Demethanization: The New Viral Energy Transition Sensation

Decarbonization has become the catch-all term for climate action. But while carbon dioxide is the biggest contributor to global warming, the case for tough action against methane emissions, known as ‘demethanization’, is literally becoming clearer by the day. As satellites and detectors closer to ground train increasingly sophisticated sensors at sources of ‘the other greenhouse gas’, this is lifting the veil on emissions that have long proven more elusive than CO₂.

The U.S. and European Commission announced the Global Methane Pledge on September 18, which aims to cut global methane emissions by at least 30% from 2020 levels by 2030. While this might seem detrimental to natural gas suppliers, it could be an opportunity to enable growth by becoming part of an interim climate solution. BloombergNEF has explored the largest impacts of demethanization, the challenges ahead, and how concerted action by vested parties could be mutually beneficial.

Demethanization can enable gas operators to sell a differentiated product and capture market share. Almost 60% of global emissions are either on the way to being, or already legislatively covered by some form of net-zero emissions target. Many of these targets have been set by nations that import copious amounts of fossil fuels, especially liquefied natural gas (LNG). The role of natural gas in the energy transition is particularly uncertain, and sellers could market zero-methane emissions gas as a product that helps achieve climate goals, expanding their potential customer base and lengthening their product’s lifespan. They could also sell demethanized gas at a premium, which could improve their bottom line. Responsibly sourced gas could soon be headed to a burner tip near you.

The Global Methane Pledge provides a competitive advantage to the U.S. that may encourage other major gas exporters to sign on. The U.S. is the only pledge signatory that is a major gas exporter, which gives it an advantage over rivals like Russia and Qatar, especially when accessing the lucrative and liquid European gas market. Aligned thinking on emissions makes the EU more likely to deal with the U.S. on future gas import deals, providing an incentive for other exporters to get in on the fun.

The EU and U.S. are backing words with bold policy action, providing a blueprint to combat methane elsewhere. In October 2020, the EU released its methane roadmap, which includes establishing a global methane observatory and refers to emission intensities in regulating hydrocarbon imports. For its part, the Biden administration is reinstating provisions scrapped under Donald Trump, and considering measures such as a tax on methane released by fossil-fuel extractors. Rarely have federal U.S. and EU climate policy been so aligned.

The pledge is a change of tack from previous action taken by European governments. The collaborative approach contrasts governments shutting down LNG deals and banning import terminals in member states France and Ireland. While politicians have condemned hydraulic fracking and singled out U.S. imports as particularly concerning, this transatlantic initiative lessens the chances of further policy pushback against U.S. LNG. Sustained efforts to tackle upstream emissions could also impact other debates, including the degree to which ‘blue’ hydrogen, which is made using fossil fuels, is aligned with net zero ambitions.

Demethanization hinges on international collaboration and could buck the polarization afflicting climate action. A show of unity on an actionable area of climate policy stands out against tensions on carbon border tariffs, resentment over the $100 billion in climate aid promised to developing nations, and fears that the COP26 summit will be a damp squib. The EU’s methane strategy notably promotes cooperating with trade partners over leading with financial penalties.

Satellite technology can help provide macro-level accountability but, for now, not all geographies are equal. Accidents of geography and climate expose producers in basins like the Permian to greater satellite scrutiny. Methane releases in the U.S. are in the limelight as a result, and advances in sensor technology will be required before similarly granular satellite data is available for geographies like Russia. That may be fortunate, however, as regulating the patchwork of U.S. gas suppliers could prove a bigger challenge than dealing with the state-owned monopolies common elsewhere.

Detection technology is advancing rapidly, but politics will be just as important. Transparency on data is critical, and will help inform plans to establish a global consensus on tackling methane in the oil and gas sector. But satellite coverage is limited, and trade partners will have to help fill in the blanks. That will require targeted diplomacy, as over 90% of the EU’s natural gas imports in 2020 came from just six countries. The U.S. is one, but getting Algeria and Russia to improve reporting and set commitments will be tricky.

Winning over Asian demand centers will be crucial in the global battle against methane. The EU’s 2020 methane plan said as much in articulating vague plans to band together with East Asian gas importers. That makes sense: Japan, China and South Korea bought over half of the world’s LNG in 2019. Having them subscribe to the Global Methane Pledge would elevate it from landmark signpost to gamechanger.

About BloombergNEF

BloombergNEF (BNEF) is a strategic research provider covering global commodity markets and the disruptive technologies driving the transition to a low-carbon economy. Our expert coverage assesses pathways for the power, transport, industry, buildings and agriculture sectors to adapt to the energy transition. We help commodity trading, corporate strategy, finance and policy professionals navigate change and generate opportunities.
Sign up for our free monthly newsletter →

Want to learn how we help our clients put it all together? Contact us