This means the average cost of methane reductions to 2030 is less than USD 5/tonne CO2-equivalent. Even if there was no value to the captured gas, almost all available abatement measures would be cost effective in the presence of an emissions price of about USD 20/tonne CO2-equivalent. Oil and gas companies carry primary responsibility for abatement. The spending required to cut methane emissions in the NZE Scenario is less than 2% of the net income received by the industry in 2022. Private sources of finance can provide capital where internal financing options are limited. Regulations and policies on methane abatement are essential to drive down methane emissions. These can be paired with public financing, either directly from governments or through multilateral development banks, to help catalyse private investments and fill gaps where private sources of finance may not be willing or able to invest at the levels needed.

Introduction Methane is responsible for around 30% of the rise in global temperatures since the Industrial Revolution, and rapid and sustained reduction in methane emissions are key to limiting near-term global warming. The energy sector accounts for nearly 40% of total methane emissions from human activity, and it has the largest potential for abatement in the near-term. Oil and gas operations are responsible for 80 million tonnes (Mt) of methane emissions and tackling these is one of the most important measures to limit near-term global warming.

The IEA’s Net Zero Emissions by 2050 (NZE) Scenario maps out a complete and rapid transformation of the energy sector to achieve net zero energy-related CO2 emissions by 2050. The scenario also encompasses rapid reductions in energy-related methane emissions, consistent with the overall goal of limiting the temperature increase to 1.5 °C. Energy-related methane emissions fall by nearly 100 Mt or 3 billion tonnes CO2-equivalent (Gt CO2-eq) to 2030 in the NZE Scenario, two-thirds of which comes from reducing oil and gas methane emissions. 1 The total reduction in methane emissions accounts for more than 15% of all energy-related GHG emissions reductions in the NZE Scenario to 2030.

Abatement opportunities and spending needs A 75% reduction in oil and gas methane emissions is achieved by 2030 in our NZE Scenario In the IEA’s Net Zero Emissions by 2050 (NZE) Scenario methane emissions from oil and gas operations fall from 80 Mt in 2022 to 17 Mt in 2030. This results mostly from the rapid deployment of emission-reduction measures and technologies, including a stop to all non-emergency flaring and venting and universal adoption of regular leak detection and repair (LDAR) programmes. By 2030, all oil and gas producers in the NZE Scenario have an emissions intensity similar to the world’s best operators today.

The NZE Scenario sees a major ramp up in clean energy investment which results in a near-25% decline in oil and gas demand between 2022 and 2030. This results in around one-quarter (17 Mt) of the overall decline in oil and gas methane emissions to 2030.

About USD 4 billion is needed to address methane emissions from the oil and gas owned by the Majors (including production from both operated and non-operated assets), 4 of which USD 2 billion is needed in low- and middle-income countries. These companies are well placed to accelerate methane cuts in low- and lowermiddle income countries where regulations often take longer to be established and enforced. They can also help bring methane abatement technologies to these countries and spread best practices. Another USD 37 billion spending is needed to address emissions from independent operators.5 These emissions are heavily concentrated in the United States, where USD 22 billion spending is needed to 2030 in the NZE Scenario. More than 40% of the emissions reductions to 2030 come from measures with no net cost (assuming an 8% rate of return over the lifetime of the measure). 6 This is because the capital and operating costs of the abatement measures are less than the market value of the additional gas that is captured and can be sold. They include solutions such as replacing pneumatics and pumps, installing recovery systems, or implementing LDAR programmes across upstream operations. These no-net-cost measures have lower spending requirements: they provide 40% of the emissions reductions to 2030 with just over 10% of the total spending over this period. They also result in USD 25 billion of revenue in the NZE Scenario to 2030 from the gas that is captured and can be sold.

Some of the largest opportunities to deploy abatement options with no net cost are in middle income countries, especially in Eurasia, the Middle East and the Asia Pacific region. These are often associated with countries that have high levels of emissions, flaring, and satellite-detected large leaks. For example, around 1.4 Mt of methane could be reduced in 2030 in Turkmenistan with measures with no net cost; in Iraq, which flared nearly 18 billion cubic metres of natural gas in 2022 resulting in a large level of methane emissions, emissions in 2030 could be cut by more than 0.6 Mt at no net cost.

Given the overall cost-effectiveness of methane abatement, the oil and gas industry should be in a position to finance many abatement measures from its own cashflows, especially if environmental and reputational issues are given due weight in producers’ capital allocation. Nonetheless, new sources of finance will likely be required to mobilise all of the investment needed in the NZE Scenario.

It will be most challenging to finance methane abatement in low- and middle-income countries, especially those without strong methane reduction policies and regulations, at facilities owned and operated by NOCs and smaller independent companies, and for measures that do not generate meaningful return over their lifetimes. In such a context, we estimate that new sources of finance could be required to mobilise around USD 15-20 billion of spending to drive methane reductions at the pace and scale seen in the NZE Scenario. This estimate does not include spending required for abatement measures in Russia and Iran. Our estimates of emissions and costs do not include abandoned and orphaned oil and gas wells. These could represent a significant source of emissions but data outside the United States and Canada is too sparse to make a reliable estimate. Within the United States, the Environmental Protection Agency indicates they are responsible for close to 5% of US methane emissions linked to the energy sector.

Oil and gas companies carry primary responsibility for abatement The profits from oil and gas sales generated by the industry could be reinvested to finance methane abatement. Globally, oil and gas companies earned record profits in 2022 and the industry’s net income doubled to nearly 4 trillion USD. Just 2% of this would be sufficient to provide all the spending in methane emissions reduction measures across the supply chain in the NZE Scenario through to 2030.

Investing in methane abatement can require significant upfront capital expenditure, and this often faces competition within companies for how to use available funds. If methane abatement projects have long pay-back options or low internal rates of return, they may lose out to other investments deemed more important to the company’s core business. NOCs face additional constraints given competing priorities for domestic spending, especially in low- and middle-income countries, potentially limiting the amounts available to invest. Companies need to adopt a more proactive corporate policy to increase investment in methane abatement. If the industry does not significantly reduce its methane emissions, oil and gas would need to be phased out much faster than in the NZE Scenario to limit the temperature rise to 1.5 °C. Many companies have set targets to reduce GHG emissions from their own operations and tackling methane emissions is the single most important measure to achieve these.

Case studies There have been several notable efforts in the past to finance methane abatement. Here we examine a selection of examples to draw out lessons that can help inform future financing efforts. This is not intended to be exhaustive, but rather focuses on examples where innovative financing mechanisms have helped to raise funds for mitigation projects, either in the oil and gas sector, or in areas that could hold lessons for oil and gas methane mitigation. International emissions pricing schemes The World Bank’s Pilot Auction Facility for Methane and Climate Change Mitigation (PAF) was a “pay-for-performance” mechanism that disbursed investment based on the delivery of pre-determined and independently verified results. The PAF used funds from both private and public sources and was backed by several donors, including Germany, Sweden, Switzerland, and the United States. It was not used for oil and gas methane but helped support projects to reduce methane from landfills, animal waste, and wastewater sites. The PAF used competitive auctions where companies bid on the right to sell future emissions credits at a price established through the auction. Project developers were then secured a minimum price guarantee for the credits they gained from methane abatement projects. Investors received payment only after achieving independently verified methane emissions reductions. However, the mechanism also allowed investors to sell their bonds to other companies if they could not deliver the required emission reductions, de-risking the investment.

Technical annex Our estimates of methane emissions from oil and gas operations rely on generating country-specific and production type-specific emission intensities that are applied to production and consumption data on a country-by-country basis. More information about the approach taken is available in the IEA’s Global Methane Tracker Documentation. Emissions from onshore, offshore, unconventional oil and gas production, and downstream operations are allocated to 91 equipment-specific sources. This is generally based on proportions from the United States, with modifications made for countries where other information is available, including discussions with relevant stakeholders. Abatement costs for methane emissions from oil and gas production are also based on the IEA’s Global Methane Tracker. Our approach looks to reconcile all available information in a consistent manner, recognising that there is relatively limited publicly available data on methane mitigation costs globally.

A total of 45 options are available to reduce methane emissions, each with an applicability and reduction potential, capital and operational costs, and technical lifetime. Costs are based upon information for the United States modified according to labour costs within each country, whether the equipment is imported or manufactured domestically (which impacts the capital costs and whether import taxes are levied), and other country-specific or region-specific information. Emission levels in the NZE Scenario take into account changes over time in oil and gas supply in each country, with abatement measures deployed gradually over time until the current technical abatement is achieved in full by 2030. All non-emergency flaring is eliminated by 2030 in the NZE Scenario, reducing methane emissions due to the incomplete combustion of natural gas in flares. Natural gas is a valuable product and methane recovered through some measures can be sold. These measures can therefore result in overall savings if the value of the methane sold is greater than the cost of deploying the measure. The value of the methane captured is based on well-head prices consistent with the gas price trajectory of the NZE Scenario in each country. Costs and savings examine methane abatement from a global, societal perspective meaning that well-head gas prices can be substantially different from subsidised domestic gas prices. No external emissions prices are included in the estimates of costs and savings. A rate of 8% is used to discount costs and savings over the lifetime of each abatement measure when calculating net present values.

Source:http://IEA