Updated July 22, 2022. On May 11, 2022, the pipeline company refiled its proposal to implement a PCG pooling service option for RSG, but with the modification that it would post its RSG certification criteria on its website rather than in its tariff and commit to not changing the criteria without either 30 days' notice or after the end of the certification period set forth in the shipper's certification form. On June 30, 2022, FERC issued an Order accepting this modified proposal. There is now at least one FERC-jurisdictional pipeline where parties can buy, sell, and ship RSG.
The Federal Energy Regulatory Commission (“FERC”) recently weighed in on responsibly sourced natural gas (“RSG”) for the first time by rejecting—albeit without prejudice—a pipeline company’s request to implement a producer-certified gas (“PCG”) pooling service option for RSG. Although FERC rejected the pipeline company’s proposal based on a single issue and the pipeline company is free to file a modified proposal in the future, FERC’s rejection is nevertheless a setback for a greenhouse gas mitigation strategy that could play an important role in combatting climate change—particularly as American producers ramp up production in response to the war in Ukraine and high prices.
Responsibly Sourced Gas
RSG is natural gas that is produced and transported in a manner that reduces or minimizes an oil and gas company’s upstream methane emissions, although it can also take into account other environmental considerations such as effects on land, water, or environmental justice communities. A producer’s upstream methane emissions can be reduced by eliminating flaring and venting and implementing gas well head, gathering system, and storage monitoring practices to detect and subsequently stop methane leaks. While preventing these upstream emissions may seem minor in comparison to the greenhouse gas emissions that the actual burning of natural gas produces, they make up the largest industrial source of methane emissions in the U.S. And, according to the International Energy Agency, 45% of the industry’s methane emissions could be avoided with little or no additional cost.
Responsibly Sourced Gas Certification
In response to growing regulatory, investor, and consumer pressure and recognizing the importance of reducing their own Scope 1 and 2 emissions, an increasing number of producers have begun to certify their gas as RSG through independent third-party companies. These certifiers—the most prominent of which include Project Canary and SYSTEMIQ in partnership with the Rocky Mountain Institute—serve a similar role as credit rating agencies do in the bond market by offering varying degrees of RSG certification for a producer’s gas based on the degree to which the fugitive emissions that occur in producing such gas are eliminated. SYSTEMIQ provides letter grades ranging from A to F and Project Canary awards silver, gold, or platinum certifications. These certification companies take different approaches to monitoring and evaluating the “responsibleness” of a given producer, field, or source. Project Canary, for example, takes a fairly granular approach by installing on-site methane sensors to provide continuous monitoring of potential methane leaks and then combines the leak information with other quantitative and qualitative data to assess production on a well-by-well basis.
PCG Pooling Proposal
The pipeline company made the modest proposal to implement a PCG pooling service option that would allow for the buying and selling of RSG that met certain third-party certification and methane intensity standards. The proposal was entirely optional in that producers, shippers, and consumers would be free to participate in the PCG pooling service or to continue dealing in uncertified gas pursuant to the pipeline’s other pooling options. The pipeline explained that the purpose of its proposal was to create a service for which market participants could trade RSG at liquid trading points on its system as opposed to the purely bilateral RSG agreements that the market is currently limited to. The PCG pooling service would have allowed producers whose gas had a methane intensity of less than 0.20 percent and who had received either a Project Canary Gold or Platinum certification, a SYSTEMIQ grade of C or higher, or had qualified under Xpansiv Data Systems, Inc.’s Digital Fuels Program to nominate their gas for the PCG pooling service. The pipeline company made a number of modifications to its proposal in response to comments from shippers, producers, and environmental organizations, including incorporating the criteria for gas to be RSG certified into its tariff, allowing the decoupling of the environmental attributes of RSG from the gas itself, expanding the pooling points to its entire system, and agreeing to file a report with FERC following the first year of the PCG pooling service’s operation.
Despite receiving some degree of support from nearly all intervening parties, on April 29, 2022, FERC rejected the pipeline company’s RSG proposal. FERC’s rejection was solely premised on its inability to evaluate the minimum PCG criteria the pipeline company incorporated into its tariff for certifying gas as RSG. FERC explained that both industry and government lacked established standards that could guide the Commission’s review of the “nascent RSG market.” FERC also critiqued the proposal based on the fact that there are only a handful of independent certifiers of RSG—although the handful of credit rating agencies appears generally sufficient for the bond market—and there is currently no federal regulation for methane emissions in the oil and natural gas sector that could guide its review of the pipeline company’s proposed methane intensity level. FERC concluded that given the “early stage in the evolution of RSG standards” it would not be appropriate for it to consider such standards. FERC indicated that had the pipeline company’s RSG criteria been set forth on its website—as originally proposed—rather than incorporated into its tariff, the proposal would not have been rejected.
What’s Next for Responsibly Sourced Gas at FERC
FERC arguably missed an opportunity to help foster the nascent RSG market and, in turn, reduce potent greenhouse gas emissions as U.S. shale producers increase their production. FERC is correct that the RSG market is in its early stages but due to FERC’s rejection of the pipeline company’s proposal it will remain—at least for the time being—a more limited, entirely bilateral market. This bilateral market would have remained available to shippers or producers who felt that a higher or lower standard was more appropriate than the one proposed by the pipeline company regardless of FERC’s decision. But FERC’s rejection means that, at least for the time being, it remains the only market option for parties that want to ensure the gas they are burning is not produced in a manner that unnecessarily exacerbates climate change.