October 25, 2019
This week, LawIQ was a sponsor of the North American Gas Forum held in Washington, DC. One of the presentations featured a representative from a major oil and gas producer who spoke about the efforts of the Oil and Gas Climate Initiative (OGCI). The members of that group represent 30% of the world’s oil and gas production. A key goal of the OGCI is to reduce the collective average methane intensity of the upstream gas and oil operations to below 0.25% by 2025, with a goal to achieve 0.20%. In addition, the group also aims to work towards near zero methane emissions from the full gas value chain, including transport and distribution to final customers (downstream). The Environmental Defense Fund also spoke about its plans to launch an $80 million satellite in 2022 that will be able to measure individual methane leaks down to two parts per billion across 80% of the globe.
As we discussed in Environmentalist Expertise Drives Increased Investor Interest and Changes to Project Strategy, there is a developing trend among investors to consider a company’s environmental, social and governance (ESG) program in their analysis of a company. Given the focus of the OGCI and the ESG investor community, pipelines may need to begin considering how they will show that they are making progress toward the goal of zero methane emissions from their system.
Pipelines have traditionally retained a portion of the gas they receive to cover the fuel burned to transport the gas, but also for what is called lost and unaccounted for (LAUF) gas. While the name can vary from company to company, the concept is usually the same. The company calculates the difference between the amount of gas it has received from its customers and the amount of gas it has delivered on behalf of its customers. It then subtracts from that number the amount of fuel it has used, and the remaining amount is considered LAUF. As the focus on methane emissions grows, LAUF may become a measure to watch for when measuring a company’s performance.
Does LAUF Equal Methane Emissions from a Pipeline?
While LAUF cannot be equated with methane emissions -- because there could be other reasons why it is “unaccounted for” -- LAUF is a readily available number for most companies. A focus by the industry and investors on this measure of performance would benefit shippers, who would see a reduction in the excess gas they have to provide to account for such losses, and would also help the industry demonstrate its focus on reducing methane emissions consistent with the goals of the OGCI.
Today, we look at how this measure has performed over the last few years for the four largest Kinder Morgan pipelines, as measured by revenue, as a baseline for assessing the variability of this measure and whether it has been trending towards zero. As will be seen, the variability is quite high from pipeline to pipeline and the trend has been good for some of the Kinder Morgan pipelines but, for another, the trend has been in the opposite direction.
Kinder Morgan’s Performance
As can be seen in the graphic below, the four largest Kinder Morgan pipelines, Tennessee Gas Pipeline, Natural Gas Pipeline Company of America, El Paso Natural Gas and Southern Natural Gas, have experienced widely different results over the past few years. The variability from month to month is to be expected as measurement issues are identified and fixed or incidents occur which may drive the result high for a given month. But perhaps the most surprising result is that Southern Natural Gas has over the long term been reporting that it delivers more gas than it receives, or, in other words, that its LAUF is negative. While reaching zero LAUF is an admirable goal, regularly having a negative LAUF raises a question about the overall measurement system being used.
To factor out the month-to-month variability, we have included in the above graphic a moving 12-month trailing average for each company. As can be seen, this average has less volatility and allows one to determine a general trend as to whether the company is getting closer to reducing the number to zero or just the opposite. Here, the clear leader appears to be Tennessee Gas Pipeline, whose 12-month trailing average has recently dropped from above 0.20% to less than 0.10%.
Conversely, Natural Gas Pipeline Company of America in the early years had a 12-month trailing average LAUF ratio that was below 0.10%, but has seen that ratio steadily climb to a point where it is almost twice what it had been in the earlier years.
Overall Company Performance
While it is instructive to see how the individual pipelines fared on this measure, rolling it up to a parent company is also possible so that investors could use it to assess the performance of one public company versus another. Set forth below is the combined performance for all four of the Kinder Morgan pipelines combined into an aggregate LAUF for the periods for which we have results for all four pipelines.
Because the results of four companies are combined into one value, there is less month-to-month volatility. Also, to Kinder Morgan’s credit, the trend seems to be downward. However, with a consistent focus on this measure, Kinder Morgan could likely drive its ratio close to zero, and meet the goal of the OGCI.