INTERVIEW: Jonathan Stern on U.S. pressure to scrap EU Methane Regulation

The European Union is becoming increasingly dependent on U.S. LNG, a dependence that is set to deepen with the blockage of the Strait of Hormuz. At the same time, the EU is trying to stand up the Methane Regulation, which aims to impose limits on methane intensity on imported gas.

The stakes are high. Methane is an extremely potent greenhouse gas, and as the IEA recently pointed out, there is still “no sign” that methane emissions are declining from fossil fuel operations.

But the details of the EU Methane Regulation are complex and contentious, and implementation is taking longer than initially expected.

The regulation has been the target of an intense lobbying campaign by the gas industry in both the U.S. and Europe, as well as by the U.S. government, all of which are lobbying European policymakers to weaken the proposed rule, or even scrap it altogether.

The U.S. ambassador to the EU, Andrew Puzder wrote in an April op-ed in the FT that Europe faced “a long, cold and costly winter” if it didn’t severely weaken the Methane Regulation, even warning that U.S. LNG companies may “redirect supplies” to other markets that face less regulatory burdens. 

Professor Jonathan Stern, a Distinguished Research Fellow at the UK’s Oxford Institute for Energy Studies, responded to Puzder with a letter, also published in the FT, saying Puzder’s arguments “echo industry lobbying” and that the claims are “overstated.”

Gas Outlook spoke at length with Stern and the interview is published below, edited for brevity and clarity. 

Gas Outlook: First off, one of the things that has puzzled me is that from the industry’s perspective — and the U.S. government’s perspective — there’s been a little bit of incoherence in their argument, which is that U.S. gas is so clean that it should be granted regulatory “equivalence” when it comes to the EU Methane Regulation. But at the same time the conditions of the regulation are so onerous that it’s going to disrupt the trade. It confuses me how they square that circle, and I wanted to get your perspective on that.

Jonathan Stern: There’s several aspects to this. In terms of the U.S., despite it having become the dominant LNG supplier to Europe, it’s not really possible for the U.S. to claim country equivalence because the U.S. has the most complex supply chains — not “supply chain,” but plural, “supply chains” — for its LNG exports. Qatar or Norway might claim country equivalence because, in the case of Norway, it has one LNG terminal. In the case of Qatar, you’ve got many terminals but they’re all roughly in the same place drawing from the same field.

But the U.S. produces from millions of wells in multiple basins (unlike anywhere else other than Canada) compared with most other producers, which produce from individual fields. And then it has multiple routes to liquefaction terminals in very different locations. So, it’s just not possible for the U.S. to claim country equivalence. Until the current administration started to unravel all the Biden regulation on emissions, perhaps it would have had a stronger case. But now that a lot of that regulation is being unravelled, or exceptions being made to the dates when it becomes relevant, I simply don’t think that’s possible.

In relation to the assertion that the U.S. has some of the cleanest, or on average some of the cleanest LNGs, this very difficult to establish. Just trying to assemble the information to make that comparison is difficult.

That raises another question. The EU Methane Regulation applies to European importers. How difficult will it be for them to demonstrate even the data for where their gas is coming from. Can they go to the European Commission and say, “we got this cargo from this producer in the U.S. demonstrating this methane intensity.” That’s pretty difficult, isn’t it?

Well, there’s several ways to do this. There’s a basic difference between those importers that say, “We’ve got a certificate for this volume of gas from this country, and we think that’s reasonable.” And the other way it can happen is a producer or a terminal owner where the cargo comes from, provides a certificate of its own estimate of emissions. And then competent authorities in the EU decide whether the information provided meets the requirements of the Regulation.

Now, at the start of this — and don’t forget we’re at the start of a process – we haven’t really got started yet on detailed MRV of emissions. There are indications that at this point in the process a very high standard may not be required. I expect the competent authorities to say, “We’ve looked at your submission and this year we’re going to accept it. But, by next year when you submit the next report, we’re going to require higher standards.” I think standards will be progressively tightened as more information and more data and institutional capability becomes available.

And so, what importers present in 2030 will need to be more detailed than what they present in 2027, or good reasons will need to be given.

But there’s another layer on top of all of this, which is obviously, if we’re in a situation in 2030 where we’re desperately worried about supply because the [Strait of Hormuz] has been closed for four years, this is not going to happen.

I understand that what the Commission is going to publish next month may say `if we’re still in a situation of serious security of supply, then we will probably suspend some requirements until we are no longer in that situation’.

Yeah, and one of the industry’s arguments on the Methane Regulation is to press for a “stop the clock” on implementation of the regulation, arguing that it is going to cut off a ton of LNG imports because they’re not compliant —

But that’s a bizarre argument, they’re not saying they want to stop the clock. They’re basically saying “we want this to go away.” The Commission has said repeatedly and in print: no imports of fossil fuels are going to be rejected as a result of this Regulation. What is going to happen eventually is that you’ll have to pay penalties for imports that don’t meet a defined standard. The main argument is about penalties…how high are they, when do they get introduced, are they the same for every importing country or are they different? The arguments are not “We’re going to reject 100 bcm of LNG because it doesn’t meet our standards.”

Yeah, I was going to say that. The regulation itself, I believe, only indicates that there will be penalties, not that the cargo wouldn’t be admitted into the into the European Union. So, then I guess I’m wondering, why is the industry so upset about this? Because it seems like they’re going to great lengths to, as you’ve mentioned, make it go away. If this is something that they can comply with, and if the gas in the U.S. is so “clean,” what is the outrage?

Firstly, `the industry’ is not a monolithic body. Talking to these companies, some of them are saying, “Listen, this is no big deal for us. We know what our emissions are and we can credibly present them.” Others are saying, “Look, the EU has fallen down on its timetable. We should have had a lot more information by now. We need templates for intensity and equivalence criteria which are going to be imposed.” And that’s fair enough. But there are several who are simply saying, “We don’t want this.” And this could be a reflection of those who think that greenhouse gas emissions are not very important, or irrelevant.

I’ve been around regulatory uncertainty in the EU and the gas industry for a long time. I liken this to what happened when we were liberalizing the markets in Europe and we were moving from oil-linked to spot prices, and from long-term to spot contracts. And we had a similar situation with many in the industry saying, “Don’t do this, it’ll be a disaster. No one will be able to keep warm or cook food.” Within about three years of it being introduced, everyone had moved to a new system and no one could remember what was said because most of those guys had adapted or gone.

I don’t want to minimize the complexity of this regulation. It’s very complex and we haven’t got many of the pieces that we need and that, to some extent, is the problem for the Commission. But rather than stopping the clock, it makes more sense to say, “you guys need to publish the secondary regulation and legislation, and we don’t think it’s reasonable to impose penalties on us until we understand what you’ve got in mind.”

It seems like the industry lobbying is having quite an effect. The leaked draft suggests a weakening of the penalties. We don’t know to what extent. But I guess my question is kind of twofold. If the regulation was properly implemented, on schedule, and with reasonable teeth to it, how effective would it be in actually reducing methane emissions? Or, on the flip side, are we facing a future where this regulation is being watered down to such a degree that it’s not going to be effective?

Both of those outcomes are possible. But at the start, the requirements will probably be relatively weak until we have more regulatory detail. When we have the secondary legislation and regulation the requirements will be phased in more gradually. What will tend to happen is that companies with the capability to present credible data will take the lead. But what exactly is credible data? We still haven’t really got to grips with those questions in terms of what is going to be acceptable. So, I think it’s going to be messy. I think effectiveness will take longer than was foreseen. But no, I don’t think it’s going to end up as something that is completely ineffective.

And the reason for that is that when this [Strait of Hormuz] crisis passes —and it will — the EU will return to focusing on greenhouse gas emission reduction. Whether that will happen in the U.S, I don’t know. But it will happen in Europe.

So, for me, if you really want to continue to sell your LNG in Europe — and a lot of companies will want to sell in Europe — you will need to get your act together on methane emissions.

And in a couple years’ time, let’s say 2030, when this regulation starts to have more meat on the bones…European gas demand is expected to be going down over time. What’s your outlook on European gas demand in the medium term?

Well, a lot of this depends on price. What we were expecting before Hormuz, was that we were moving into a period of much more balanced or even surplus supply over demand globally. And therefore, prices would go down significantly. Well, of course the opposite has now happened.

When the crisis passes, we will go back to the forecast that I think everyone had prior to February 2026, which was that we would be in a period of much lower prices. Now, then the question is whether gas demand has been destroyed in Europe or whether, at lower prices, that demand can come back? And then of course there’s the other real unknowable about demand from data centres. How many of these are actually going to be built and how many are going to be relying on large amounts of gas?

My feeling is that gas demand in Europe is in secular decline. But so is gas production. So, the question really is does demand decline faster than production or the other way around, because that will determine the need for imports? And that’s really not very knowable because there are too many dynamics to take into account.

But companies which are building LNG assets that have multi-decade lives are planning to be exporting for a long time. Of course they can export to Asia, but a lot of those countries probably are not going to see substantial increases in LNG imports, particularly Japan, Korea, and Taiwan. There’s even uncertainty about how fast China’s LNG imports are going to grow. So, Europe will continue to be a very important market and for companies with substantial technical expertise and financial capability, it doesn’t seem to me that [the Methane Regulation] should be that big a deal.

Yeah, interesting. I guess my last question is to kind of put a finer point on what you just mentioned about global LNG demand. Is there demand destruction happening right now because of Hormuz?

Absolutely, particularly in Asia, but as I’ve said also in Europe. In Asia like Japan, Korea and Taiwan that can afford to pay whatever they need to pay. China is a little bit in between, but when you look at South Asia: India, Pakistan, Bangladesh, they just can’t afford to pay more than about $7 or $8 and even that’s quite a high number for them.

And then Southeast Asia you have to distinguish between say Singapore and Thailand and some of the other countries where their ability to pay is less. They won’t stop importing, they will simply not increase imports as expected, and some may see a fall in imports, until prices fall to a lower trajectory. So, for some countries this will be a temporary demand reduction, and for others it may be destruction — i.e. demand that never returns.

And if you look at how many of them are reopening coal-fired power stations, you can see that they have alternatives. This is not good news for global greenhouse gas emissions, but it reflects affordability.

So, it’s a complex story and we need to see not just Hormuz reopen, but some confidence that this is not going to be a kind of on-again off-again situation, where it opens for a few days or weeks and then we  have another problem. We’ve got to have some confidence that at least until U.S. LNG ramps up to essentially compensate for the loss through the Strait that we actually will see a fairly secure supply coming through the Strait.

But is that confidence shattered to some degree? Is there permanent scarring now happening? Is Southeast Asia going to jump to renewables instead?

I think that’s a risk, but you can’t generalize because individual countries are in different situations. A country which has built an LNG receiving terminal will want to use it. But that only holds to the extent that they can get what they believe to be reasonably priced LNG on a consistent basis.

And is the same true for gas-fired power plants — if you haven’t built one yet, it might not make sense to build one now?

Exactly. Exactly. You’ve already got in India gas-fired power plants which are hardly being used because they’re dependent on LNG. 

(Interview by Nick Cunningham; editing by Sophie Davies)