On 15 July 2024, "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") was published in the Official Journal, and consequently entered into force on 4 August 2024.
Recognizing methane's significant contribution to climate change, being second only to carbon dioxide, the EU Methane Regulation is the European Union's attempt to "take the lead"1 on efforts to reduce methane emissions.
The EU Methane Regulation includes wide-ranging measures that will impact those with gas, oil or coal operations in the EU (including LNG facilities in the EU). However, the EU Methane Regulation also includes measures applying to coal, oil and natural gas produced outside the EU but placed on the EU market by importers. This article focuses on this second category – the measures applying to entities importing hydrocarbons into the EU, and specifically those importing LNG.
Key Points to Note for LNG Importers
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.
Whilst the EU Methane Regulation refers to "natural gas", rather than LNG, in the vast majority of the articles, it is clear that the EU's intention is to include LNG imports within the scope of the EU Methane Regulation, and that a reference to "natural gas" should be interpreted as meaning natural gas in all its forms (e.g., including liquefied natural gas or compressed natural gas).
The EU Methane Regulation is relevant to both new and existing LNG supply contracts placing LNG / natural gas produced outside the EU on the EU market ("Relevant LNG Supply Contracts"). In summary, the key outcomes will be: (i) Importers requesting changes to existing Relevant LNG Supply Contracts; and (ii) Importers seeking to include novel provisions in new and renewed Relevant LNG Supply Contracts, in each case to ensure they can comply with the new requirements. We are already seeing the EU Methane Regulation impacting the negotiation of new LNG sale and purchase agreements.
Reporting Obligations
Most of the relevant obligations for Importers concern the Importer being required to submit methane-related information to competent authorities of the Member State in which they are established. The Member States then share this information with the Commission2, who in turn make it publicly available (free of charge) through a "methane transparency database" (to be published by 5 February 2026) that will also report on the methane requirements in the country where the natural gas was produced.3 By 5 August 2026, the Commission will also publish "methane performance profiles" of Importers, Member States and countries where natural gas imported into the EU was produced. These performance profiles will be made publicly available (free of charge) and will be updated annually. Amongst other things, the methane performance profiles will include an assessment of the efforts undertaken by Importers to monitor, report and reduce methane emissions.
In short, the EU Methane Regulation includes a suite of reporting obligations that enables the Commission to "name and shame" Importers. Presumably the EU expects such an approach will result in public pressure that will encourage Importers to source LNG with lower methane intensity.
What information must be shared?
By 5 May 2025, and by 31 May every year thereafter, Importers are required to submit to the competent authority in the Member State in which they are established, certain information concerning the natural gas imported into the EU, including (but not limited to):
- details of the "exporter", meaning the contractual counterparty of the Importer under the relevant supply contract;
- if different from the exporter, details of the "producer", meaning 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";
- details of the methane measurement, reporting and verification ("MRV") methodologies applied by the exporter or the producer (as applicable); and
- information on whether the exporter or producer (as applicable) applies regulatory or voluntary measures to control its methane emissions.5
In addition, Importers are required to submit information concerning MRV equivalency and methane intensity, as described in more detail below.
MRV Equivalency
New or Renewed Relevant LNG Supply Contracts
From 1 January 2027, Importers are required to demonstrate to the competent authorities of the Member State in which they are established that Relevant LNG Supply Contracts concluded or renewed6 on or after 4 August 2024 only relate to the sale and purchase of natural gas 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. This includes an obligation to report to the relevant competent authorities on an annual basis.7
The Commission will publish recommendations and model clauses that Importers can seek to include in the relevant supply contracts.8
Existing Relevant LNG Supply Contracts
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.9
The EU Methane Regulation does not expressly state what steps an Importer must take to satisfy the "all reasonable efforts" standard, but Article 28(2) provides that such efforts "may include the amendment of those contracts".
Given market participants will not wish to be in breach of law, not least because of the potential penalties that may be imposed on them (discussed further below), we expect market participants may go to considerable lengths to mitigate the risk of being subject to an allegation that they have failed to comply with this "all reasonable efforts" obligation. For example, this could entail an Importer: (i) contacting its contractual counterparty to request a meeting to discuss the EU Methane Regulation and potential amendments to their Relevant LNG Supply Contract (with regular follow-ups if the counterparty fails to meaningfully engage); (ii) sending to its contractual counterparty a draft written amendment to the Relevant LNG Supply Contract to align the agreement with the requirements of the EU Methane Regulation (with regular follow-ups if the counterparty fails to meaningfully engage); and/or (iii) considering whether the Relevant LNG Supply Contract includes any relevant provisions that could be utilized to require or encourage a written amendment to the contract.
From 1 January 2027, Importers are required to inform the competent authorities of the Member State in which they are established, on an annual basis, of the results of such efforts, and in case of failure must "provide sound justification to those competent authorities for such failure and set out the actions they have undertaken as part of those efforts".10
It is important to note that whilst the requirement for Importers to report on the results of such efforts starts from 1 January 2027, the underlying obligation for Importers to undertake all reasonable efforts to require that the natural gas is subject to MRV measures at the level of the producer that are equivalent to those measures set out in the EU Methane Regulation starts from 4 August 2024.
How to determine if MRV measures at the level of the producer are equivalent?
Equivalency can be achieved by either:
- the natural gas being subject to independent third party verification equivalent to that set out in Articles 8 and 9 of the EU Methane Regulation, and the relevant producer applying methane monitoring and reporting measures that are either: (a) equivalent to those in Article 12 of the EU Methane Regulation; or (b) at "level 5" under the Oil and Gas Methane Partnership ("OGMP") 2.0 reporting framework (OGMP 2.0 includes five levels, "level 5" representing the highest reporting standard including site-level measurements in addition to source-level quantification) – i.e., producer-level equivalence; or
- the country where the natural gas is produced applying an applicable regulatory methane MRV framework that is at least equivalent to that applied in the EU, including effective supervision and enforcement (the Commission will establish a process for determining whether a country's regulatory framework is considered to be equivalent, but it should be noted that even if a country satisfies the Commission's requirements, its status of being equivalent can be revoked at any time by the Commission11) – i.e., country-level equivalence.
Methane Intensity
Existing Relevant LNG Supply Contracts
With respect to Relevant LNG Supply Contracts concluded before 4 August 2024, Importers are required to use "all reasonable efforts" to report to the competent authorities of the Member State in which they are established the methane intensity of the natural gas placed by them on the EU market, calculated in accordance with the methodology to be adopted by the Commission by 5 August 2027. Importers are required to report on the results of such efforts on an annual basis from 5 August 2028.12
Relevant LNG Supply Contracts concluded or renewed on or after 4 August 2024
With respect to Relevant LNG Supply Contracts concluded or renewed on or after 4 August 2024, Importers are required to report to the competent authorities of the Member State in which they are established the methane intensity of the natural gas placed by them on the EU market, calculated in accordance with the methodology to be adopted by the Commission by 5 August 2027. Importers are required to report such methane intensity data on an annual basis from 5 August 2028.13
Relevant LNG Supply Contracts concluded or renewed on or after 5 August 2030
With respect to Relevant LNG Supply Contracts concluded or renewed on or after 5 August 2030, Importers are required to demonstrate to the competent authorities of the Member State in which they are established that the methane intensity of the natural gas placed by them on the EU market (calculated in accordance with the methodology to be adopted by the Commission by 5 August 2027) is below the maximum methane intensity value for natural gas that will be established by the Commission in a delegated act.14
The EU Methane Regulation provides that the maximum methane intensity value will be based on objective criteria as well as a report prepared by the Commission by 5 August 2029, that will, amongst other things, consider the impact on the security of energy supply.15 The EU Methane Regulation does not provide a deadline for the Commission adopting a delegated act establishing the maximum methane intensity value for natural gas, but it must inevitably be adopted in the period between 5 August 2029 (the deadline for the Commission's report) and 5 August 2030 (the date from which Importers are subject to this obligation).
Penalties
Penalties for breaches of the EU Methane Regulation are to be set by the Member States, but the EU Methane Regulation provides that the penalties should:
- be "effective, proportionate and dissuasive";
- be "proportionate to the environmental damage and impact on human safety and health";
- negate the economic benefit derived from the infringement;
- gradually increase for repeated serious infringements; and
- feature periodic penalty payments to compel Importers to cure the underlying infringement.
The EU Methane Regulation includes a suite of measures that Members States should ensure competent authorities have the power to impose, including (but not limited to) the confiscation of profits gained (or losses avoided) due to infringements, and the imposition of administrative fines. The suite of measures that may be imposed by competent authorities is subject to the qualification that the measures "do not endanger the security of energy supply".16
With respect to administrative fines, these are capped at "20% of the annual turnover in the preceding business year".17 This cap on the administrative fines will likely, and quite rightly, grab the attention of industry participants. Whilst this is phrased as a cap, including such a high cap may give Member States some guidance on how material the fines should be.
Whilst the penalties are to be set by the Member States18, the EU Methane Regulation provides that competent authorities should cooperate to ensure that the penalties and measures are designed and applied "in an effective and consistent way across the Union"19 – most likely included to avoid fragmenting the market by having certain Member States with materially lower fines than others.
Observations and Concerns
Identifying the Producer
The EU Methane Regulation's definition of "producer"20 does not translate well to the LNG industry, especially LNG originating in the United States. The producer will rarely be the entity selling the LNG to the Importer. Even in a straightforward case of a liquefaction facility being supplied by a single gas field, the project may be structured such that the natural gas is sold by the upstream participant(s) to a midstream entity that liquefies the feedstock gas and markets the LNG. This means that even if an Importer is buying directly from the facility (far from a given bearing in mind an LNG cargo may be traded many times over before it reaches its final destination), the Importer will most likely not have a direct contractual relationship with the "producer".
This becomes increasingly complex or unworkable in the context of a liquefaction facility that sources feedstock gas from multiple gas fields, and it becomes completely unworkable when applied to 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 United States, it is commingled in a web of pipelines where it is freely traded. It just so happens that the US was the largest LNG supplier to the EU in 2023, making up almost half of total LNG imports.21
Given it is critical for the Importer to receive the required methane related data from the producer in order to comply with the EU Methane Regulation (and avoid the potentially substantial penalties), this is a significant issue. Not only is it likely that the Importer will not have a direct contractual relationship with the producer, it may be difficult or impossible to determine who the producer is.
Surely, and particularly at this moment in time, Europe wants to avoid the situation where Importers can only import LNG from certain countries and/or from certain liquefaction projects where the producer can be identified and is willing to provide the required data. While buyers can use "all reasonable efforts" to cajole sellers of LNG, those sellers cannot agree to MRV requirements to which they are unable to comply. The result is that EU buyers may choose not to buy US LNG if it exposes them to the risk of failing to comply with the EU Methane Regulation.
Who is the Importer?
The EU Methane Regulation's definition of "importer"22 is imprecise, as it is not clear what specific activity constitutes placing natural gas on the EU market, and therefore it may prove difficult to determine who the Importer of a given LNG cargo is for the purposes of the EU Methane Regulation.
It is common in the LNG industry for cargoes to be sold and purchased many times over, and this can include multiple transfers at the time of unloading. LNG reloads are also possible. Market participants will need to know who the Importer of a given LNG cargo is for the purposes of the EU Methane Regulation (noting this will not necessarily be the importer of record), and we expect any uncertainty may lead to an increased interest in offshore title transfers as certain market participants seek to mitigate the risk of being caught within the scope.
What does "renewed" mean?
Whilst one may reasonably take the view that a "renewal" of an existing Relevant LNG Supply Contract would concern a change or extension to the supply period, we are concerned that the term may be interpreted more broadly23 and that any amendment or modification to an existing Relevant LNG Supply Contract that market participants would not typically consider to be a "renewal" (e.g., an assignment or novation of an existing contract, an amendment to the price, or a change to the scheduling mechanics), may be considered to be a "renewal" by the relevant authorities, which in turn would make the Importer subject to additional obligations under the EU Methane Regulation.
We hope that the Commission urgently publishes guidance on what constitutes a "renewal" of a contract for the purposes of the EU Methane Regulation, as otherwise market participants may be reluctant to enter into relatively routine amendments, modifications and transfers to avoid the risk of making their LNG supply contract subject to additional obligations.
Uncertainty over Methane Intensity rules and requirements
For parties looking to conclude (or renew) Relevant LNG Supply Contracts that will include supply into the EU in 2028 and beyond, Importers will be wishing to include provisions requiring their supplier to provide the necessary data to allow the Importer to report on the methane intensity associated with the production of the natural gas supplied, as this must be reported from 5 August 2028. However, the methodology that must be used to calculate the methane intensity will not be adopted by the Commission until 5 August 2027 (this being the Commission's deadline under the EU Methane Regulation). Suppliers will find it challenging to agree to provide data calculated using an unknown methodology, particularly given such obligation will need to be passed up the value chain to the "producer".
Maximum Methane Intensity Value
As noted above, the EU Methane Regulation provides that the maximum methane intensity value will be based on objective criteria as well as a report prepared by the Commission by 5 August 2029. We encourage the Commission to consult with the LNG industry when preparing such report to ensure that the maximum methane intensity value proposed in such report is set at a realistic level that operating LNG liquefaction facilities and producers can achieve.
Conclusion
The EU Methane Regulation acknowledges that the EU is a major consumer of hydrocarbons, and is clearly seeking to use this position to encourage changes upstream to tackle global methane emissions. However, producers and sellers outside of the EU may be reluctant or unwilling to agree to a suite of obligations entirely driven by the buyer's downstream market, especially those that can change or are subject to unreasonable interpretation by a foreign government body. Even if producers and sellers are willing to agree to "soft" commitments to provide select methane related data, buyers may face a tough challenge convincing sellers (and ultimately producers) to stand behind such commitments – particularly if the level of fines imposed by Member States are as severe as many market participants are fearing. At the same time, Importers will be concerned about not receiving the required information, or receiving bad data that fails to meet the EU standard, and consequently being exposed to penalties and reputational damage.
Sellers may be inclined to "price in" any additional commitments they are required to give to EU buyers, and this could ultimately result in Europe paying more than other markets. Alternatively, if the sellers and the buyers cannot reach agreement on such additional commitments, sellers may choose to transact with buyers in alternative markets, and this could impact energy security in Europe. There is a real danger that the EU's rules could limit the supply of LNG to Europe.
In conclusion, Importers will be required to comply with the new rules set out in the EU Methane Regulation, but the information they need is held by a third-party (the producer) who the Importer most likely has no direct contractual relationship with. Further, the producer may have little or no appetite to adjust its operational processes and/or methane MRV measures (if any) to ensure that the natural gas it produces will ultimately be fit for purpose for the EU market and, in fact, the producer likely will have no contractual privity with the LNG seller. In time, producers may adjust to ensure they remain attractive in a competitive gas market (particularly if other markets adopt similar requirements), and the rest of the LNG value chain may adapt to ensure Europe continues to be a major LNG consumer and reliable LNG sink, but for now we expect negotiations for LNG supply contracts have just become a little tougher for EU Importers.
Footnotes
1 Recital (6)
2 Article 27(2)
3 Articles 30(1) and 30(2)
4 Article 30(3)
5 Article 27(1) and Annex IX
6 See our concerns below regarding the interpretation of the term "renewed".
7 Article 28(1)
8 Article 28(3)
9 Article 28(2)
10 Article 28(2)
11 Article 28(6)
12 Article 29(1)
13 Article 29(1)
14 Article 29(2)
15 Article 29(6)
16 Article 33(2)
17 Articles 33(1) and 33(2)
18 Member States are required to notify the Commission of the penalties by 5 August 2025, see Article 33(1).
19 Article 33(4)
20 As noted above, the "producer" is defined 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".
22 Being 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.
23 In part due to Article 28(3) referring to Importers "in the process of modifying or renewing existing contracts".
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.