PAYNE INSTITUTE COMMENTARY SERIES: COMMENTARY

By Brad Handler

February 7, 2025

The following remarks were prepared for the SPE Decarbonization Congress in Texas on the evolution of carbon markets to finance the decommissioning of primarily orphaned and abandoned oil and gas wells.

My intent today is to update you on the progress being made towards developing a market system that generates funds to plug orphaned and abandoned oil and gas wells. With that said, in Q&A we can also discuss how this system might play into other decarbonizing activities such as differentiated gas and CCS.

The process starts with a mindset, a decision to place monetary value on avoiding the emissions of greenhouse gases. Ascribing value can be done in various ways. To offer just one example, lenders can offer lower interest rates for projects that reduce carbon emissions.

But the specific idea of a carbon market is founded on standardizing around avoiding the emission of 1 ton of CO2 equivalent. And in this way 1 ton of CO2 becomes a form of a currency of its own, that can hold value.

As you probably know, there are jurisdictions globally that have mandated carbon emissions reductions and use markets to enable those reductions. These are referred to as compliance markets.

And then there is a set of voluntary carbon markets, or VCM, which is tiny by comparison. I imagine you’ve all heard something about the VCM because it is wrestling through integrity challenges.

Higher standards are emerging from such wrestling, and buyers are expressing the willingness to pay more for quality, which in this case means how confident a buyer can be that the credit achieves its claimed climate benefit.

The prospects for the VCM, and more generally carbon offsetting, seem hinged to two sources of longer-term demand. The first is from corporates. By the end of 2024, nearly 10,000 companies had made commitments to lower their GHG emissions, with most emphasizing a 2050 Net Zero reduction.

These companies comprise a very significant portion of the world’s carbon emissions. Just how much is hard to say because there is a lot of double counting, but it is a lot.

This could of course change in the current environment, particularly in the U.S. But if this notion of climate responsibility remains relevant, we would expect a lot more buying of these carbon credits to offset the carbon emissions the companies cannot reduce operationally.

The second source is the establishment of a set of internationally accepted rules for countries to trade carbon credits in order to help them meet their stated commitments to lower their emissions. These are referred to as Article 6 rules, part of the Agreement agreed to by participating countries during the 2015 COP in Paris.

The Article 6 rules basically let one country buy carbon credits from another country that, say, protects its forests in a verifiable, additive way. The buying country can then use those credits to help meet its own commitments to lower its carbon footprint.

There are 3 categories of integrity that need to be satisfied if carbon markets are to flourish. The first, in orange, has gotten the most attention — the characteristics of the credits themselves. The various attributes aggregate to providing confidence that the activity avoids or removes emissions from the atmosphere.

Carbon market actors have invested a lot of effort to try to ensure integrity along these categories, and others and I am optimistic that credibility in this vein can be established for many activities. With that said, I do strongly believe there must be some appreciation of reasonable levels of uncertainty.

The second, in blue, is the idea that the information about the credit and the underlying activity must be available and accurate. It is also critical that the credits themselves are accounted for, to avoid selling it more than once.

The carbon market has been very rag-tag and weak data systems still predominate. A lack of money is partly to blame; I think mistrust of blockchain, which gets immediately associated with crypto, probably has an impact as well. But the potential to bolster credit integrity through blockchain’s use is real.

The third, in green, may not be important at first, but I think it will be eventually. It is securitization, by which I mean that the credits can qualify as financial securities. That would put them in the same investable category as stocks or bonds, broadening the market as buyers, investors and the financial services industry, including banks, auditors and exchanges, can feel more confident that everything is legally compliant.

With that as backdrop, let’s shift to crediting related to oil and gas wells.

You can think of crediting for the P&A’ing of distressed or abandoned wells as being part of a potential crediting family. Which is to say that there are developer entrepreneurs out there trying to sort out the “how” of getting paid to plug wells in various stages of their productive lives and even not drill it in the first place.

The focus of avoided emissions shifts depending on the well type. Plugging abandoned and even marginal wells, primarily avoids fugitive methane. For flowing wells, the benefit shifts to CO2 emissions savings from a reduction in hydrocarbon supply, although usually there is a focus on shutting in more methane emissive assets.

Carbon market activity thus far has been limited to orphaned, abandoned and marginal wells. On the orphaned and abandoned side there have been 13 projects listed on a VCM registry, comprising 4.5MM credits across 27 wells. In other words, it is tiny! Sales efforts have largely been direct to prospective buyers and through B2B marketing channels like Patch and Cloverly.

On the marginal wells side, I am only aware of private transactions that have not been listed on a registry. ClimateWells’ work in California is likely the most significant; in its case, the work has been funded by JP Morgan.

Let’s dig in a little deeper into credit characteristics and talk about the methodologies for crediting plugging abandoned assets.

The orphaned and abandoned market currently has three methodologies being used to issue credits, offered by three registries for the issued credits.

A few points about these

1. These 3 methodologies are very different.
2. I don’t think that one is necessarily right or better than another; they address different wells in different states
3. However, having multiple methodologies makes it that much harder to educate buyers, especially those outside of the oil patch
4. And lastly, I think all the methodologies need to be bolstered, adding various provisions.

Without dwelling on too many of the details, let me highlight one important distinguishing feature. The number of credits issued can be based on current leak rates. Or it can be based on an assessment of a likelihood of the well emitting over the course of time. The first is really CarbonPath’s target; it and ACR take a measured volume and run it flat for the credit period. The second, which is most clearly reflected in BCarbon’s methodology, incorporates an assumed decline rate and a probability that the wellhead will leak.

I will finish by sharing a little about the ecosystem that is developing for carbon markets, illustrating it through abandoned oil well crediting.

The 13 plugging projects that have been listed on the registries have been done by 9 developers, all small companies.

The plugging job and the pre- and post-plugging methane measurements were independently verified by entities with deep O&G P&A experience.

Two of the projects have obtained a carbon credit rating. This is an added expense, but as I noted in an earlier slide, projects with high ratings are securing much higher prices than lower ratings and at least some buyers want the additional “blessing”.

Related, carbon credit insurers are starting to emerge. They can help protect a buyer against a claim that might emerge on the credits; in this case if the P&A job fails, say after a few years, and some of the assumed carbon benefit is lost.

As far as upgrading data management, asset creators have emerged, using Distributed Ledger Technology and creating a unique token for each credit, i.e. for each ton of CO2 equivalent that has been avoided. In this space, only CarbonPath’s credits have been tokenized, using a system it developed through Celo.

But again, I think the ecosystem will evolve such that not only are more tokenized, but those tokens could undergo the scrutiny of a financial regulator, like FINRA, which can enable the token to be deemed financial securities and thus conform better with financial services’ and exchange requirements.

And with that, I am happy to take any questions.

ABOUT THE AUTHOR

Brad Handler, Payne Institute Program Director, Energy Finance Lab, and Researcher

Brad Handler is a researcher and heads the Payne Institute’s Energy Finance Lab. He is also the Principal and Founder of Energy Transition Research LLC. He has recently had articles published in the Financial Times, Washington Post, Nasdaq.com, Petroleum Economist, Transition Economist, WorldOil, POWER Magazine, The Conversation and The Hill. Brad is a former Wall Street Equity Research Analyst with 20 years’ experience covering the Oilfield Services & Drilling (OFS) sector at firms including Jefferies and Credit Suisse. He has an M.B.A from the Kellogg School of Management at Northwestern University and a B.A. in Economics from Johns Hopkins University.

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