Should You Worry About NOAA's Natural Gas Report?

Last week, the National Oceanic and Atmospheric Administration (NOAA) and the University of Colorado Boulder published joint research that found unexpectedly high methane leaks from two natural gas production sites in Colorado and Utah. One of the major selling points for natural gas is that it burns more cleanly than coal, making it what many call an important "bridge fuel" that will smooth the transition from our dirty, fossil-fuel-based energy system to the clean, zero-carbon system of the future. However, if too much methane -- a potent greenhouse gas -- is released along the natural gas supply chain, it may compromise natural gas' clean credentials. What are the facts, and what effect might they have on investors?

Just the facts, ma'am
The NOAA/UC Boulder study analyzed "fugitive methane emissions." Natural gas is largely made up of methane anyway, so fugitive emissions are methane that has been unintentionally released into the atmosphere, where its effects as a greenhouse gas are far more damaging than anything carbon ever dreamed up. We should keep a magic number in mind here. The Environmental Defense Fund (EDF) and Princeton University published a study showing that natural gas reduces climate effects when compared to coal in electricity generation only if methane leakage remains below 3.2%.

The NOAA/UC Boulder study looked at data from well sites in two locations: the Denver-Julesberg Basin in Colorado and the Uinta Basin in Utah. Major operators in these areas include Anadarko Petroleum (NYS: APC) , with nearly 1.2 million acres in Denver-Julesberg, Chesapeake Energy (NYS: CHK) , with roughly 650,000 acres in Denver-Julesberg, and Newfield Exploration (NYS: NFX) . with about 250,000 acres in Uinta. The study found methane emissions well above the 3.2% magic number, and significantly above industry and EPA estimates: 4% at the Colorado site and a whopping 9% at the Utah site.

If these numbers apply to the industry at large, then one major selling point for natural gas evaporates into the ether.

A little thing called the scientific method
But it would be irresponsible to extrapolate these results to the entire natural gas spectrum. This study, while valuable, provided a snapshot of only two specific locations on one specific day. It is interesting and important, to be sure. Even the American Natural Gas Alliance said: "The findings raise questions and warrant a closer examination by the scientific community." But much more research will be needed before a clear picture emerges.

Another, earlier study raises additional questions on this topic. A 2010 analysis of reported routine emissions at Barnett Shale gas well sites in the City of Fort Worth showed leak rates ranging from 0% to 5%, with only 10% of wells accounting for 70% of emissions. Assuming accurate reporting, it seems that not all well sites are created equal.

I asked Ramon Alvarez, a senior scientist at EDF focusing on natural gas, about the apparent variability in emissions, both between well sites in Fort Worth and between Colorado and Utah. I wondered what might account for the difference. He speculated that there were two possible explanations. In the case of Fort Worth, he observed that differences in emission management practices from one well site to the next were most likely to explain the variability. Regarding the major difference between NOAA's observations in Colorado and Utah, Dr. Alvarez pointed to recent studies that linked emission variability to differences in state regulatory frameworks. Colorado is one of two states (Wyoming is the other) that have most effectively regulated these matters for more than a decade.

Takeaways
My talk with Dr. Alvarez highlighted the fact that there is still a lot of room for companies to rein in methane emissions. He explained that the overall trend is good, and that industry is increasingly recognizing that methane emissions are important. Companies are currently pursuing low-hanging fruit. For example, Dr. Alvarez said that two or three years ago, about a quarter of wells used a technique called reduced emission completion. Now around 93% of wells do so.

Meanwhile, robust efforts are under way to provide a clear picture of exactly how much methane is emitted to the atmosphere along the natural gas supply chain. "EDF is working with leading academic researchers and industry leaders to conduct scientifically rigorous measurements of quantitative emissions across the natural gas supply chain from well to the end user ... We are developing the methodologies where necessary to move past a "he said, she said" conversation to one focused on data characterizing leak rates," said Steven Hamburg, chief scientist at EDF, in a recent blog post.

Encouragingly, several major natural gas players are collaborating with EDF in its endeavors, including Anadarko Petroleum, Encana (NYS: ECA) , and Southwestern Energy (NYS: SWN) . Investors should look for companies like these that are taking a proactive stance on methane emissions. My bet is that once EDF's survey is complete, it will serve as a tool for regulation, and companies that have gotten ahead of the curve will be much better able to adapt.

Meanwhile, shareholders are seeking to punish laggards. For instance, Trillium Asset Management has filed shareholder resolutions with ONEOK (NYS: OKE) and Range Resources (NYS: RRC) pushing for greater disclosure of the companies' methane emissions management processes. More such pressure is likely as better data emerge.

Investors in natural gas should look for companies that take their methane emissions seriously and disclose their control strategies in a transparent manner. I will report on EDF's emissions studies as they are released, and I plan to analyze emissions data to see how companies are currently performing in this regard.

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The article Should You Worry About NOAA's Natural Gas Report? originally appeared on Fool.com.

Sara Murphy has no position in any stocks mentioned. You can follow her on Twitter at @SMurphSmiles for updates.The Motley Fool recommends ONEOK and Range Resources. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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