Today, the European Commission published the document “Questions and answers on importer requirements of EU Methane Regulation (EU) 2024/1787” (the “Methane Q&A”). In short, the Methane Q&A is an attempt, but an insufficient one, to answer fundamental questions that have troubled the energy industry ever since “Regulation (EU) 2024/1787 of the European Parliament and of the Council of 13 June 2024 on the reduction of methane emissions in the energy sector and amending Regulation (EU) 2019/942” (the “EU Methane Regulation”) entered into force on 4 August 2024.

The EU Methane Regulation includes wide-ranging measures applying to: (i) those with gas, oil or coal operations in the EU; and (ii) importers placing on the EU market natural gas, oil or coal produced outside the EU. The Methane Q&A focuses on this second category – the measures applying to entities importing hydrocarbons into the EU.

The Methane Q&A purports to address 35 questions. This article does not seek to summarize all the responses provided but highlights a selection of the answers that are most troubling, surprising, or noteworthy. Industry participants should refer to the Methane Q&A itself to review all the responses provided.

It is important to note that the Methane Q&A notes that the document “is intended purely as a guidance tool – only the text of Regulation (EU) 2024/1787 has legal force” and that the guidance “may be subject to modifications without notice”.

For an overview of the measures applying to entities importing hydrocarbons into the EU, and specifically those importing LNG, please see the following article: EU Methane Regulation: A Problem for the LNG Industry?

The issue of commingled gas / US LNG

The EU Methane Regulation requires the importer^[1] to report methane related information to the competent authority in the Member State in which it is established. This information must ultimately be provided by the “producer”, defined in the EU Methane Regulation as the entity that produced the natural gas “by extracting it from the ground in a licensed area, processing it or conveying it through connected infrastructure within that licensed area”. It is the measurement, reporting and verification measures applied at the level of the producer that are critical for the purposes of complying with the EU Methane Regulation.

Identifying the producer in certain hydrocarbon value chains will be highly complex or impossible, particularly in the case of LNG, and LNG liquefaction projects that source their gas from a grid or natural gas aggregators – e.g., US LNG projects. Gas is not “tagged” or tracked in the US; it is commingled in a web of pipelines where it is freely and often traded. For globally-traded LNG, the importer is highly unlikely under most circumstances to have a direct contractual relationship with the producer.

The industry has raised this concern with the European Commission, and the following question was included in the Methane Q&A: “How can a third country exporter who sources commingled gas from trading hubs provide to an EU importer certain information required under Article 27/Annex IX?”. The response provided in the Methane Q&A to this fundamental issue is “Importers and exporters need to make sure that the required information is passed down to them via the person/entity they have a direct relationship with”.

This response fails to answer the question, and perhaps intentionally so, as the question exposes a complex issue for the EU Methane Regulation. An importer purchasing LNG on an FOB basis from a US LNG liquefaction project can, and no doubt will going forward, ask the FOB seller to provide the methane-related information it needs to comply with its reporting obligations under the EU Methane Regulation. However, if the liquefaction project is pulling its feedstock gas from a commingled grid with gas that is often supplied from multiple sources or from pipeline traded gas supplies, it is likely impossible to identify the precise producer for each relevant molecule of natural gas. The European Commission appears to be laboring under the misconception that each natural gas molecule can be physically tracked back to the relevant wellhead, when in most cases it cannot be.

The Methane Q&A could have been the opportunity for the European Commission to open the door to a book-and claim or mass-balance solution, albeit that such a solution would not be compatible with the strict wording of the EU Methane Regulation as it is currently drafted. 

When is a contract concluded?

Certain importer requirements under the EU Methane Regulation depend on whether the relevant supply contract is “concluded” or “renewed” on or after certain dates. Therefore, it is critical for the market to be able to objectively determine when a contract is “concluded” or “renewed”.

With respect to when a contract is “concluded”, the industry was rightly seeking a clear definition or test. For example, it may be the date when the relevant supply contract has been signed by all parties thereto, or when the relevant supply period begins, or when the contract becomes fully effective and unconditional (in the case of a contract that includes conditions precedent). However, the Methane Q&A fails to provide a clear answer, instead stating: “There are a few ways which could indicate when the contract is concluded, depending on the will of the parties, which should be clearly spelt out”. This response does not provide meaningful clarity to market participants.

When is a contract renewed?

With respect to the issue of what constitutes a renewal of a contract, the guidance is clearer, but it is concerning. As we noted in our article in September, whilst one may reasonably take the view that a “renewal” of a relevant supply contract (e.g., an LNG sale and purchase agreement) would concern a change or extension to the supply period, we were concerned that the term may be interpreted more broadly and that any amendment or modification to a relevant supply contract may be considered to be a “renewal” by the relevant authorities. Unfortunately, it is now clear this concern was justified.

The answer provided in the Methane Q&A is that “a contract might be considered as a new or renewed contract if one of its essential elements is new” and a broad array of examples are included that critically include changes to:

1. the contracting parties – therefore catching assignments or novations of supply contracts;
2. the duration of the contract / supply (even including “automatic” renewals, which we expect includes pre-agreed extension rights);
3. the price or price formula;
4. the volume being supplied;
5. the dispute resolution provision; or
6. other key elements of the contract.

Whilst the Methane Q&A notes that an amendment that does not impact a contract’s fundamental elements “might be considered an amendment/addendum to an existing contract and not as a renewed or a new contract”, we expect that market participants will now be reluctant to enter into relatively routine amendments, modifications and transfers to avoid the risk of bringing the relevant contract within the scope of additional obligations under the EU Methane Regulation.

Demonstrating MRV Equivalence

Article 28(1) of the EU Methane Regulation provides that from 1 January 2027, importers are required to demonstrate to the competent authorities of the Member State in which they are established that relevant supply contracts concluded or renewed  on or after 4 August 2024 only relate to the sale and purchase of crude oil, natural gas or coal that is subject to MRV measures at the level of the producer that are equivalent to those measures set out in the EU Methane Regulation.^[2]

Industry participants have interpreted Article 28(1) differently. One interpretation of Article 28(1) is that importers must be able to demonstrate MRV equivalence for all supply contracts concluded or renewed after 4 August 2024, but that the obligation to report to the competent authorities only begins in 2027. In other words, if a party enters into a new relevant supply contract today, the supply must be MRV equivalent at producer-level now (e.g., the producer must be at Oil and Gas Methane Partnership (“OGMP”) 2.0 level 5 now), but the importer will only need to demonstrate this to the competent authorities from 1 January 2027. The second interpretation of Article 28(1) is that the requirement to be MRV equivalent only commences on 1 January 2027, so in the scenario of a party entering into a new relevant supply contract today, it is only necessary for the supply to be MRV equivalent at producer-level from 1 January 2027 (e.g., the producer must be at OGMP 2.0 level 5 from 1 January 2027, but this is not required prior to 1 January 2027).

The Methane Q&A provides the following responses on this issue: (i) in response to question 9, “If these contracts are still acting in January 2027, they will have to comply with the requirement of Article 28(1) and report on these contracts as of 1 January 2027”; (ii) in response to question 15, “Producers and exporters can commit today to achieve MRV equivalence by 2027…making sure they have reached level 5 by January 2027”; and (iii) in response to question 21, “Independent verification in line with the Regulation is required from 1 January 2027 for all contracts adopted since August 2024 that are still active on 1 January 2027”. These statements indicate that the European Commission adopts the second interpretation of Article 28(1).

Whilst this is only non-binding guidance, it is likely to be positively received, given our understanding is that currently no producers are at level 5 under the OGMP 2.0 reporting framework. However, for new or renewed contracts with supply periods starting after, or continuing beyond, 1 January 2027, buyers will likely be seeking contractual confirmations and assurances that from 1 January 2027 the supply chain is subject to MRV measures at the level of the producer that are equivalent to those measures set out in the EU Methane Regulation.

Who is the importer?

Whilst the Methane Q&A is only a guidance document and does not have legal force, there is clearer guidance on the issue of identifying which entity is the “importer” for the purposes of the EU Methane Regulation. Answer 31 states that the term “is linked to the custom process” and that the importer will be the entity that: (i) “has legal responsibility for ensuring that all customs formalities are completed to ensure the release of the good for free circulation on the Union territory”; and (ii) “makes the payment of tariffs (if applicable), and, if applicable, other taxes or levies”. The response also confirms that the importer “must be established in the EU in order to import and place the goods on the EU market”.

Conclusion

Demonstrating the importance of a clear and harmonized approach to tackling the issue of methane emissions, it was reported only last week that US President Joe Biden’s administration had written a letter asking the European Union to ensure LNG shipments that meet US methane regulations automatically comply with Europe’s standards for imports, and requesting discussions “to ensure the continued reliable and stable supply of natural gas from the United States to Europe”.^[3]

Industry participants were left scratching their heads over the meaning of many of the requirements imposed on importers by the EU Methane Regulation when it was published on 15 July 2024. Imprecise definitions, articles that are open to interpretation, and issues parked for another day, added material uncertainty to a market that is working to ensure that Europe receives sufficient volumes to keep the power on this winter and in the years ahead. The requirements also left many with the view that the design of the EU Methane Regulation showed a lack of understanding for the complex value chains that ultimately lead to hydrocarbons being supplied into Europe.

Whilst it was perhaps foolish to expect the Methane Q&A to be the panacea, many will be disappointed by the failure to adequately respond to some of the key issues validly raised by the industry.

[1] The EU Methane Regulation defines an “importer” as anyone who, in the course of a commercial activity, places crude oil, natural gas or coal originating from a “third country” on the EU market.

[2] Market participants will also need to consider their existing LNG contracts - i.e., Relevant LNG Supply Contracts concluded before 4 August 2024. With respect to such existing contracts, importers are required to undertake “all reasonable efforts” to require that the natural gas supplied is subject to MRV measures applied at the level of the producer that are equivalent to those set out in the EU Methane Regulation.

[3] https://www.reuters.com/business/energy/biden-officials-ask-eu-align-methane-rules-with-us-ease-lng-flows-letter-says-2024-11-13/

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