The paradox of natural gas

The paradox of natural gas

17-08-2017 | Stunning statistics

Natural gas is giving investors a headache, due to a paradox in its effect on climate change.

  • Sylvia van Waveren
    van Waveren
    Engagement Specialist

What has happened?

Gas is often seen as a green fuel that is a much better for the environment than oil or coal. However, its main ingredient, methane, is also one of the biggest contributors to climate change when unburned gas escapes during its extraction, with fracking proving a particularly large problem.

Such is its potency that methane has 80 times the warming power of carbon dioxide over a 20-year timeframe, and is responsible for about 25% of global warming. Estimates suggest that energy companies are releasing at least 3.5 trillion cubic feet of methane into the atmosphere each year, equivalent to all the gas sold by Norway.

Yet the contribution to global energy needs made by cleaner-burning gas cannot be disputed, accounting for 22% of world electricity production in 2014, up from under 8% in 1988, meaning we now burn much less coal and oil.

So how to tackle this double-edged sword? Robeco’s Active Ownership team is engaging closely with the oil& gas industry to try to solve the conundrum of how methane can be a boon and a curse at the same time.

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Why is it important?

Robeco’s engagement forms part of a wider campaign by institutional investors to encourage oil and gas companies to improve and disclose their management strategies to minimize methane risk to climate change.

The importance of the initiative is such that it is being led by United Nations Principles for Responsible Investment (PRI), of which Robeco is a signatory, representing 36 investors and USD 4.2 trillion in assets. The PRI published its Investor’s Guide to Methane jointly with the US-based Environmental Defense Fund which has worked to combat methane release in the increasingly important American shale gas industry.

And it has not fallen on deaf ears – many of the oil majors participate in the Oil and Gas Methane Partnership, the industry’s own initiative to improve emissions reporting and cut methane emissions. Members include BP, Eni, Repsol, Statoil and Total.

What does it mean for investors?

“We see the methane issue more as a business opportunity than a risk,” says Sylvia van Waveren, who is leading Robeco’s engagement with the oil & gas industry. “What we often say to companies is that methane is a potential revenue source; it would be a waste if companies do not use it because it escapes into the air.”

“When we talk about motivation at the company level, it’s still early days: European companies are talking in general terms and just now are conceptualizing methane policies. If we’re lucky, they have calculated how much methane is part of their greenhouse gas emissions. And if we’re more fortunate, they are producing regional and segregated figures from carbon, but it’s really very meager how motivated the companies are and what triggers them most.”

“One issue that is particularly bothersome is that many companies do not know how to calculate, estimate and set targets to reduce methane. It is still a mystery to many of them. That’s why we come in with engagements. We need to keep them sharp on this issue and ask them for their actions, calculations and plans.”

“We rely very much on our knowledge that we get from within the sector when we are in dialog with them as institutional investors,” she says. “We review data analyses and make intermediate reports of scoring. We find best practice solutions and we hold companies accountable. There are also times when we name names. So in that sense, that is how engagement works.”

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What is a Wholesale Client?
A person or entity is a “wholesale client” if they satisfy the requirements of section 761G of the Corporations Act.
This commonly includes a person or entity:

  • who holds an Australian Financial Services License
  • who has or controls at least $10 million (and may include funds held by an associate or under a trust that the person manages)
  • that is a body regulated by APRA other than a trustee of:
    (i) a superannuation fund;
    (ii) an approved deposit fund;
    (iii) a pooled superannuation trust; or
    (iv) a public sector superannuation scheme.
    within the meaning of the Superannuation Industry (Supervision) Act 1993
  • that is a body registered under the Financial Corporations Act 1974.
  • that is a trustee of:
    (i) a superannuation fund; or
    (ii) an approved deposit fund; or
    (iii) a pooled superannuation trust; or
    (iv) a public sector superannuation scheme
    within the meaning of the Superannuation Industry (Supervision) Act 1993 and the fund, trust or scheme has net assets of at least $10 million.
  • that is a listed entity or a related body corporate of a listed entity
  • that is an exempt public authority
  • that is a body corporate, or an unincorporated body, that:
    (i) carries on a business of investment in financial products, interests in land or other investments; and
    (ii) for those purposes, invests funds received (directly or indirectly) following an offer or invitation to the public, within the meaning of section 82 of the Corporations Act 2001, the terms of which provided for the funds subscribed to be invested for those purposes.
  • that is a foreign entity which, if established or incorporated in Australia, would be covered by one of the preceding paragraphs.
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