The EU Methane Reduction Regulation is now in force, what is the impact on LNG imports to the EU?

What obligations does the Methane Regulation impose on EU LNG importers?

Chapter 5 of the Methane Regulation sets out the obligations on LNG importers into the EU. These obligations will be implemented in a staged approach, becoming increasingly more onerous over time.  This means that anyone negotiating a long term LNG SPA now, will need to consider the increasingly onerous obligations under the Methane Regulation, and importers (usually buyers) will need to consider what obligations they need to impose on their counterparties to ensure that Importers can comply with their obligations.

Initially, obligations on LNG importers are limited to monitoring, reporting and verification (MRV) requirements in line with Annex IX of the Methane Regulation. By 5 May 2025 (and by 31 May every year thereafter), LNG importers must report to the relevant the EU Competent Authority information broadly relating to the exporter and producer of the imported LNG, as well as information on the measures in place to monitor and minimise methane emissions of the imported LNG.

However, the obligations ramp up significantly from 1 January 2027. From this date, LNG importers must demonstrate that all supply contracts concluded or renewed on or after 4 August 2024 are subject to MRV measures equivalent to EU MRV measures under the Methane Regulation. These MRV requirements include both site level and source level emissions, as well as reconciliation between the two and independent verification of the same. For supply contracts concluded or renewed before 4 August 2024, importers must show they have taken “all reasonable efforts” to ensure that EU-equivalent MRV measures are in place under those contracts. The Regulation specifically states that this may include the amendment of those contracts, meaning the there is likely to be a requirement to re-negotiate these supply contracts.

In another ramp up, from 5 August 2028 importers will be required to report on the methane intensity of production for imports into the EU for all supply contracts concluded or renewed after 4 August 2024. The methodology to be used will be established in a further delegated act, set to be adopted on or before 5 August 2027 (the Methane DA). For existing contracts, LNG importers are required to undertake “all reasonable efforts” to report on methane intensity, using the methodology under the Methane DA.

Lastly, in the final phase of implementation, the Methane Regulation requires that any supply contracts concluded or renewed after 5 August 2030 will be required to evidence that the methane intensity of production of imported LNG (calculated in accordance with the methodology adopted in the Methane DA) is below a specific maximum methane intensity values (MMIV), set out in the same Methane DA.

Importers can be exempt from these requirements if “regulatory equivalence” has been established between the EU and the producing country. In addition, the EU has stated its aim to enter ‘cooperation frameworks’ with importing third countries to establish MRV systems equivalent to those established under the Regulation, which in the long terms should aid LNG importers in evidencing their compliance with the Methane Regulation.

The Methane Regulation includes provisions for compliance monitoring and enforcement, with non-compliance having the potential to result in penalties, including fines and restrictions on operations.

What does this mean for LNG importers and the global LNG market?

One of the most immediate impacts for LNG producers looking to sell LNG in the EU will be the need to align with the EU’s stringent methane MRV requirements and, longer term, the more stringent MMIV requirements. This is likely to encompass the implementation of comprehensive monitoring systems to track methane emissions across supply chains, including sophisticated leak detection technologies and regular inspections, significantly increasing operational complexity.

LNG importers will also need to establish or upgrade their data management systems to ensure accurate and timely reporting so as to ensure compliance with the new annual reporting deadlines.

Financial implications

The economic and financial implications of the Methane Regulation is likely to be significant. There will be an inevitable increase in capital expenditure from investment in advanced monitoring equipment. Upgrading or retrofitting existing facilities to minimize emissions may also require significant capital outlay. The increased administrative burden of compliance reporting will also add to operational expenses, and the availability or not of emissions data may impact on whether cargoes originally destined for other markets can be diverted to the EU market.

It will be interesting to see whether this leads to a bifurcation of the market between “EU Methane Regulation Compliant” LNG, and LNG that does not need these standards.

Supply Chain Adjustments

The Methane Regulation extends to the entire supply chain of imported LNG, including emissions during extraction, liquefaction, transportation, and regasification, extending the impact of the regulation beyond the borders of the EU, with the potential to affect global supply chains.

LNG importers will need to scrutinize their suppliers more rigorously to ensure compliance with EU standards. As touched on above, this will involve renegotiating contracts to include stringent emissions MRV clauses, potentially leading to supply chain disruptions or increased costs.

Market Dynamics

Countries exporting LNG to the EU will face pressure to align with the EU’s Methane Regulation in order to maintain their export market status. Issues of non-compliance could lead to market access issues, providing an additional incentive for exporting countries to adopt similar methane reduction practices and potential ‘cooperation frameworks’ with the EU.

LNG producers have in recent years been promoting LNG produced from their facilities as having lower green house gas intensity than their competitors, but the introduction of the Methane Regulation will encourage the adoption of a common methodology to assess these claims, and prospective offtakers will want to have the flexibility to be able to deliver LNG cargoes into the EU even if this is not their base case.

How the Methane Regulations will be implemented for the short term trading of cargoes will be interesting to see.

Innovation

The Methane Regulation may have the potential to spur innovation within the LNG sector, with the need for advanced methane detection and mitigation technologies driving research and development efforts. The EU’s emphasis on best practices and international cooperation may also lead to greater industry collaboration, sharing of knowledge, and as already touched on, the establishment of global standards for methane management.

Final Thoughts

The Methane Regulation presents both challenges and opportunities for LNG importers. While compliance will necessitate significant investments and operational adjustments, it also opens avenues for market differentiation and innovation. By embracing these changes and demonstrating leadership in methane emission reduction, LNG importers can not only meet regulatory requirements but also enhance their competitive position and contribute meaningfully to global climate change mitigation efforts.