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Methane emissions under scrutiny: what the new EU Regulation means for energy and imports

On 27 May, the Council approved the EU Methane regulation, which is expected to come into force in early July 2024. Methane is the second-largest contributor to climate change after carbon dioxide (CO2) responsible for at least 25 per cent of the rise in global temperature since the industrial revolution. Achieving long-term climate goals requires reducing both gases. However, due to methane’s higher global warming potency, swiftly reducing it could help limit near-term warming.

While agriculture and waste sectors account for the majority of the EU methane emissions, the 2020 EU Methane strategy prioritised the reduction of emissions in the energy sector – that is those arising during the extraction, transport and end-use of fossil fuels – oil, gas and coal. Methane is not only a greenhouse gas but also a primary component of natural gas, and capturing it provides economic and safety benefits, making it one of the most cost-effective ways to combat climate change.

The EU Methane regulation imposes obligations on oil and gas operators, mine operators, importers and Member States with regard to monitoring, reporting and verification and mitigation of methane emissions. The Regulation harmonises rules on the Leak Detection and Repair (LDAR) programmes and venting and flaring, alongside emissions from active and inactive wells and coal mines.

Obligations for the EU operators

What it means in practice is that the EU oil and gas companies will need to regularly monitor, report and verify emissions associated with their infrastructure at a source- and at a site level. This is the major change and challenge compared to the status quo. While methane detection and quantification technologies have been rapidly evolving, it takes time and practice to choose the right equipment for different types of facilities and to build the right processes to capture and analyse the data to identify the major mitigation opportunities.

Moreover, the Regulation harmonises the rules on LDAR by mandating the operators to regularly check their facilities for potential leaks and fix them within a specified period of time, which until now have been fragmented with different rules applying across Member States. Finally, the Regulation imposes a ban on routing venting and flaring of gas, except for specified cases.

Similar obligations have been placed on active underground coal mines concerning two major emission sources – drainage stations and ventilation shafts – which help maintain safe methane concentration levels. The mine operators will need to continuously monitor emissions from drainage stations and ventilation shafts at a source level, report and verify them. Moreover, the Regulation imposes a ban on routine venting and flaring from drainage stations and introduces limits on venting from ventilation shafts.

Obligations for the fossil fuel importers

Due to the decreasing EU fossil fuel production, the issue that attracted a lot of attention was emissions associated with imported fossil fuels – oil, gas and coal. The Commission’s original proposal suggested three mechanisms to address imported emissions under Chapter 5: importer requirements, a methane transparency database and a methane emitters global monitoring tool (articles 27-29 of the proposal). Hence, there were no reduction targets, standards or incentives proposed, just a provision that the importers’ requirements could be strengthened over time.

Such an approach was criticised by the co-legislators, especially the European Parliament demanding binding standards on imports. The final phase of negotiations, encompassing the Chapter 5 provisions, occurred under time pressure, as the co-legislators (Council, European Parliament and Commission) were determined to finalise the negotiations before COP28.

The final version of the Regulation proposes three types of obligations on the EU fossil fuel importers, which will be implemented gradually between 2025 and 2030. Initially, the importers will need to collect and report to Competent Authorities mostly qualitative information set out in Annex IX of the Regulation. They will need to demonstrate that the MRV standard used by producers and exporters is equivalent to the one specified in the Regulation. Finally, they will report and demonstrate that the methane intensity of imported oil, gas or coal is below the maximum methane intensity thresholds specified by the Commission.

Hence, the final version of the Regulation is seemingly stronger than the proposal, but its scope is limited to production (instead of the full supply chain) and it does not include key details, without which it is impossible to judge its impact.

Implementation and future outlook

The implementation of provisions related to the EU domestic emissions by operators and Member States will be the first test for the Regulation. But the degree to which EU operators will comply with the Regulation will be underpinned by the balance of regulatory carrots (National Regulatory Authorities’ tariff decisions in case of mid- and downstream operators, government support for methane reduction projects in the coal sector) and sticks (financial and reputational penalties decided by Competent Authorities).

The new requirements related to imported energy – importer requirements, MRV equivalence, methane intensity of crude oil, natural gas and coal production – are unlikely to have any immediate impact, primarily because access to the EU market will not be conditional on meeting these requirements. In other words, the failure to comply with the Regulation will not result in an import ban on oil, gas, or coal into the EU market. Instead, non-compliance will incur penalties that are set and enforced by 27 MSs.

The details not specified in the Regulation will be defined by the EU Commission through a series of Delegated and Implementing Acts. In addition, the EU Commission will need to revise early impacts of the Regulation by 2028, the Regulation will need to be adjusted before it could be meaningfully implemented. Hence, the adoption of the EU Methane regulation is not the end but rather the beginning of a long implementation process.

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The full OIES analysis of the Regulation by M. Olczak, A. Piebalgs and J. Stern can be found here.

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