EU Methane Rules: Impact for Global LNG Exporters

The Issue

Last November, the European Union reached a provisional agreement on its long-developing methane legislation, which aims to reduce emissions from domestically produced and imported oil, natural gas, and coal. Gaps in the legislation represent key problems that producers and consumers are grappling with to better track and reduce emissions across natural gas value chains. The legislation should enter force in the next few months, but even afterwards there will be major uncertainties. This brief describes the methane regulation and discusses the significance for global gas suppliers, including special challenges for U.S. liquefied natural gas (LNG) exporters.

Introduction

In November 2023, the European Union reached a provisional agreement on its long-developing methane legislation, which aims to reduce emissions from domestically produced and imported oil, natural gas, and coal. As Brussels takes steps to establish “methane performance profiles” of supplier countries and producers, the demand for better emissions data will ramp up quickly, including from liquefied natural gas (LNG) exporters.

The legislation should be formally adopted and enter into force within the next few months, but even afterward there will be major uncertainties. The European Commission needs to clarify how it will calculate the methane intensity of imported gas and determine “maximum methane intensity values” (i.e., an import standard). It will need to clarify how it will judge whether imported fossil fuels are produced under measurement, reporting, and verification (MRV) rules that are equivalent to EU standards, and whether there is regulatory equivalence in any other countries that could potentially allow some producers to be exempt from these requirements. Other unanswered questions concern verification of data and potential penalties for noncompliance.

EU requirements are also hard to reconcile with the way U.S. LNG volumes are produced and traded—and this is a concern since the United States is Europe’s largest LNG supplier. The methane legislation demands data “at the level of the producer” (Article 27a), but U.S. LNG sellers usually do not produce gas themselves, instead buying molecules from large producers or gas marketers. These sellers have limited information on the methane intensity of the gas they purchase, so this EU rule could be difficult to satisfy. In addition, a large share of U.S. LNG is sold on a free-on-board basis to traders or aggregators who sell from their portfolios to buyers in multiple regions, including Europe. These aggregators have no producer-level data. EU requirements will be easier to meet in countries with more concentrated production and simpler supply chains, such as Qatar.

This CSIS brief describes the European Union’s methane legislation, outlines areas of uncertainty, and discusses the significance for the global LNG industry.

Near the Finish Line but More Distance to Cover

In November 2023, the European Union’s major legislative bodies reached a provisional agreement on new methane rules. The European Commission, the Council of the European Union, and European Parliament had all introduced separate versions of the legislation, and “trilogue” negotiations resolved key differences. Two parliamentary committees have endorsed the agreement, and after a recent plenary vote in the parliament and pending approval from the council, the methane legislation will be published in the Official Journal of the European Union and enter into force, barring any surprises, in the summer.

It has taken years for the legislation to reach this point. The European Union first introduced a methane strategy in 2020. The commission’s legislative proposal followed in late 2021, the council approved its “general approach” in December 2022, and the parliament adopted its position in May 2023. There were persistent disagreements, including rules related to leak detection and repair as well as MRV. A significant area of dispute—and the critical issue for global LNG suppliers—concerned gas import rules. Key parliamentary committees and many environmental organizations advocated stringent requirements for imported gas. Rather than adopting a firm import standard, the European Union has imposed a series of information requirements that will ratchet up between now and 2030.

The legislation is nearing the finish line, but unfinished details will be significant for domestic oil and gas producers and suppliers to the European Union. These issues 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 meet the new obligations. While key elements of the legislation could evolve before and after it enters into force, each of these issues is examined below.

MRV Equivalence

The methane legislation imposes new MRV rules on all domestic operators, aiming to increase the accuracy and reliability of reported emissions. As of January 2027, these standards will then be applied to imports, so the European Union will have to assess whether other countries’ MRV regulations are equivalent to or stronger than their own. This is a critical issue that could influence market competitiveness—or eventually even market access for gas suppliers. Crafting the rules for determining MRV equivalence will be challenging given the variation in regulatory regimes and governing bodies across countries. For example, how can countries demonstrate to Brussels that their rules—such as U.S. Environmental Protection Agency (EPA) requirements or upstream regulations in Nigeria or Colombia—are as strong as those in the European Union? Article 29a does outline important clauses related to measurement and quantification of methane emissions and notes that the commission may request standardization organizations to develop harmonized standards. But for now, there is considerable uncertainty over the information suppliers must provide.

Article 27a of the agreed text states that EU importers must demonstrate by January 2027 that supply contracts concluded after the entry into force of the legislation are produced in countries with MRV measures equivalent to or stronger than EU rules. Importers must undertake “all reasonable efforts” to bring previously concluded supply contracts into compliance and report annually on 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.”

Crucially, the methane legislation allows for international producers or other countries to be exempted from requirements, but under conditions that may prove difficult or time consuming. Article 27a(4) specifies that MRV measures can be determined to be equivalent to EU rules 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 (see discussion below). Article 27a(5) notes that Brussels can also determine country-level equivalency to its rules, but only if producing countries initiate a request and provide all necessary data to prove their MRV requirements are equivalent to or stronger than EU rules. Again, independent third-party verification of data is required. U.S. methane regulations might meet such a standard, but it remains uncertain how this process will work and how long it will take.

Verification of Data

The provisional legislation notes the importance of independent, accredited verification of data to satisfy monitoring and reporting requirements. But it is unclear which entities will emerge as accreditation bodies, aside from references to Regulation (EC) No 765/2008, which provides a broad framework on how accreditation systems should operate. Article 9 specifies that verifiers must be separate from operators, “undertakings,” and importers subject to the regulation. Article 8(2b) of the legislation states that 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 technical sophistication required to analyze and interpret methane emissions data suggests a limited pool of potential verifiers. 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

An essential goal of the legislation is to measure the methane intensity of the European Union’s imported fossil fuels, but the methodology for calculating such values has yet to be determined. Article 27b states that a delegated act will be adopted within three years of enactment, which will set 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 questions about how this standard will be calculated. For example, in areas with significant associated gas production (gas produced along with oil), how will emissions be allocated across products: based on mass, energy content, or economic value?

Importers with supply contracts concluded or renewed after the enactment date are required to begin annually reporting their products’ methane intensity by 2028. Until then, importers 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, given the complexity of methane emissions monitoring, quantification, reporting, and verification.

Maximum Methane Intensity Values

The European Union will set a maximum methane intensity value to cap allowable emissions for crude oil, natural gas, and coal imports beginning in 2030. The consequences for failing to meet this standard are not yet clear. There have been proposals to impose a fee on noncompliant suppliers, and there is an implicit threat that the European Union could eventually close market access to emissions-intensive gas suppliers. In May 2023, the 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 percent.” This 0.2 percent target would align with an earlier goal set by the Oil and Gas Climate Initiative, as well as the agreed 2030 target for signatories to the Oil and Gas Decarbonization Charter and the upstream methane intensity target in the waste emissions charge under the U.S. Inflation Reduction Act of 2022 (IRA). Although the 0.2 percent methane-intensity target was dropped in the November 2023 provisional EU agreement, it may resurface if Brussels determines there is value in global alignment—but the commission may also want to set its own target.

How quickly the European Union will set its methane performance standard matters greatly. If it takes several years to create a methodology and set a target, “third countries” and companies will have limited time to adjust their processes and equipment. Accelerated action would help gas suppliers prepare to meet or exceed the standard.

Potential Penalties

Like other extraterritorial rules, such as the European Union’s Carbon Border Adjustment Mechanism, an explicit goal of the methane legislation is to push global actors to align with EU standards. 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 European Union’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.

What happens if suppliers refuse to provide the data? Article 30 explicitly states that a failure to meet the requirements of Articles 27(1), 27a(1) and 27a(2), 27b(2) and 27b(2a), and Annex VIII will be subject to penalties. Penalties are 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. Article 30 also includes a list of factors to be considered when imposing penalties. But the European Union 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.

Why This Matters for Global Gas Producers

It is easy to get lost in the minutiae, but these rules are important for global gas producers. 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 European Union is well ahead of other gas-importing regions in demanding and publicly sharing more granular data on the emissions intensity of purchased gas. But as Brussels clarifies these rules, Japan, South Korea, and other gas importers are in the early stages of gathering information on emissions intensity from their gas suppliers. It is possible—although far from certain—that they could eventually adopt similar requirements. Supply-side regulations—such as the U.S. EPA’s final rule on greenhouse gas emissions from the oil and gas sector and the IRA’s methane fee and associated reporting requirements—have the greatest potential to drive methane reductions from the oil and gas industry. But a stronger demand pull for gas with demonstrably lower emissions intensity could also create a powerful signal.

There is an essential, unresolved question about how these regulatory requirements will shape commercial terms and the day-to-day business of the global gas trade. The European Union’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. 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 European Union might push the oil and gas industry in this direction, but regulatory and market momentum elsewhere will probably be necessary.

While these rules will apply to all imported gas, they will be especially challenging for U.S. LNG exporters because of the complicated nature of U.S. gas supply chains. The United States 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. Time is of the essence—because within a few months LNG suppliers to Europe will be playing by a new set of rules.

Ben Cahill is a senior fellow with the Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Hatley Post is an intern with the Energy Security and Climate Change Program at CSIS.

The authors are grateful to Maria Olczak, Jonathan Stern, Fiji George, Greg Ross, and Brandon Locke for their comments on earlier drafts.

This brief was supported by general funding for CSIS and the CSIS Energy Security and Climate Change Program.