EU Methane Regulation creates new challenges for the LNG industry

The EU Methane Regulation (Regulation (EU) 2024/1787), which came into force in August, is an important component of the European Commission’s “Fit for 55” package to reduce global methane emissions by 2030 (as we previously reported here, article in German). The obligations set out in the EU Methane Regulation also pose particular challenges for importers of LNG (liquefied natural gas) – challenges that are, in part, difficult to reconcile with the practical realities of LNG trading.

 Obligations for LNG facilities and importers

The obligations in the EU Methane Regulation also apply to operators of LNG facilities and operators of natural gas distribution facilities (Article 1(2)(c)). Initially, facility operators are required to report estimated methane emissions by 5 August 2025. In addition to reporting obligations, operators are subject to practical obligations such as the general mitigation obligation to prevent and minimise emissions (Article 13), specifically leak detection and repair (LDAR programme set out in Article 14), as well as restrictions on venting and flaring (Article 15).

Importers also have to comply with certain requirements under the EU Methane Regulation. The term “natural gas” covers all forms of natural gas, including LNG as liquefied natural gas. Requirements that therefore also apply to LNG importers include the duty to provide information and documentation (Articles 27 and 28), which must be reflected in supply contracts.

• Requirements to provide information to the competent national authorities: By 5 May 2025 for the first time and then by 31 May of each following year, importers must provide the competent authorities of the Member State they are established in with the information listed in Annex IX, or give a substantiated explanation as to why they are unable to provide this information. The latter may become relevant because the general Annex IX requires certain details earlier than the specific Articles 28 and 29.
  The Member States, in turn, are required to forward to the Commission, by 5 August 2025 and by 31 August of each year thereafter, the information they receive from importers. The Commission makes this information publicly accessible. The information to be forwarded by importers includes:
  • Details of the exporter or, if different, the details of the producer;
  • exporting third countries and regions at NUTS-1 level according to the Nomenclature of Units for Territorial Statistics of the Union, in which products were produced or through which products were transported;
  • information as to whether and how the producer or exporter measures methane emissions at site level, has them verified, reports them in accordance with the requirements of the United Nations Framework Convention on Climate Change (“UNFCCC”), and whether the UNFCCC reporting requirements and the standards of the Oil and Gas Methane Partnership (“OGMP”) 2.0 are being met;
  • measures taken by the producer or exporter to reduce their methane emissions (e.g. LDAR surveys or measures to control and limit venting and flaring operations), together with relevant reports for the last available calendar year, if available.
• Evidence obligations for LNG supply contracts concluded before 4 August 2024: As part of the above information obligations, from 1 January 2027 importers must demonstrate for these contracts that they have undertaken all reasonable efforts to require their supplier to ensure that the LNG placed on the market was subject throughout the supply chain to monitoring, reporting and verification (“MRV”) measures equivalent to those in the EU Methane Regulation (Article 28(2)). Reasonable efforts may also include amending contracts to add clauses on MRV equivalence retrospectively.
• Evidence obligations for LNG supply contracts concluded from 4 August 2024: For these new or “renewed” contracts, importers must (also from 1 January 2027) provide mandatory evidence of the equivalence of MRV measures for the quantities of LNG supplied (Article 28(1)), which is only possible if importers require their suppliers by contract to provide the relevant evidence. For evidence of equivalence, Article 28(5) in conjunction with Articles 8 and 9 sets out certain standards and procedures (e.g. the reporting standard in accordance with OGMP 2.0 level 5).
• Calculating methane intensity: By 5 August 2028 for the first time, and every year thereafter, producers within the EU and importers of LNG produced outside the EU must calculate and report the methane intensity of LNG placed on the market (Article 29). In the case of existing contracts concluded before 4 August 2024, all reasonable efforts must be made to determine the methane intensity. The methodology for calculation is to be adopted via a delegated act of the European Commission by 5 August 2027. Suppliers and importers are therefore advised to draft contract clauses regarding the supplier’s reporting obligations in an open-ended manner until specific values are required.
• By 2030, the European Commission will also set maximum methane intensity values (Article 29(5) and (6)), which LNG placed on the market must not exceed; from 5 August 2030, importers will be required to demonstrate compliance with these limits (Article 29(2)).

Difficulty in identifying the producer

Identifying the LNG producer poses practical challenges for importers. In most cases, the LNG importer’s contractual partner is not the actual producer of the LNG.

Ironically, it is with the EU’s most important LNG supplier, namely the USA (2024 Market Monitoring Report by ACER), but also in other markets with a large number of gas producers, that this regulatory concept will encounter significant practical obstacles. Identifying an LNG producer who would be required to comply with MRV measures is particularly difficult in these cases. Often, instead of the LNG producer as supplier, a reseller or aggregator is involved: someone who themselves has no knowledge of the precise origin of the product and cannot obtain such information, as they source LNG from a pool or a hub, making it almost impossible to assign it to specific gas production sites or to verify whether MRV measures in line with the EU Methane Regulation have been taken there. It will therefore be virtually impossible for LNG importers in all cases to name the producer or to secure a contractual assurance that the delivered LNG has MRV equivalence. However, since this equivalence will become mandatory for new and renewed contracts, EU importers may ultimately have to cease imports entirely in order to avoid fines.

Identification is likely to be easier when importing from countries with centralised natural gas production. However, it is unclear whether the legislators considered that this would make it particularly difficult to source LNG from highly developed, liquid markets with a large number of non-state producers.

The difficulties in identifying the LNG producer could be avoided, for example, if the European Commission determines that the third country has an equivalent regulatory framework on monitoring, reporting and verification (Article 28(5)(b) and (6)). However, this procedure must first be established in a delegated act. Until such time as the first third countries with an equivalent regulatory framework have been recognised, some time is likely to pass during which importers will still be required to identify the producers of imported LNG. This is particularly impractical because, in the absence of relevant equivalency declarations from the European Commission, companies must demand contractual arrangements from their contract partners at a bilateral level: arrangements which, due to the market conditions in certain main supplying countries, those contract partners may not be able to provide.

Remaining uncertainties in terms of practical implementation

The terms “importer” and “renewed” contracts also remain unclear, so it is likely that the European Commission will issue further guidance.

Outlook

The EU Methane Regulation highlights a contradiction between the more challenging handling of LNG imports, on the one hand, and their promotion across the EU, such as through subsidies for LNG terminals and programmes like AggregateEU on the other. At present, the regulatory situation for LNG importers is unsatisfactory: while it is clear they will face many new obligations, crucial details as to how these obligations are to be implemented remain unresolved. Due to existing uncertainties regarding the fulfilment of these obligations under the EU Methane Regulation, fewer import contracts may be concluded. This could lead to an increase in LNG prices within the EU or even to supply shortages. The European Commission should either promptly recognise equivalent national regulatory frameworks or further refine the regulations itself in order to prevent future LNG shortages and avoid disadvantaging Europe’s competitiveness. These questions are already of relevance for LNG supply contracts: according to the ACER 2024 Market Monitoring Report, LNG supply contracts are typically concluded for long periods of up to 15 years and must therefore be adapted to reflect the obligations in the EU Methane Regulation. LNG importers are therefore advised to closely monitor the further clarification of the obligations by the European Commission and to respond at an early stage when concluding contracts or by making appropriate amendments to contracts with LNG suppliers.