The latest version of a proposed methane fee on the oil and gas sector did little to assuage industry groups that oppose the concept, but analysts said it could be a critical tool for curbing planet-warming emissions to meet midcentury climate targets.

A fee on methane emissions would be a milestone in U.S. climate policy after past efforts to put a federal price on carbon struggled to overcome steep political obstacles.

Proponents of the methane provisions, including the Environmental Defense Fund, have described the methane emissions fee as an important backstop to forthcoming regulations from the U.S. Environmental Protection Agency and U.S. Pipeline and Hazardous Materials Safety Administration to curb methane emissions.

The most recent text of a U.S. budget reconciliation package unveiled by the House Rules Committee on Oct. 28 left most major components of the methane fee intact, but it included revisions that appeared to make industry compliance easier than previous versions of the bill.

The methane fee program would still expand the number of companies required to report emissions data to federal regulators and potentially subject them to millions of dollars in annual fines, starting with emissions reported in 2023. But the methane fee that would be imposed on eligible oil and gas companies would start at a lower amount in the first year and ratchet up through 2025. The bill would also provide an additional $775 million in incentives that could be tapped by operators for investments in monitoring and mitigation. Operators would be exempt from paying the methane fee for "emissions caused by unreasonable delay in environmental permitting of gathering infrastructure."

It remained unclear if the methane fee will get through Congress, but it could offer U.S. President Joe Biden a boost headed into a critical United Nations conference on climate change in Glasgow, Scotland, which opened on Oct. 31. Biden announced a new pledge under the Paris Agreement in April for the U.S. to reduce economywide greenhouse gas emissions by 50% to 52% from 2005 levels by 2030. The White House recently announced that the U.S. will work with other nations participating in a voluntary Global Methane Pledge to cut global emissions of methane by at least 30% below 2020 levels by the end of the decade.

"Given that the White House plans to prioritize its Global Methane Pledge in Glasgow, we still would not rule out the methane fee — particularly after the excision of the Clean Electricity Payment Program," analysts at ClearView Energy Partners said in an Oct. 28 note to clients.

A methane fee could help avoid roughly 172 million tonnes of CO2 equivalent emissions by 2050, according to an analysis by Energy Innovation: Policy and Technology LLC, an organization focused on accelerating clean energy with policies that reduce greenhouse gas emissions. The analysis was released before the most recent tweaks to the legislation. Jeff Rissman, Energy Innovation's industry program director and head of modeling, said the organization was updating its modeling, but he expected top-line numbers would remain similar because the changes to the methane fee program were relatively minor.

"The conclusion of the memo remains unchanged: The methane fee is a straightforward policy with minor costs and major benefits for the U.S. economy, workers and the climate," Rissman said.

Main components of methane fee survive

The plan would build off the U.S. EPA's Greenhouse Gas Reporting Program, which requires about 8,000 large emissions sources to report their annual emissions. And the plan would still direct the EPA to lower within two years the emissions reporting threshold from 25,000 tonnes of CO2 equivalent per year to 10,000 tonnes per year.

The revised bill retained the standards for methane emissions intensity that oil and gas companies would need to hit to avoid penalties, apart from changes that would hold operators of underground storage facilities to the same emissions intensity standard as pipeline companies.

For oil and gas producers, the methane intensity threshold still would be 0.2%. For operators of onshore natural gas pipelines, onshore gas transmission compressors, and underground storage facilities, that threshold would be 0.11%. For other gas infrastructure to which the bill would apply, such as LNG terminals, LNG storage facilities, processing facilities and onshore gathering and boosting infrastructure, the intensity target would be 0.05%.

Under the latest version, the methane fee would ratchet up in phases, starting at $900 per tonne of methane for 2023 and rising to $1,200/tonne in 2024 before increasing to the full amount of $1,500/tonne.

Another revision would set a threshold on allowable methane leakage for producers that do not sell natural gas to market, such as those who routinely flare gas associated with oil production.

"The survival of the methane fee is a win on the surface for environmentalists, and something the Biden administration will be able to point to in COP26, though the tangible impact on producers will largely be negligible," said Parker Fawcett, S&P Global Platts Analytics analyst for North American supply. "At $900/[tonne] of methane, breakevens would increase on average less than $0.30/[barrel], though by 2023 a significant amount of eligible operators will have already significantly reduced their methane intensity below or closer to the 0.2% threshold."

Fawcett said the $775 million in funding that operators could access via grants, rebates, or loans "will also be a tangible step in helping the industry invest in methane reduction technology and monitoring equipment."

Industry opposition remains

Industry groups remained critical of the methane fee despite the revisions in favor of the oil and gas sector.

"It remains a tax on essential energy for American families already facing higher bills this winter," the American Gas Association, which represents investor-owned utilities, said in an Oct. 29 statement. It noted that the methane fee had not been included in an earlier framework.

Pipeline trade group Interstate Natural Gas Association of America said in an Oct. 28 statement that "this new tax on natural gas in the reconciliation bill will needlessly harm consumers without commensurate emissions reduction benefits. Industry continues to make great strides in reducing emissions, and INGAA members are committed to continuing that progress."

Several industry groups, including the American Petroleum Institute, or API, have emphasized the forthcoming agency regulations as a better alternative.

"We support the direct regulation of methane by the EPA as the most impactful way to build on the downward trend of methane emission rates in key producing regions rather than a duplicative and punitive natural gas tax that would only hurt American consumers and undermine the economic recovery," said Frank Macchiarola, API's senior vice president of policy, economics and regulatory affairs.

Energy Innovation had estimated that the methane fee would spur the U.S. oil and gas industry to spend some $90 billion on methane abatement measures from 2023 to 2050 and about $43 billion on methane fee payments. But the organization said that would amount to less than 1% of the industry's projected revenue over that period.

"The oil and gas industry could absorb these costs and remain profitable without increasing prices for consumers," Rissman said.

S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.