March 23, 2023
The Era of Underreporting is Over
What’s new in March — The government now has a financial incentive and the technological capability to make accurate methane emissions measurements.
A recent Stanford University study shows that methane emissions can be measured accurately across the planet using satellites. A prior study of oil and gas wells in the Permian Basin identified that methane emissions are underreported by 14-52x.
While the oil & gas sector has been required to file emissions reports for years, the Inflation Reduction Act (IRA) adds teeth to these requirements by including new methane fines that can cost up to $1500 per metric ton of methane.
Oil & gas companies must now reckon with the fact that there is a financial cost for real-world underperformance.
Methane fines will materially impact profitability.
(Graph: Data analysis by Actual. Abandoned wells and leakage are not captured in reported data. EPS predictions from historical data were estimated by using fines of $1500.) To understand the impact of the new methane fines on profitability, we took a 12-quarter benchmark period from 2018-2020 where both financial* and emissions data were available, then calculated what the Earnings per Share (EPS) would have been had the fines been in place. The impacts can be material, especially in situations where reported data is lower than independent satellite measurements. In the worst-case scenario, small producers could see their EPS depressed by over 1000%, while the major producers could see their EPS reduced by nearly 10%.
How does this affect you?
Teams in corporate development at large oil & gas companies need to pay closer attention to the emissions of acquisition targets because it could significantly impact their EPS. Similarly, the financial plan for spin-offs of highly polluting assets could lead to a proliferation of stranded assets in your supply chain.
CFOs and Capital Planning teams at oil & gas companies of all sizes will need to consider focusing capital expenditures to reduce methane emissions and leakage in order to preserve their EPS.
Audit and Compliance Teams need to plan for a world where fines are likely much higher than predicted. The government will levy fines based on real measured data, not reported data. Research shows real emissions are 14 to 52 times greater than reported, so fines will likely be much higher than predicted.
Investors in oil and gas projects will need to consider the impact of these fines when calculating returns, and seriously consider the risk that their portfolio could include future stranded assets.
Not only is it important to understand the landscape of your current assets, but it is important to consider the risk and regulatory pressures in order to avoid real negative financial impact. Untangling ever-changing regulations that govern the climate-related risks faced by physical assets can be facilitated by Actual’s Platform.
Already, ExxonMobil discovered a previously unreported cloud of methane emissions above one of their facilities and filed to correct their methane emissions report. Oil and gas companies are likely to continue coming forward, recognizing that regulators will take action. The era of underreporting is over.
Until next time,
* Data from a combination of 10-k filings and Nasdaq databases.