European regulations on methane emissions to drive reporting on US LNG supply chain

www.spglobal.com    23 Sep 2024

Highlights

EU regulation targets emissions of imported fuels

Measure US LNG sector to better track, reduce emissions

Compliance, reporting uncertainties remain

A new European Union regulation aimed at imported fuels is sending a strong signal to the US LNG sector and other suppliers to better track and control methane emissions.

The long-anticipated EU Methane Regulation went into effect Aug. 4, with a key compliance period starting in 2027, but many details about how the new rules will work have yet to be developed. Reporting requirements that begin in May 2025 stand to establish an emissions baseline and set the stage for the coming years.

The top US LNG exporter, Cheniere, sees the EU regulation as a measure that "sharpens the requirements" for addressing emissions, according to Robert Fee, the company's vice president of international affairs and climate. Cheniere has been working on its own methane measurement and reporting effort for over six years, Fee added.

"We want to help our customers grow their business the same way that we want to grow ours," Fee said. "Today and into the future, that's going to be in a world where there's an increasing focus on climate-related issues, and certainly through 2030 industry needs to take action to measure and mitigate methane emissions to near zero."

Instead of an "immediate, strict and fast requirement" for importers to report all the data the EU wants or face a penalty, Fee said the initial regulation prompts companies to first submit information for existing supply deals and then incorporate the requirements into new contracts over time.

Cheniere anticipates "no immediate disruption to the marketplace" with the EU making clear it still sees US LNG as a critical supply nearly three years after the loss of most Russian pipeline gas, Fee said.

The regulations contain provisions to maintain a security of supply and requires importers to take "reasonable efforts" to meet reporting requirements — terminology that market participants and policy experts say should avert near-term impacts on flows of LNG to Europe.

Implementation

Exactly how the EU will apply the rule to LNG importers has injected uncertainty into talks over LNG supply contracts since August, attorney Alex Kerr, a partner with Baker Botts in London who advises clients in such negotiations, said in an interview. The US LNG sector in particular faces major reporting and compliance uncertainties that stem from the nature of the US gas system and its vast pipeline network, policy and legal experts note.

"It's led to a slowdown and a bit of a pause while people take stock on longer-term deals," Kerr said.

For the US LNG industry, the rule's requirement to collect data "at the level of the producer" presents the clearest hurdle for exporters who do not have a clear line of sight to the wellhead, analysts say.

"That's a key phrase, and the challenge is you have a lot of people in the gas supply chain in the United States that just don't have that information," said Ben Cahill, director of energy markets and policy at the University of Texas at Austin's Center for Energy and Environmental Systems Analysis.

European authorities "have to be practical" in implementing these rules to still be able to keep importing gas, Menelaos Ydreos, secretary general of the industry group the International Gas Union, told Commodity Insights.

EU methane push

EU officials in April said the rule enables the region "take the lead" on efforts to curb methane. Among human-emitted greenhouse gases, methane is the second biggest contributor to climate change after carbon dioxide.

The initial push by the EU is focused on making fuel importers demonstrate they have a plan in place and gathering information, Max Mucenic, an analyst for the Center of Emissions Excellence at S&P Global Commodity Insights, said in an interview.

Starting in January 2027, importers will have to show the supplies they bring in are subject to regulations at least as stringent as the EU standards.

By 2030, there will be a methane emissions intensity standard that imported supplies are expected to meet.

The EU said the regulation delivers on the Global Methane Pledge, an agreement signed in 2021 by the US and more than 100 other countries that aims to reduce global methane emissions at least 30% from 2020 levels by 2030.

The regulation also connects the emissions reporting to the Oil and Gas Methane Partnership 2.0, or OGMP 2.0 — the United Nations Environment Program's measurement-based reporting program created in 2021 to provide a framework for reporting methane emissions in the oil and gas sector.

Unfinished pieces

Under the EU regulation, importers in May 2025 will have to submit information annually to a "competent authority" overseeing compliance in each member state with certain information about the supply.

Those authorities have yet to be established. Eventual penalties for non-compliance are also unclear.

The law does allow for a regulatory exemption. Supply countries can provide data showing their LNG is subject to requirements at least as stringent as the EU rules, but European officials have yet to spell out how that process will work.

By the end of the decade, US LNG export capacity of over 13 Bcf/d in 2024 is expected to increase twofold as export projects in development or under construction come online.

Global LNG demand is rising rapidly too, expected to increase more than 70% from over 400 million mt/year in 2024, according to S&P Global Commodity Insights base case long-term supply-demand forecast. But Commodity Insights' forecast varies significantly across different scenarios, with the potential for demand to decline moderately by 2050 compared with current levels in a scenario where the energy transition accelerates.

American government officials could potentially work with EU counterparts to recognize domestic US regulatory controls, including a final Environmental Protection Agency rule on emissions from the US oil and gas sector and the US methane fee, which amount to some of the strongest supply-side regulations on methane in the world.

The EU may also be able to draw on an effort by the US Department of Energy with other countries to establish a credible framework for tracking and reporting emissions, Mucenic said.

It is "far from settled," though, which regulations the EU will deem equivalent to its standards, according to Charlie Riedl, executive director for the Washington, DC-based trade group the Center for Liquefied Natural Gas.

Meanwhile, the EU staking out a strong stance on addressing methane emissions — flexing its buying power and influencing other countries — provides some regulatory continuity for US market participants facing the uncertainty of a US presidential election year, Mucenic said.