What do EU methane rules mean for global gas suppliers?

By Newsbase May 7, 2024

There is particular complexity in how the rules will be applied for US LNG exports, as exporters often do not produce the gas that they supply globally, and lack the data on emissions upstream.

WHAT: EU bodies reached a provisional deal on legislation to cut methane emissions from both domestically produced and imported oil and gas in November.

WHY: The legislation will have major implications for global gas suppliers in the years to come.

WHAT NEXT: There is great uncertainty about how the legislation will be applied, in terms of MRV equivalence, verification of data, the methodology to calculate methane intensity, maximum methane intensity values and potential penalties.

 

The EU last November came to a provisional deal on legislation to cut emissions from both domestically produced and imported oil, natural gas and coal. But there are gaps in the legislation that will create major uncertainties even after it comes into force in a few months, in particular for US LNG exporters, experts at the Center for Strategic and International Studies (CSIS) write in a blog post.

The EU is now determining “methane performance profiles'' of supplier countries and producers, which will drive demand for better emissions data quickly, including LNG exporters. The European Commission needs to clarify how it will calculate the methane intensity of imported gas and set “maximum methane intensity values,” or import standards. It needs to decide how it will assess whether imported oil and gas are produced under measurement, reporting and verification (MRV) rules that are equivalent to EU standards, and if there is regulatory equivalence in any other countries that could potentially allow some producers to be exempt from these requirements. Verification of data is another issue that needs to be solved, as are potential penalties for non-compliance.

Regarding US LNG, EU requirements are also difficult to reconcile with the way that US LNG is produced and traded – which is a key concern given that the US is now Europe’s largest LNG supplier. The EU legislation seeks data “at the level of the producer,” but US LNG exporters typically do not produce the gas themselves but from large producers or marketers. The exporters have limited data on the methane intensity of this gas. Furthermore, a significant share of US LNG is sold on a free-on-board (FOB) basis to traders or aggregators that sell volumes from their portfolios to buyers in many regions, including Europe, and have no producer-level data. The EU requirements will be easier to fulfil in supplier countries with more concentrated production and simpler supply chains, such as Qatar.

The provisional agreement on methane legislation last November was reached by the European Commission, the EU Council and the European Parliament. The legislation is expected to be published in the Official Journal of the EU this summer.

The legislation is years in the making. The EU first introduced its methane strategy in 2020, and this was followed by the Commission’s legislative proposal in late 2021. What followed was persistent disagreements on the legislation, including rules on leak detection and repair and measurement, reporting and verification (MRV). A key area of dispute was gas import rules, with key parliamentary committees and environmental organisations pushing for stringent requirements for imported gas. Instead of a firm import standard, the EU has imposed a series of information requirements that will increase between now and 2030.

While the legislation is now near the finish line, unfinished details create uncertainty for domestic oil and gas producers and suppliers to the EU. The issues at stake include MRV equivalence, verification of data, the methodology to calculate methane intensity and “maximum methane intensity values” and potential penalties for operators and importers who fail to fulfil the new requirements. 

 

MRV equivalence

The legislation introduces MRV rules for all domestic operators, to increase the accuracy and reliability of reported emissions. These standards will be extended to imports as of January 2027, so the EU will need to determine whether other countries’ regulations are equivalent or stronger than its own.

“This is a critical issue that could influence market competitiveness – or eventually even market access for gas suppliers,” the CSIS experts note. “Crafting the rules for determining MRV equivalence will be challenging given the variation in regulatory regimes and governing bodies across countries.”

It may be a challenge for countries to demonstrate to the EU that their rules are as strong as those in the EU. The European Commission may request that standardisation organisations develop harmonised standards, but for the time being there is a lot of uncertainty over the information that suppliers should provide.

By January 2027, EU importers should demonstrate that supply contracts concluded after the legislation entered into force are with countries with MRV rules equivalent to or stronger than the EU ones. Importers should also carry out “all reasonable efforts” to bring previously concluded contracts in line with the rules and annually report on their progress. The Commission must recommend optional model clauses to provide this information, and member states and the commission “shall protect the commercial secrecy of data obtained.”

Notably, international producers or other countries can be exempted from the requirement if it proves difficult or time consuming. MRV rules can be determined as equivalent to the EU ones if producers meet EU methane quantification standards or the Oil and Gas Methane Partnership (OGMP 2.0) Level 5 standards and are also subject to independent third-party verification. Brussels can also determine country-level equivalency to its rules, but only if producing countries initiate a request and provide all necessary data to show their MRV requirements are equivalent to or stronger than EU rules. Again, independent third-party verification of data is needed. US methane regulations might meet such a standard, the CSIS experts note, but it remains uncertain how this process will work and how long it will take.

 

Verifying data

The legislation stresses the importance of independent, accredited verification of data to fulfil monitoring and reporting requirements. But it is unclear which entities will serve as accreditation bodies. The verifiers should be separate from operators, “undertakings,” and importers subject to the regulation, and verification activities “shall be aligned with European or international standards and methodologies.” But the commission will still have to adopt a delegated act specifying a methodology for calculating methane intensity.

The choice of verifiers could be limited, the experts note.

“The technical sophistication required to analyse and interpret methane emissions data suggests a limited pool of potential verifiers,” they write. “Commercial entities in the certified gas space offer independent third-party verification of emissions data, but it is unclear which of their varying methodologies may be deemed acceptable.”

 

Methane intensity

A central aim of the legislation is to measure the methane intensity of the fossil fuels that the EU imports, but the methodology for calculating this intensity is yet to be determined. A delegated act should be adopted within three years of the legislation coming into force, which will fix the rules and “consider the different production processes and site conditions for the production of crude oil, natural gas and coal, and shall take into account existing international methodologies and best practice.” 

There are several uncertainties about how this intensity will be assessed. For example, the experts note that in areas where there is significant associated gas production, there is a question whether the emissions will be allocated across products based on mass, energy content or economic value.

Importers with supply contracts concluded or renewed after the legislation enters into force need to start annually reporting their products’ methane intensity by 2028. Before then, they should “undertake all reasonable efforts” to report methane intensities for existing contracts. The timeline for the Commission to develop and publish a methodology is a concern, the experts write, given the complexity of methane emissions monitoring, quantification, reporting and verification.

 

Maximum methane intensity values

The EU will set a maximum methane intensity value to cap allowable emissions for crude oil, natural gas and coal imports starting in 2030. But the consequences for failing to meet this standard are not yet clear. There have been proposals to impose a fee on offenders, and there is an implicit threat that the EU could eventually close market access to emissions-intensive gas suppliers.

In May 2023, the European Parliament proposed that the Commission “study the possibility of introducing an ambitious upstream methane emission intensity performance standard at below or equal to 0.2%.” This target would align with an earlier goal set by the Oil and Gas Climate Initiative (OGCI), as well as the agreed 2030 target for signatories to the Oil and Gas Decarbonisation Charter and the upstream methane intensity target in the waste emissions charge under the US Inflation Reduction Act of 2022 (IRA). Although the 0.2% target was dropped in the November 2023 provisional EU agreement, it may reappear if Brussels determines there is value in global alignment – but the Commission may also want to set its own target.

A lot will depend on how quickly the EU sets its methane performance standard. If it takes several years to establish a methodology and set a target, “third countries” and companies will have little time to comply. If the EU moves ahead faster, this would help suppliers prepare to meet or exceed the standard.

 

Potential penalties

Like most extraterritorial EU legislation, a key goal of the methane legislation is to encourage global action. But not all gas-producing countries share the same ambitions. Gas suppliers may simply refuse to provide the requested data or provide incomplete data, perhaps arguing that they lack the technical systems or financial resources necessary to meet the EU’s MRV requirements. Gas producers could argue that domestic laws on national security or corporate data secrecy prevent them from sharing sensitive information. They may also provide incomplete or poor-quality data that fails to meet the standard set by Brussels.

If suppliers refuse to provide the data, the legislation states that they will face penalties, capped at “20% of the annual turnover of the legal person concerned in the preceding business year” or “20% of the yearly income in the preceding calendar year” for natural persons. However, the EU delegates enforcement to its 27 member states.

“This raises the possibility of a variable regulatory landscape – especially among member states with deeper concerns over energy security or natural gas prices – that would undercut the legislation’s effectiveness,” the experts write.

 

Implications for global gas producers

These rules are important for global gas producers, the experts stress, as “gaps and uncertainties in the legislation represent key problems with which both producers and consumers are grappling regarding how to better track and reduce methane emissions across natural gas value chains.”

The experts note that the EU is well ahead of other gas-importing regions in demanding and publicly sharing more granular data on the emissions intensity of purchased gas. But Japan, South Korea and other gas importers are in the early phases of gathering information on emissions intensity from their suppliers as well, and they could end up adopting similar requirements. On the supply side, the US EPA’s final rule on greenhouse gas (GHG) emissions from the oil and gas industry and the IRA’s methane fee and associated reporting requirements have the strongest potential to reduce methane emissions from the sector. 

“But a stronger demand pull for gas with demonstrably lower emissions intensity could also create a powerful signal,” the experts write.

The critical question is how these regulatory requirements will affect commercial terms and the day-to-day business of the global gas trade. 

“The EU’s methane legislation seems it will be most effective in developing national- or operator-level methane intensity profiles. Developing this data would be an important achievement, creating incentives for emissions reductions,” the experts write. “But the EU requirements do not map neatly onto commercial transactions. Will emerging data on emissions intensity become available at the level of LNG cargoes or discrete pipeline volumes? If so, will the market begin to assign a premium to gas with lower emissions intensity? Emerging rules in the EU might push the oil and gas industry in this direction, but regulatory and market momentum elsewhere will probably be necessary.”

Another uncertainty is whether the rules will apply to all imported gas. They may be particularly challenging for US LNG exporters because of the aforementioned issue with US gas supply chains. 

“The US is unique in this regard, but since it has become such a large LNG exporter to Europe, Washington and Brussels will have to reach some accommodation,” the experts write. “Time is of the essence – because within a few months LNG suppliers to Europe will be playing by a new set of rules.”

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