Can labelled debt hold the key to tackling methane abatement?

On June 20, the MethaneSAT satellite lost contact with mission control. Engineers are still investigating what caused a communications break down in one of the world’s most advanced methane tracking satellites. Its legacy, meanwhile, lives on.

Launched in 2024, MethaneSAT was tasked with measuring methane emissions with unprecedented precision. Its reason d’etre is vital, given that methane is far more potent than carbon dioxide. Some 30% of global temperature rise since the industrial revolution can be attributed to it.

Yet, a financing gap persists in methane abatement by the oil and gas industry – one of the largest sources of methane emissions. New guidance from the Methane Financing Working Group recommends changing the way debt markets approach structuring oil & gas debt instruments. Could new forms of labelled debt hold the key to methane abatement?

A persistent gap

“The methane abatement financing gap persists despite clear economic and climate benefits”, says Ana Diaz, global energy transition lead at Climate Bonds Initiative, which participates in the working group.

The guidance frames methane abatement as the oil and gas industry’s ‘most effective climate tool’, based on not only its technological feasibility but also its economic viability.

“Solutions—like leak detection and repair, better flaring controls, and zero-emitting equipment—are already commercially available and cost-effective. In fact, a significant portion of the sector’s methane losses could be captured with a positive net present value”, Diaz told Net Zero Investor.

Diaz contends that up to 50% of oil and gas methane emissions could be slashed by 2030 using existing technologies, marking significant progress towards meeting the IEA’s target of 75% within the same time frame.

Status quo

The structure of current oil and gas debt finance contributes to this persistent financing gap.

“One core issue is that most debt in the oil and gas sector, over $3.2trn in outstanding instruments, carries no conditions related to emissions reduction. Methane abatement is rarely embedded in standard financing structures”, notes Diaz.

“Moreover, many methane projects, especially those led by national oil companies (NOCs) or independent producers, are too small to meet the typical $500 million benchmark size required by labelled debt markets”, she adds.

There are other constraining factors at work too. Methane abatement projects must compete for internal capital in oil and gas majors, data quality and reliability remains a challenge and the risk of greenwashing in oil and gas debt markets is one investors are acutely aware of.

Labelled debt

The solution then, according to the working group, is to link methane abatement with a bond’s use of proceeds or methane-linked KPIs.

“Labelled debt instruments such as use of proceeds bonds are well suited to finance methane abatement. Their capital is tied to specific methane reduction activities or emissions targets, offering transparency for investors and accountability for issuers”, explains Diaz.

Established frameworks such as the ICMA Green Bond Principles could be leveraged to boost investor confidence. In an ideal world, the resulting financing structure would to lower borrowing costs for issuers and incentivise the company to align with investor expectations regarding methane abatement.

Greenwashing

Such bonds, however, are not without pitfalls. Investors would inevitably take on risks – the most worrisome of which is greenwashing.

“Unless project integrity is well defined, there is always the risk that ‘green’ capital is used to sustain business-as-usual oil and gas operations under a misleading climate label”, warns Diaz.

To address such risks, the working group has published guidance to help investors identify qualified projects.

For instance, specifying that proceeds should not find their way into new oil and gas development is imperative. As is linking material emissions from joint ventures in KPIs.

Labelled debt, the new guidance concludes, is an opportunity to make outsized progress on the methane front.

Debt markets pushing the envelope on methane abatement by 2030, will serve as a reminder that methane abatement is technologically, commercially and financially within reach. More so today than at any point in the past.

It is hard to ignore the role of an advanced methane tracking satellite in catalysing that progress. Even though communication was lost on June 20, MethaneSAT had already communicated a great deal. Lest we forget.