National Oil Companies and the Global Methane Opportunity
Paasha Mahdavi and Andrew Howell explore why reducing methane emissions from oil and gas in the global south is often seen as “low hanging fruit.”
At the UN’s annual climate conference, held last month in Azerbaijan, world leaders took the stage to promise a bold transition away from fossil fuels. But behind the scenes, the conference’s chief executive – a leader of Azerbaijan’s national oil company, Socar – was brokering oil deals. The controversy reveals a paradox at the heart of climate diplomacy: recent hosts such as the United Arab Emirates last year and Azerbaijan this year acknowledge the reality of climate change but have a vested interest in the world’s continued consumption of fossil fuels.
Across the globe, oil-exporting countries and their national oil companies (NOCs) — Socar, UAE’s ADNOC, Malaysia’s Petronas and roughly 70 other state-owned oil producers — have little incentive to support a rapid transition away from oil and gas. But there’s at least one thing oil exporters and climate advocates can agree on — the need to slash methane emissions.
Methane is a potent greenhouse gas, responsible for about a third of the global warming we are experiencing today. The oil and gas industry emits 80 million tons of methane each year, primarily through unintentional leaks. NOCs emit more than half of it. Given their operating size and global emissions footprint, our new research shows that these NOCs are the wild card that will determine whether the world succeeds in limiting climate change.
The good news is that reducing oil and gas methane emissions is one of the most cost-effective ways to tackle climate change. Repairing leaks and updating old equipment go a long way. For NOCs that can’t afford the upfront costs of these projects, sustainability-linked bonds and loans can offer financing conditional on hitting methane reduction targets.
Yet, finance is just one piece of the methane puzzle. Even when NOCs have the capital for large-scale methane abatement, they are unlikely to act unless their governments support these efforts. Cleaning up methane emissions isn’t just about money, it’s also about politics. Providers of finance don’t make the ultimate decisions about state owned enterprises: politicians do. And they march to a different drummer when it comes to climate goals.
Think about what matters to a leader of an oil-rich economy. In Brazil, as in most countries with NOCs, it is the head of state – President Luiz Inácio Lula da Silva – who has the final say on strategic decisions at Petrobras, his nation’s NOC. First and foremost, Lula wants to get re-elected. To do that, he and his party need to raise money for government expenditures, to keep the economy moving and fund social policies that curry favor with his constituents. But Lula also has green ambitions, declaring two years ago at COP27 that “Brazil is back” on the global stage to fight climate change. This will be a hard line to walk, given that Petrobras has long-term ambitions to "be there at the very end of the fade-out of oil.”
Mexico’s new president Claudia Sheinbaum is attempting the same balancing act with the country’s NOC, PEMEX. Sheinbaum wants “Mexico to be a renewable energy powerhouse,” but also sees PEMEX as the cornerstone of Mexico’s economy. But Mexico’s PEMEX has a poor climate track record and emits more methane than almost every other NOC in the world. And in contrast to Brazil, Mexico has been slow to join several methane and climate initiatives, including the Global Methane Pledge to cut 30% of their methane emissions by 2030.
At the end of the day, oil remains politically central to the national development of countries like Brazil and Mexico. And so, leaders must tread the tightrope between climate ambitions and the political (and fiscal) need to keep producing oil and gas.
Our research looks at how NOCs thread this needle, and what it would take for them to slash methane emissions while chalking up political wins and hitting their financial targets. We used NOC financial data and in-depth interviews with financiers, government officials, industry leaders, and global NGOs. A path forward came into focus. We need groups of international financial institutions, civil society, foreign ministries, and private finance all working together towards the same goal. Each plays a unique and critical role.
International finance institutions can lay the groundwork. At a minimum, the World Bank and the IMF can incorporate methane reporting into regular country consultations. They can also create and expand conditional finance programs. The IMF’s Resilience and Sustainability Trust offers low-interest loans for countries to finance projects that address climate change. Mauritania, for example, received a loan conditional on eliminating flaring and methane discharges from their state-owned oil company.
However, these programs need to get smarter to achieve their potential. This means introducing robust measuring, monitoring, reporting, and verification (MMRV), allowing for accurate baselines, realistic targets and accurate assessment of progress towards those targets. Mauritania’s loan did not have well-defined targets or MMRV requirements, and it’s unclear whether their pledges will translate into real reductions.
Here’s where civil society steps in. NGOs, think tanks, and academics can help hold governments accountable to the emissions reductions they have promised. For example, in Nigeria, the non-profit International Methane Emissions Observatory teamed up with government officials, operators, and local scientists through workshops and training programs to improve methane monitoring.
A whole new set of accountability tools are coming in the form of satellite-based measurement. One example is the Environmental Defense Fund’s MethaneSAT, which is part of a revolution in publicly available satellite methane data. Starting next year, MethaneSAT will use infrared imaging to report methane emissions from much of the world’s oil and gas infrastructure, including NOCs. This data will help governments, providers of finance, civil society and the NOCs themselves understand their methane emissions — opening up opportunities to bring them down.
Diplomats and foreign ministries play an important role as well. For example, the U.S. State Department provided Kazakhstan technology transfer, data sharing, and planning and project implementation assistance. They also created detailed work plans for Kazakhstan’s NOC to take forward to keep these plans operational. As a result, Kazakhstan is now a member of the Global Methane Pledge.
These levers won’t work for every NOC. Some nations are isolated on the global stage and aren’t as accountable to these international pressures. Russia and Iran both manage NOCs yet are heavily sanctioned and don’t rely as much on international finance. In these cases, we turn to trade policy like import rules, tariffs, and restrictions. Unlike the policy “carrots” of financial levers, trade policy relies on “sticks” – countries will face high import costs or lose market share if they fail to comply.
Trade policies work for places that have leverage. Consider the EU, which has set the ambitious goal of becoming climate neutral by 2050 while being the world’s largest gas importer. Algeria exports 78% of its gas to the EU. But the EU only imports 14% of its gas from Algeria. As a result, Algeria is more dependent on the trading partnership. This dynamic lets the EU apply pressure on Algeria to reduce emissions from their gas exported to Europe.
This is the basis of the EU’s methane regulations, passed in June 2024. Starting in 2030, these rules will further incentivize NOCs that export energy to Europe to cut methane emissions. According to one study, the regulation by itself could reduce up to 30% of methane emissions from the global oil and gas sector, about the same as capturing 90 billion cubic meters of gas -- equivalent to the entire yearly gas consumption of Germany -- that would otherwise warm the planet.
People talk about methane emissions from oil and gas in the global south as “low hanging fruit.” The halls of COP29 in Azerbaijan were filled with solutions to cut methane emissions swiftly and broadly. The IEA has even declared that half of the oil and gas sector’s methane emissions can be abated at no net cost, and in many cases increasing value. And yet here the world remains, in 2024, at higher methane emissions than ever.
So what’s the hold up? Geopolitics throws a wrench in the financial sector’s plan for a neat market solution. But geopolitics can also be the solution. We must forge deep connections across the financial sector, civil society, foreign ministries, and world leaders, and explore trade policy where relevant. NOCs are both a contributor to global warming and a potential opportunity to slow the pace of that warming, bringing broad benefits to society. Let’s get to work.
Dr. Paasha Mahdavi is Associate Professor of Political Science and Environmental Science & Management at UC Santa Barbara, where he also serves as Director of the Energy Governance and Political Economy Lab and Co-founder of The 2035 Initiative, a climate think-tank at UCSB. He is the author of Power Grab: Political Survival through Extractive Resource Nationalization (Cambridge 2020), along with bylines in the Washington Post, Foreign Policy, and a GP Opinion piece in 2017 on oil in Kurdistan. Andrew Howell is Senior Director of Sustainable Finance at the Environmental Defense Fund, where he is responsible for engaging with the investor community to help accelerate the energy transition. He holds the CFA and Fundamentals of Sustainable Accounting (FSA) designations, and has authored pieces for the World Economic Forum, Energy Monitor, and GreenBiz. Together at EDF, Andrew and Paasha are part of the Financial Influence on National Oil Companies research project.
Andrew Howell is Senior Director of Sustainable Finance at EDF, where he is responsible for engaging with the investor community to help accelerate the energy transition. He works on a range of sectors including oil & gas, transportation and financial services. Previously, Andrew was an equity research analyst with Citi Research, where he led a top ranked research team focused on emerging and frontier markets. Andrew has also worked at the Emerging Markets Investors Alliance, where he led investor ESG engagements in the mining and energy sectors. Andrew attended the University of Pennsylvania and Insead, holds the CFA and Fundamentals of Sustainable Accounting (FSA) designations, and is fluent in French and Russian.
Photo by Tim Mossholder
