It’s no secret that the oil and gas industry is working to lessen its impact on the environment. The benefits of doing so are largely well-documented. Lesser known is how responsibly sourced gas (RSG) can improve the bottom line.
Operators that produce natural gas in a carbon-neutral operation could ultimately reap benefits through share-price uplifts, reduced costs of debt and other premiums. Legitimate RSG sites have undergone third-party certification to attest that the operator adheres to the highest industry standards across all operational facets.
Analysts say that, while it will take time for the market to mature, RSG producers are likely to yield financial benefits.
Some market uncertainties make it difficult to predict when—and if—the Independent Energy Standards Corp. (IES)-certified gas market peaks, said Rystad Energy natural gas analyst Zongqiang Luo.
“It depends, for instance, on whether the utilities and end users are willing to pay for the price premium,” Luo said. “Will the industry publish another standard to compete with the current standards from IES? Will the consumers in other countries acknowledge the standards from IES companies? Or even will there be more companies like IES with different standards?”
To pay or not to pay (a premium)
Embracing RSG could yield other benefits, he said, including a bolstered focus on upgrading infrastructure to meet industry standards. Doing so could improve measurement accuracy, which would help a company become more auditable and transparent.
“In the near term, gas producers’ equity values are going to be benefitting more from higher natural gas prices than from smaller forays into renewable (natural gas, renewable natural gas) or responsibly sourced gas.” —Stacey Morris, Alerian
But it remains to be seen whether the majority of customers will be willing to pay more for the responsibly sourced commodity.
“It will be very challenging to see the utilities or end users actually pay a price premium,” Luo said.
One IES survey of 1,600 households throughout the Northeast and Midwest found that 80% of people would pay up to 20% extra for responsibly produced gas, S&P Global reported.
Alerian research director Stacey Morris said that while RSG—alongside carbon-neutral LNG cargoes—is going to become more of a trend, it’s too soon to predict the financial perks they might include.
“I think it’s very early stage, and it may be difficult to chalk up improved valuations or lower debt costs purely to green gas initiatives, especially since natural gas prices have improved so much lately,” Morris said.
“In the near term, gas producers’ equity values are going to be benefiting more from higher natural gas prices than from smaller forays into renewable (natural gas, renewable natural gas) or RSG.”
It’s not unheard of to charge a premium for RSG, just as it’s not unusual to pay extra for organic food at a grocery store.
The first public transaction of IES-certified gas happened in 2017, when Southwestern Energy Co. sold its RSG to New Jersey Natural Gas at an extra cost. Southwestern, the nation’s second-largest gas producer, was the first to commit to 100% certification of its assets.
A few additional deals have happened since, and experts are expecting to see activity strengthen going forward.
A growing market
Chris Romer, CEO and co-founder of Project Canary, said the rise of ESG investing—coupled with heightened investor, regulator and customer focus on environmental performance—is driving activity.
“The certified gas market has grown exponentially over the past year, with approximately 15% of U.S. daily production certified—or soon to be certified—by independent third-party organizations, like Project Canary,” Romer said.
“The trend will continue to gain momentum, and we foresee a scenario where certification and continuous, padlevel monitoring is the industry’s baseline.”
Project Canary, which analyzes 600 data points across the ESG spectrum on a per-well basis, is considered the top certification firm, Romer said.
“Only the top environmental performers receive certification, which means buyers can have confidence in knowing this gas is best-in-class.” Right now the team, which includes data scientists, engineers and industry experts, is working with 50 E&Ps, midstream operators and dozens of other companies looking to embrace RSG.
Romer said of the burgeoning growth, “The certified gas market has grown tremendously during the past 12 months to a point where there is a clearly defined, differentiated market and demand for this sustainable product.”
As the market continues to evolve, some trading platforms have become dedicated to the certified gas and low-carbon energy markets. And although transactions between a buyer and seller are mostly confidential, it’s understood that a premium of between one and five cents per Mcf has become commonplace for certified gas.
Going forward, effective measures will continue to be key so that the industry fully understands and addresses methane emissions to gain critical ESG recognition, Romer said.
“Just like a Carfax report or LEED [Leadership in Energy and Environmental Design] rating for a building, gas certification gives the buyer—be it LNG or utilities—trust that the gas was produced in the most environmentally responsible manner possible,” Romer said.
“Companies that are forward-thinking, intentional and proactive in their actions are well positioned to attract ESG investments, access more diverse pools of capital, increase [their] customer base and do good by our environment.”
Pure gas players in Appalachia, the Haynesville and other basins and plays in the U.S. are leading the certified RSG charge, while associated-gas producers in the Permian and other oil plays are following behind.
There are multiple good reasons for producers to embrace the phenomenon, Romer said.
“Expectations have shifted; shareholders, regulators, customers expect energy companies to engage on climate, lead in the conversation and do more than just loft aspirational targets but actually take action on emissions,” he said.
“That’s what certified gas does: It’s taking action to tackle unwanted methane emissions. It’s a win-win for business performance and our environment.”
Tallgrass Energy Partners became a midstream leader via its Rockies Express Pipeline, the first interstate gas transmission pipeline in the nation to receive an independent environmental assessment and certification from Project Canary.
Companies with a positive rating through IES’ TrustWell system have succeeded in charging premiums of up to 10 cents for Mcf, then-IES CEO Jory Calukins told S&P Global in 2019.
“We’ve seen a notable and rapidly growing need from end markets for differentiated gas and a willingness to pay a premium for gas that’s been independently and credibly verified as responsible,” Calukins said.
Newly Devalued: ‘Business as Usual’
In the first blush of renewable energy, there was a perceived risk that existing oil and gas assets would become stranded, either economically, as investment left the sector, or physically.
But the oil and gas industry has risen to the challenge, changing up operations to increasingly reduce its own emissions.
“If you have a genuine clean energy aspect to your operation, you can attract investors,” said Phil Lookadoo, a partner with law firm Haynes Boone LLP. He was working in October 2021 with a group pursuing an emissions-free gas pipeline project that will be able to participate in hydrogen or responsibly sourced gas transactions.
There is now a realization that there is growth potential in existing assets as part of the energy transition, said Lookadoo, “and that is attractive to investors from midstream to upstream.
“Producers can be rewarded for being in the top 25% taking steps to eliminate methane emissions and can even get a premium for their gas,” he said.
To ensure credibility, several third-party organizations, such as Equitable Origin, Methane Intelligence and Project Canary, independently verify and certify ESG performance. Haynes Boone, widely known for its upstream bankruptcy tracker and quarterly capital-access surveys, has recently started an ESG tracker.
“There is a sense at every level of the energy industry that this is not greenwashing, but that ESG performance is a legitimate factor for operators and investors,” Lookadoo said. “Energy transition is happening across the economy, and everyone can see it’s happening.”
The big investment houses are looking for big plays, but there are opportunities at many deal sizes, he added.
“The majors can use balance sheet financing for energy transition. But, for the smaller operators to do things like retrofitting, they are looking to the smaller investment shops.”
Bondholders are also stepping up. “They have seen that, if they want to secure their return for years into the future, everyone has to come up with something more than business as usual. Because ‘business as usual’ is declining in value.”
Environmentalists have raised awareness, “but they have not been so great on how we are supposed to get from here to there. They have not been so great on operations.
“That is where energy companies come in. They have the operational capability. They have the track record of supplying reliable energy for decades,” Lookadoo said.
“The winners in this energy transition will be determined by economics, not by politics. By who can provide energy that is both reliable and clean.”
—Gregory DL Morris
Soledad Mills is CEO of Equitable Origin, which has a fully transparent gas certification system based on independent third-party verification. The nonprofit published the first independent, voluntary certification standard called the EO100 Standard for Responsible Energy Development for the oil and gas sector in 2012.
The organization’s vision is to recognize and reward responsible energy producers and give that recognition value in the marketplace.
And if the Canadian utility company Energir is any indication, it’s working. In 2020, it procured gas at a premium from an EO100-certified supplier. The Quebec-based company, which has 520,000 customers there and in the northeastern U.S., has committed to sourcing 100% of its gas from EO100-certified suppliers.
Although Equitable Origin is set to certify about 10% of U.S. natural gas production in the coming year, Mills said the industry hasn’t yet reached a tipping point. She expects the market to peak—alongside oil and gas demand—in the mid-2020s.
Certified companies throughout the nation are seeing premiums of varying amounts, said Mills, who added that the exact amount has not been publicly disclosed.
But she expects that to soon change.
“As the market evolves, we expect to have more data on this,” she said. “However, we have heard anecdotally that even if small premiums (for example, less than 1%) are achieved on a portion of the gas produced, it can yield significant returns due to the volumes involved.”
A willing customer
Statistics suggest that customers are willing to pay more for certified gas.
Nearly two-thirds of Americans will spend extra for environmentally sustainable products, a GreenPrint study found. The study, released in March 2021, also found that people are more likely to buy a product that’s clearly identified as being environmentally friendly.
“As for the average consumer, they may need more education in order to be willing to opt into a premium on their electricity bill,” Mills said. “But the survey shows that 75% of millennials are willing to pay a premium for environmentally friendly products.”
While consumer appetite for RSG grows, so too does the amount of gas being certified throughout the U.S. and Canada.
“Only the top environmental performers receive certification, which means buyers can have confidence in knowing this gas is best-in-class.” —Chris Romer, Project Canary
Mills has also observed increasing interest from Europe, which adopted a methane strategy in 2020.
“We expect to see this trend grow globally as multinational companies adopt certification as a strategy to measure and manage ESG risks across all their assets and as foreign companies follow the leading practices of North American producers,” she said.
Several studies have shown that ESG compliance reduces the cost of capital, but Mills said the benefits extend beyond finances.
“Certified natural gas can help producers measure and manage their ESG performance more efficiently by providing an independent framework that consolidates and aligns globally recognized management systems, performance and reporting indicators and industry guidelines.”
Determining how long it might take for the market to mature depends on how a person defines “mature,” she said.
“A mature market could imply that more parts of the value chain become involved in driving performance disclosure and improvements across the life cycle of production,” she said.
“It could also mean increasing demand for certified natural gas and potentially a requirement from buyers to only purchase gas from certified sources. The growth of certification in this space has been exponential, and the market continues to evolve with each new certification and transaction.”
Mark Callahan, director, gas and power pricing, at S&P Global Platts, said at a gas conference in Chicago in September 2021 that it will take time for the market to build an appetite for RSG.
“In engagements that we have done, largely we’ve seen that the producers are ahead of the game—a bit more educated than the end users at this point in time,” Callahan said during the panel.
“Combined with the fact that this is a voluntary market, and you don’t have a lot of public utility commissions that have given the approval for end users to go out and pay this premium, those are just a few factors why I think this is going to take time.”
Bob Schults, head of North American markets for Xpansiv CBL Holding Group, said at the Chicago conference he’s hopeful that producers benefit financially from operating in environmentally sustainable ways.
“I certainly hope that there is some sort of premium to begin this marketplace in order to encourage producers to do the right thing and to start making some economic decisions that can improve their methane intensity.”
It seems more utility companies—the largest buyers of gas— are getting behind RSG.
Colorado Springs Utilities announced in March 2021 that it will buy certified RSG through a pilot project involving Project Canary, Bayswater Exploration & Production LLC, Rimrock Energy Partners LLC and Kinder Morgan Inc.
“This partnership will allow us to further diversify our energy portfolio and expand our commitment to environmental stewardship,” the utility’s CEO, Aram Benyamin, said in a press release. “This is [a] first-of-its-kind pilot project in the nation, and I’m proud to say we are at the forefront of exploring this newly evolving RSG market.”
Bayswater CEO Steve Struna said in the release that doors are opening for those who embrace ESG.
“Stakeholders are looking to companies to enhance transparency regarding operations. This win-win partnership enables us to produce both oil and natural gas resources in an environmentally responsible manner while attracting new customers and markets.”
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