Using ambient-pressure X-ray photoelectron spectroscopy (AP-XPS), we studied the adsorption and reactions of CO and CO + H on the Ni(111) surface to identify the surface chemical state and the nature of the adsorbed species during the methanation reaction. In 200 mTorr CO, we found that NiO is formed from CO dissociation into CO and atomic oxygen. Additionally, carbonate (CO) is present on the surface from further reaction of CO with NiO. The addition of H into the reaction environment leads to reduction of NiO and the disappearance of CO. At temperatures >160 °C, CO adsorbed on hollow sites, and atomic carbon and OH species are present on the surface. We conclude that the methanation reaction proceeds via dissociation of CO, followed by reduction of CO to atomic carbon and its hydrogenation to methane.