The EU’s new methane regulation is beginning to reshape natural gas and LNG supply contracts, mandating comprehensive monitoring, reporting and reductions of methane emissions. Fully effective from 2030, the regulation challenges market participants to align on emissions reduction methodologies and adapt contracts to include emissions clauses. As the industry recovers from the disruptions caused by Russia’s invasion of Ukraine, the focus on emissions transparency and compliance is increasing, and transforming the industry’s approach to managing methane emissions.
The new regulation, adopted in May, obliges the gas industry to measure, monitor, report and verify methane emissions and take action to reduce leakage within the bloc. Critically, it does not only apply to domestic EU gas production, but gas suppliers to the EU will have to adhere to the bloc’s emissions monitoring, reporting and verification rules. From 2030, Brussels will implement a maximum methane intensity limit for gas imports, and failure to adhere to the limit is expected to result in financial penalties.
The new EU regulation is a “unique” import standard globally, as it is being spearheaded from the buyers or importers of gas and not by producing countries, according to Georges Tijbosch, the chief executive of nonprofit methane emissions certification company MiQ. “From that perspective, it’s pioneering that the EU has taken that step,” he tells Energy Intelligence.
Efforts from the market to address emissions were stalled by Russia’s invasion of Ukraine in February 2022, after which supply security took center stage, Tijbosch says. But as the market settled after the shock from the invasion, and as the EU will require compliance on emissions data sharing from next year, addressing methane leakage has come back into the spotlight. “We see over the last week to two weeks, we’ve been asked by several players in the markets, like, how do I look at so and so clause? Where are we going to be in 10 years, if I ask today for certified [gas], what does that mean?” he says. “People are now negotiating such clauses into active commercial conversations.”
Adapting existing or new contracts to include emissions clauses can be done in two ways, either through emissions transparency clauses — measurement and verification of emissions — or including direct emissions reductions. However, the latter is seen as more challenging, particularly for long-term supply contracts.
“As we have seen some offset paired [LNG] cargoes delivered over the past five years already, it’s a much more challenging exercise to incorporate offsets or direct emissions reductions to [the] long-term contractual framework. Because this has to be seen primarily through the lens of regulatory risk that the parties will need to face. Risk allocation between the parties is a bit challenging,” Agnieszka Ason, an energy lawyer and consultant, told delegates at the Flame gas conference in April.
Emissions transparency clauses have already been utilized in the LNG sector. Cargoes supplied under Pavilion Energy’s supply contracts with Chevron and QatarEnergy are accompanied by a statement of greenhouse gas emissions from the gas well to the discharge port.
Fine Tuning Policy
Brussels still needs to fine-tune the policy, as the lack of detail of the new rules could be a potential hurdle to incorporating emissions reduction in gas supply contracts, experts say.
“Some critical details have to be clarified in secondary legislation [delegated acts and implementing acts], including the methodology for calculating methane intensity and maximum allowable methane intensity values,” Ben Cahill, a senior fellow at the Center for Strategic and International Studies, tells Energy Intelligence.
Given that the methane intensity limits will come into force in just six years, the market cannot afford to wait, as both current and new contracts will be impacted by the policy. “I would expect new contracts, particularly contracts that are going to be signed after the regulation has come into force … to contain wording that stipulates what the consequences would be, or will be when the metrics are defined,” Professor Jonathan Stern, of the Oxford Institute of Energy Studies, told delegates at Flame.
Inclusion in Short-Term Contracts First
Buyers and sellers may first incorporate emissions reduction efforts in shorter-term supply deals, which could be then used as a blueprint for longer-term deals.
“We are looking at, with several LNG players, to do this year certified LNG cargoes. There are several players that are very enthusiastic to do that. And that’s most probably going to be on shorter to medium term kind of style,” says Tijbosch. That said, he believes the market is now pushing to include emissions provisions in long-term contracts given stricter regulation and growing scrutiny of emissions by various stakeholders. “Why would you sign long-term contracts if you don’t have provisions on emissions? I would argue that that’s not good risk management for all corporations,” he adds.
While Europe has thrown down the gauntlet with its methane regulation, the spotlight on emissions is growing in Asia. “Japan, South Korea and other countries are moving more slowly, but this has climbed up the agenda and companies and government agencies are engaged. This is normal for Japanese companies and institutions like Jogmec; they do their homework and deliberate carefully, but when they take a decision, it can have a powerful effect,” says Cahill.
Carbon-Neutral LNG?
The lack of transparency around the carbon credits needed to offset the CO2 emissions from LNG cargoes likely hindered the evolution of the carbon-neutral LNG trade.
Stern classified carbon-neutral LNG as a “failed experiment” due to the credit quality of the offsets. “I don’t say that lightly, because it was very, very important in Asia, particularly in Japan and China,” he said at Flame.
Tijbosch expects carbon offsetting to remain a feature of the market, but suggests the industry is better off addressing emissions directly, given the vast quantities of LNG that would require such offsets. “The LNG industry would be way better off dealing properly and go on the front foot of dealing with methane and reducing leaks and/or CO2 consumption in the liquefaction plants. As opposed to ‘Hey, I’ve got some carbon offsets,’” he notes.
Ason, meanwhile, expected carbon-neutral LNG supply agreements to become the norm and could act as a bridge towards full carbon reductions across the value chain.
Data Transparency
Building up data on methane emissions across the full value chain as required by the EU regulations and the adoption of a widely recognized independent emissions standard will help drive the inclusion of emissions reduction clauses in contracts.
“A key challenge is to develop a widely recognized methodology with trusted — and ideally, independently verified — data on emissions intensity. We don’t yet have an industry standard,” says Cahill.
More data will help set emissions baselines, which will help the market incorporate emissions reduction clauses into supply contracts. “You can’t baseline if you don’t have that data yet, and to get the data you need to sign a contract. So there’s a whole kind of chicken and egg thing involved on that,” according to Tijbosch. “I think what we’ve seen in the past and heard from a lot of people is, the supply chain is complicated. I disagree. I don’t think it’s complicated, but you need to build the right kind of tool for it.” In response, earlier this year, MiQ launched its Supply Chain Protocol, which provides data on well-to-gate methane emissions.
Eric Thorp is a reporter with Energy Intelligence covering European natural gas. A version of this article appeared originally in World Gas Intelligence.