Execs at Gastech see EU methane regulation as shaking up industry

(Houston, Texas) — Executives and industry analysts gathered at Gastech in Houston focused on the tightening regulatory screws on leaking methane across the global gas supply chain.

Increasing regulation and potential taxation or other penalties on high-emitting sources of gas could pose headwinds to dirtier forms of LNG in the years ahead.

An array of regulations, particularly at the European level, are set to shake up the gas market in the near future. These include the EU’s Corporate Sustainability Due Diligence Directive, an EU programme aimed at cleaning up corporate supply chains.

The EU is also slowly standing up the carbon-border adjustment mechanism (CBAM), which will tax high-polluting industrial products like cement, steel, and fertilisers if they are not adequately taxed or regulated for carbon emissions in their home country. Notably, however, gas and LNG are not targeted in CBAM.

But gas will be subjected to the European methane regulations, which will require gas imported into the continent to verify its methane leaks across the supply chain, requiring the gas or LNG to meet European-equivalent standards. For the next few years, the EU will require reporting, but the regulations take full effect in 2030.

Meanwhile, the U.S. is imposing methane regulations on oil and gas operations and also a methane fee on energy producers who don’t get their emissions under control.

Taken together, the new rules across various jurisdictions could have some bite.

Instead of piecemeal purchases of LNG supposedly sourced from low methane-emitting sources, often based on carbon offsets — which was a growing trend coming out of the pandemic prior to the 2022 energy crisis — the global LNG market will increasingly see more binding regulations and taxation targeting methane.

Many of these policies are being phased in incrementally, but the market is “moving from voluntary to obligatory,” Ben Smith, a partner at Norton Rose Fulbright, a global law firm, said at the Gastech conference on Wednesday.

This presents a conundrum. The industry has long claimed LNG offers benefits over coal, but forthcoming rules will force them to verify and demonstrate that difference.

The gas industry’s claim that gas and LNG offer climate benefits is “predicated on” a favourable comparison with coal, said David Drury, managing consultant at Gas Strategies. “Therefore, it is quite disconcerting to see headlines like this,” he said, displaying a series of news headlines warning that, because of methane leaks, gas may have a climate impact that is worse than coal. 

That could pose threats for companies in the U.S., where methane leaks have been a chronic problem. The U.S. and Mexico have much worse greenhouse gas intensity per unit of gas production, compared to the Middle East, Africa, and the Asia Pacific, according to Kateryna Filippenko, director of global gas at Wood Mackenzie.

That is due to the “nature of shale gas production and also long distances for pipeline transport,” she said.

Cutting methane emissions is “low hanging fruit,” but even some projects in the Permian basin “might still struggle to tackle methane emissions,” Filippenko said.

The result could be a “bifurcated market,” where more tightly-regulated and cleaner forms of gas sell at a higher price in the EU market, and other cheaper and dirtier forms of LNG sell at a lower price elsewhere where methane oversight is more lax, she said.

Other analysts agreed with that assessment. “This clearly could lead to a bifurcated market, where we have cargoes that are EU compliant and cargoes that aren’t EU compliant,” Smith said.

Many estimates put methane leakage across the U.S. at around 3 percent, but one study from earlier this year found that some Permian production leaks methane as high as 9 percent, which would make it vastly worse for the climate than coal. Even the 3 percent leakage rate would eliminate any purported climate benefit by swapping out coal for gas.

Toby Rice, CEO of EQT, the largest gas driller in the U.S., hailed his company’s low methane leaks on an afternoon panel at Gastech on Wednesday. “It is .007 methane intensity – it’s world class,” he said. EQT replaced equipment, it now drills wells faster, and pinpoints methane leaks, and otherwise uses nature-based offsets to “zero out” the rest of the company’s upstream emissions, he said.

He said his company’s success was “achievable and replicable” for other companies.

That remains to be seen. EQT is a gas-focused company in Appalachia, where methane leaks are lower because companies are solely focused on gas. In the Permian, energy companies focus on crude oil, and the gas that comes up out of the ground is a byproduct (called “associated gas”), so there is less urgency to control methane leaks. Venting and flaring are common.

But Rice was unfazed by criticism. “The most challenging thing that we deal with isn’t the operational execution in front of us. It’s that political forces have overwhelmed market forces.”

He said the oil and gas industry is “the greatest industry in the world,” but “we need to get back to the place where market forces rule. That means the political forces need to take a back seat.” He did not specify what political policy was holding the industry back, but EQT has been a loud critic of regulations that slow pipeline construction.

EU methane regulations

Talk of a “bifurcated market” was a constant theme discussed at Gastech.

“An EU tax on all LNG methane emissions cannot be ruled out. Further down the line, we may even see the EU implement a broader tax on all GHG emissions from LNG imports,” WoodMac wrote in a commentary ahead of Gastech.

Cristian Signoretto, director of global gas and LNG at Eni, said that methane was an issue that the industry “needs to address,” or it may result in a more fractured market, forcing global gas markets back towards more “regionalization” in pricing. That would undo some of the shifts towards more market liquidity in recent years, “which I think is not good for overall industry momentum,” he said. Instead, he preferred a global approach to methane regulation.

Not everyone saw the EU methane regulation as a game-changer. The premium that will be placed onto LNG entering Europe may not be high enough to force producers and other parts of the supply chain to clean up their operations, said Rak Lim, an associate at McKinsey. EU rules “will likely allow for continued LNG production with methane intensity beyond regulatory maximum,” he said. The level of pricing required to force more dramatic change would be too high for European buyers.

Still, he too saw a possible bifurcated market opening up, but the extent to which that dynamic emerges will depend quite a bit on the EU offering more clarity, Lim said. For instance, how severe would the EU crackdown in 2030 be on supplies that don’t meet European standards?  An outright ban?

Richard Holtum, global head of gas, power and renewables at commodity trader Trafigura, largely waived off these concerns, calling EU methane regulation “noise.” For the next few years, it will only amount to reporting requirements. “It doesn’t have a meaningful impact and won’t for quite some time.”

When asked what possible developments worry him, Holtum said he sees very few downsides facing the industry. “We’re pretty bullish for the rest of the decade for LNG and gas.”

“I think we’re entering a golden decade of LNG, golden decade of gas,” Holtum said, referring to rising supply and increasing demand. But, the only thing the industry needs to keep its eye on, he quickly cautioned, was “methane slip.”