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Is there an opportunity for investors in methane abatement?

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Over the last two years, methane emissions have come into the foreground as it became clear that they can create much more damage to the environment compared with carbon dioxide. Consequently, regulators in the US and Europe have brought in significant new regulation to curb methane emissions.

The US kicked off the new regulatory spree with methane emissions fees introduced in the Inflation Reduction Act in 2022 and the EU followed suit in May with its first-ever EU–wide regulation on methane emissions from the energy sector.

The UK published its plans in May and there are indications that eventually all of these separate parts of regulation could end up being linked into a more global plan that will also affect trade and imports from countries with a more lax approach to methane emissions.

Why methane and why now?

While methane lives in the atmosphere for a shorter period than CO2 its harmful effects can be in the multiples of carbon in terms of warming the atmosphere. According to McKinsey research methane emissions from human activity account for one-third of global warming and these emissions have risen by 25% over the last 20 years.

From a trading perspective, there are interesting options for getting involved. This being a relatively new area of international attention there is not a tradable market in place yet, although it is possible to trade methane by “converting” it to carbon for trading purposes.

A more straightforward option would be to trade a stock with direct exposure to methane, such as the recently listed Zefiro Methane Corp [FRA: Y6B].

The company is focused on two very different but connected activities which create multiple sources of revenue. One is plugging abandoned oil wells still leaking methane. Emissions from those defunct wells are estimated to be creating more than half a billion tonnes of CO2 equivalent and the US government has allocated $4.7 billion to help states permanently plug orphaned wells.

Zefiro’s chief executive Talal Debs explains: “Although it had long been known that many oil and gas wells existed across the US with no known owner, it was not until recently that the sheer scale of the problem has been clear; there are literally millions of these sites, and with new detection capabilities it is evident they represent a potent source of toxic methane emissions.”

Zefiro then uses these projects as sources for carbon abatement credits. Last year the company pre-sold certified carbon credits to Mercuria Energy America, the US arm of one of the world’s largest independent commodity groups.

Demand for carbon offsets

In the carbon markets, there is a persistent demand for transparent and verifiable carbon offsets that originated from US projects. Meanwhile, in the environmental services space, there is an increasing level of sophistication in understanding and quantifying the orphan methane crisis.

“This convergence gave birth to a carbon credit methodology allowing for credits to be generated directly from well-plugging projects, based on the “carbon equivalent” tonnes of emissions prevented from entering the atmosphere as a direct result of the remediation efforts,” said Debs.

Zefiro Methane is clearly doing something right – in May it reported revenue of $8.5 million, gross profit margin of 31%, and EBITDA of $407,000 compared with no substantive revenues only two years ago.

Looking at the scale of the methane problem and all the international attention on reducing methane emissions, this will be an interesting approach to cutting emissions that could work not only for the US but could also be taken worldwide.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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