Opportunities to benefit climate and increase fiscal revenues exist. Ahead of COP26, we discuss how producing countries can use technologies and increased regulation for global good.
The world is heating up faster than originally thought, emissions are heading in the ‘wrong direction’ and global warming is irreversible. These are the alarm bells sounded by the recent UN Climate report, amplifying the warnings of the IPCC report. We could reach a global rise in temperature of 1.5 degrees Celsius within just five years unless urgent action is taken to prevent catastrophic change. The move to net-zero emissions is happening far too slowly.
Tension between development needs and emission reductions
Solutions to accelerate the transition to a zero-carbon future in the energy sector do exist, but there are multi-dimensional challenges in translating these into action. For example, a long-standing tension lies between the need to reduce emissions and the need to allow lower-income countries to continue to exploit their substantial oil and gas resources for national development - a privilege higher-income countries have already enjoyed. Although this conflict is hugely problematic, there are opportunities to tackle climate change, improve health outcomes and generate significant tax incomes while still continuing to extract and use natural resources such as gas – still a crucial energy resource for many lower-income countries.
Moreover, while global coal and oil are forecast to decline in DNV’s latest Energy Transition Outlook, natural gas will surpass oil as the largest energy source and will represent 24% of global energy supply in 2050. It is therefore critical that avoidable emissions from natural gas are indeed avoided.
A specific technology idea for COP26
There is a general consensus in climate discussions that technologies of various types will be critical to combatting the threat of global warming. But one such technology is already demonstrated and merely needs to be more widely promoted and utilised.
Specifically, there is a real opportunity to facilitate public-private collaboration to reduce hydrocarbon emissions in the oil and gas sector. Oil and gas companies seldom have commercial incentives to capture the large volumes of gas that they routinely vent and flare (except in certain highly regulated cases). Governments often lack ‘decision-useful’ information on the location and volumes of gas being flared and vented. Remote imaging technologies using satellites can square this circle!
Solutions to reduce flaring and venting do not depend on climate finance alone. Instead, by focusing on measures to reduce emissions at source, producing countries can benefit directly from their own emission reduction efforts and generate substantial fiscal revenues, and large health and social benefits.
The global gains are potentially very large. It is estimated that some 6.9 per cent of globally produced natural gas is flared (3.7 per cent) or vented (3.2 per cent) in upstream oil and gas operations, contributing half of natural gas’ negative impact on health and climate. Natural gas is the second energy source of global energy demand (after oil). But an estimated 7.5% of all produced gas is lost/wasted, almost all during exploration and production of oil and gas. This gives an indication of the potential significance of innovations to reduce this avoidable waste.
Recent pioneering research from UNU WIDER highlights a four point ‘Diamond’ model (Figure 1) comprising (i) improved measurement of the wasted gas, (ii) increased transparency, (iii) monetization technologies, and (iv) new regulation and fiscal measures can provide a viable way forward. Some countries are already benefitting from adopting this approach which requires satellite technology at its heart.
Figure 1: Integrated framework 'Diamond model' to end routine flaring and venting
Impossible to control what we can’t measure - the importance of technology
Rapid innovations in satellite technologies have already helped countries such as Nigeria to pioneer the application of remote sensing through satellites to develop a ‘Gas Flare Tracker’. The Tracker is an open-source data base, that civil society can actively and freely monitor. One important consequence is that the Nigerian Government is no longer dependent on companies to self-report their flaring emissions. Previous applications to exploit this technology had been quite limited. However, the use of satellite technologies to measure emissions clearly has potential in many more countries. For example, in 2017, the VIIRS Nightfire algorithm registered and measured no fewer than 10,820 individual flares globally. The elimination of some of these would be a tremendous positive for the global carbon-reduction agenda.
Transparency and accountability open the window to improved regulation and fiscal arrangements
With appropriate public-source data on flares and vents available, it is far easier in any country to identify the specific producing assets and companies that are responsible for these and for what specific amounts. The key to this is to ensure that the necessary satellite data is indeed established as a public good and is not subject to corporate confidentiality or other commercial restrictions.
Such transparency measures facilitate not only public awareness, but also increases company awareness as their emission performance can be benchmarked and any natural gas leaks detected early.
Small scale gas and monetization technologies can further enhance the gains
Satellite technologies can define the scale of the emission reduction opportunities when prioritized by flare volume. Together with additional spatial information this in turn enables detailed analysis of various options for monetizing some of the otherwise wasted gas. Satellites provide additional information on the presence of local communities most impacted (health) by chemical emissions from flaring and venting and for whom capturing the gas would provide local energy access and thus economic opportunities. Countries such as Ghana, the Philippines, Chad, Guatemala, and Cameroon could benefit greatly from this sort of approach: they have little oil production and few, but high-rate, flares.
Recent technology innovations in gas monetisation make this type of approach much more feasible. These innovations create gas production possibilities that are more affordable, much smaller in size, with designs that are scalable and modular, and optimized for applications that can be containerized and truck-mounted. Yet these solutions are often not implemented for commercial reasons despite their undoubted economic value. This is where regulations and fiscal measures can lower commercial break-evens of gas developments.
Regulations and fiscal measures can encourage gas emissions reductions and generate government income.
This can have, and in Nigeria’s case already has had, demonstrable and beneficial results. Nigeria’s use of its flare tracker as the basis for taxation of gas flaring have reduced flaring emissions (with collateral benefits on health) and raised significant fiscal revenues for the Nigerian Government: US$120 million in 2019, an estimated US$270 million in 2020. Countries often think that to meet their targets for emissions reductions they need to increase expenditures on new investments and on innovations, and to compensate those who may see a consequent loss in real incomes. However, in this case, countries can gain fiscal revenues from the innovation while making a significant contribution to reducing emissions, increasing local energy supply as well as improving health outcomes.
Replicating the ‘Diamond’ model approach beyond Nigeria…
Based on an assumed average gas price (US$4/MMBtu), similar initiatives to reduce emissions could provide an additional natural gas sales value of no less than US$36 billion each year, assuming 75% of the global upstream gas flared and vented is captured. However, the consequent economic development and health-improvement impact would be considerably larger. Satellite data shows flaring occurring in 100+ countries. Most such wasted energy and emissions occur in oil and gas operations in emerging economies and therefore provide opportunity for substantial progress on their Sustainable Development Goals.
Meaningful international action is needed – now!
It is very much to be hoped that these specific ideas will indeed reach the surface of the actual COP26 discussions in Glasgow. There are several reasons for suggesting this as a priority for the delegates. First the global gains are potentially huge and the voluntary efforts to reduce flaring and venting so as to realise these gains have so far been disappointing. Second, relative to many other solutions to global warming, the investment costs are not necessarily that large and are value accretive. Third, the technology required is already available – no major engineering breakthroughs are called for. Finally, the political infighting that may be involved in achieving agreement on the issue could be modest relative to the situation of other proposals on the table (e.g. early stranding of coal and other fossil fuel assets in low-income environments). The main ingredient that needs to be agreed is the legal establishment of the relevant satellite data as a global public good !
Given the win-win-win nature of the proposition in terms of climate, health and development, if there is any mutual goodwill at COP26, this should be a relatively easy ingredient to achieve!
Detailed technical and economic suggestions for extending the Nigerian success to more countries have built on the earlier work by OPM and have been presented in the two major research papers cited above by Etienne Romsom and Kathryn McPhail and published by UNU-WIDER. These papers explain the possibilities of capturing both economic value (increased fiscal revenues and less wasted gas) as well as social value (significant reductions in health-damaging emissions) from the improved management of natural gas flaring and venting; and also illustrate the tremendous opportunities for other oil and gas producing countries to take up the potential of these demonstrated realities.
About the authors:
Alan Roe holds an Associate appointment at Oxford Policy Management, is an Honorary Professorial Fellow of the University of Warwick, and a Non-Resident Senior Research Fellow at the UN World Institute for Development Economics Research (WIDER). The book, Extractive Industries, The Management of Resources as a Driver of Sustainable Development, co-edited with Prof. Tony Addison, was used as a main source for the recent UN Regional and Global Roundtables on the topic of Extractive industries and the Developing Economies.
Kathryn McPhail is the CEO of EnergyCC; Member of the Advisory Group, Natural Resources Governance Institute; and the United Nations Sustainable Development Solutions Network, which developed the UN Sustainable Development Goals. Member, Singapore Institute of Directors and served on the Sustainability Committee. Member, National University of Singapore Medicine International Council. She is a former World Bank/IFC, oil & gas and mining industry executive with FTSE 100 companies. She has recently co-authored two WIDER Working Papers on hydrocarbon gas flaring and venting (see here and here)
Etienne Romsom is the President of EnergyCC. He is a former Global Executive Vice President for DNV and Managing Director of Shell Exploration & Production in Kuwait. He has developed and led complex major projects in oil and gas globally. He co-authored two WIDER Working Papers on hydrocarbon gas flaring and venting (see here and here)