LNG in World Markets Featured Article

 The new EU Methane Regulation will compel importers of LNG into Europe to negotiate new clauses in their supply contracts, including from the US, their main supplier, to comply with increasingly tough reporting standards on methane emissions. Failure to meet the far-reaching terms of the new law, the world’s first methane requirement for imported fuels, may result in financial penalties if rules that are uncertain and difficult to implement are not met.

Regulation (EU) 2024/1787 came into legal effect on Aug. 4 and is the most significant display of the EU’s determination to cut methane emissions. It even extends the EU’s regulatory influence to LNG suppliers outside the 27-nation bloc whose leading LNG importers include Spain, France and the Netherlands. The regulation is part of the European Commission’s policy aimed at reducing greenhouse gas emissions.

But the complex legislation and industry uncertainty over compliance requirements is already adversely impacting long-term contract negotiations. One problem facing parties in these negotiations is how obligations and penalties should be assigned.

“This lack of clarity is already impacting the willingness of companies to enter into forward contracts, which is unhelpful to energy security and would increase price volatility,” says Brussels-based Energy Traders Europe.

It estimates at least two negotiations for long-term contracts have been discontinued, because parties are unable to agree how penalties should be divided if information cannot be declared in a format acceptable to the EU. Neither exporter nor importer is prepared to accept unknown penalties, and the resultant risk, that might apply if gas sources cannot be identified or an exporting country is not considered to use methane measurement, reporting and verification (MRV) equivalent to the EU’s standards.

Brussels-based trade association Eurogas, which is the chosen industry representative in talks with the commission on the legislation, has warned that a lack of clarity in the regulation creates uncertainty and complexity. It raises questions on how producers, exporters and importer scan anticipate compliance with rules today that will only be defined at a later stage by the European Commission. A key challenge to interpreting and implementing the regulation is how importers can demonstrate the point of production of their LNG.

The first deadline of the regulation goes into operation in May 2025 when importers will have to provide details to the national competent authorities where they are based of the exporter, contractual counterparty or producer of all their contracts and if these parties apply regulatory or voluntary measures to reduce methane emissions.

Exporters and producers are urged to provide details, but no standards have been set under the regulation. Failure to comply can result in financial penalties and possible reputational risk as the regulation allows for the public disclosure of companies that are fined. A methane transparency database is scheduled to be issued by the European Commission in 2026 and it will also publish “methane performance profiles” of importers and countries where gas is produced.

For non-compliance, EU member states are permitted to set financial penalties that are “effective, proportionate and dissuasive” though imports will not be stopped on the grounds of EU energy security requirements. Administrative fines can be up to 20% of the annual turnover for the importer in the preceding business year. The industry will also have to absorb the cost of installing methane monitoring equipment and higher compliance reporting costs.

The main impact of the regulation is likely to be felt from 2027 when importers need to demonstrate that any contract for the supply of LNG from outside the EU signed after Aug.4 covers only LNG producers that apply methane MRV measures equivalent to those in the EU. Importers must also report the methane intensity of the production of imported LNG from Aug. 4, 2028, including for contracts signed before that date.

New and existing LNG contracts will likely need to be revised to meet the regulation terms, particularly in meeting Articles 27, 28 and 29. For contracts signed before Aug. 4, 2028, importers must make all “reasonable efforts” to ensure LNG imports meet the terms of the regulation, including by amending these contracts.

It is unclear what the impact will be if LNG suppliers do not feel compelled to provide emissions data to importers into Europe. The regulation could also potentially create a two-tier market where lower-methane LNG is priced higher than LNG that does not meet EU regulations, a cost that would likely have to be borne by European consumers. The main LNG suppliers to Europe are the US and Russia but also include other countries such as Qatar, Algeria and Nigeria.

Criticism runs deep

A lack of clarity in some of the terms of the regulation and the likelihood of future secondary legislation by the European Commission complicates the outlook for importers from the first deadline and certainly over the next six years.

Industry criticism over the legislation’s timelines and lack of clarity in untested legislation has been swift. “The difficulty is not the level of ambition but the lack of clarity and practicability of the requirements,” says Eurogas. “The lack of clarity creates unnecessary uncertainty.”

Demonstrating the point of production is a key challenge facing importers as the production site of imported LNG may not be known. This includes LNG purchased referencing prices based on third-country hubs such as Henry Hub in the US and the UK’s NBP or gas transported to processing-export facilities through multi-stream pipeline networks, as in the US which is Europe’s main source of LNG imports. In many cases, importers will have no direct contractual relationship with the producer. Importers can also buy from the LNG portfolios of aggregators and traders which can include LNG from different sources. Supply can also be swapped to capture the best arbitrage through positioning and transport of cargoes, which further complicates the issue.

Law firms have highlighted the problems of the regulation’s text on the point of production. “This becomes increasingly complex or unworkable in the context of a liquefaction facility that sources feedstock gas from multiple gas fields, and it becomes completely unworkable when applied to liquefaction projects that source their gas from a grid or natural gas aggregators– e.g. US LNG projects,” according to Houston-based law firm Baker Botts. Gas is not “tagged” or tracked in the US as it is commingled through a system pipelines and freely traded.

Complexity and high reporting hurdles could result in importers being averse to buying LNG from the US if they risk failing to meet the requirements of the regulation. Equally, sellers could add a cost premium for supply into the EU, based on ranking, which gives leverage to the seller. The regulation is also based on producers, exporters and other suppliers of LNG agreeing to collect and provide information on methane to importers in Europe, information that is in some cases considered commercially sensitive.

Eurogas has called for pragmatic solutions to demonstrate the point of production. It has also questioned how producers, exporters and importer scan anticipate compliance with rules that will only be defined by the European Commission at a later stage. Additional potential problem areas include MRV equivalence issues that can be granted by the commission to LNG exporting countries and future methane intensity requirements.

The regulation states demonstration of MRV equivalence to the EU at production level will start on Jan. 1, 2027. This is an obligation for contracts signed or renewed after August 2024 and reasonable efforts need to be made for contracts signed before this date. Equivalence is granted if an exporting country applies – at production and exporter level – rules that are equivalent to Article 12. Under Article 12, companies need to submit reports on their operated assets which detail the type and location of all methane emissions within 18 months. But, according to Eurogas, there is inconsistent language in the regulation, making it unclear if equivalence is required at production and exporter level or just production level.

Timelines are also unclear. There is no deadline for the commission to establish MRV on a country-by-county basis and there is also no deadline for it to publish general rules for country-level MRV equivalence assessments. This brings into question whether it is achievable by the start of 2027. There is an additional risk of fragmentation as producer-level equivalence determination is the responsibility of EU member states, individually.

The methane intensity methodology is to be defined by the Commission by August 2027. Intensity reporting by importers is due from August 2028and methane intensity limits will be defined by August 2029. This is a questionable timeline as there is only one year between the definition of an upper limit and the obligation to comply with it, according to Eurogas.

The EU is faced with increased pressure from environmental groups to limit methane emissions from gas imports. The Global Legal Action Network on Oct. 16 said it had filed a case with the Court of Justice of the EU because of the absence of methane emissions data associated with production of gas sold through the Aggregate EU gas trading platform and that methane limits under the regulation only take effect from 2030.