Even before the cavalcade of press releases that came out of COP28, the European Union announced a policy framework that could lead the planet in methane emission reductions. This new policy will be a major driver in influencing operator behavior the world over. Europe is a major net importer of natural gas: over 85 percent of Europe’s gas supply is imported from non-EU sources, and over 40 percent arrives as liquefied natural gas (LNG). Meaningful European demand-side policy actions can have the important effect of driving down upstream methane emissions. In fleshing out this new policy, however, will European policymakers seize the brass ring and drive down this most potent of greenhouse gas emissions, or will the policy simply serve as a paper tiger?
The provisional agreement between the EU Council and the EU Parliament calls for the tracking and reduction of methane emissions for energy produced within Europe, as well as for imports into Europe. Monitoring requirements will be put in place by 2027, and maximum methane intensity values will be determined by 2030. Both provisions are laudable, have the potential to have significant and positive impacts, and will apply to imported LNG. However, the announced provisional agreement is just a framework and many of the details remain undetermined. And when it comes to methane emission monitoring and reductions, it’s the details that matter.
Under the provisional agreement’s framework, the European Commission will be tasked with determining a methodology for maximum methane intensities, as well as establishing the methane emissions profiles of countries and companies. While these are worthwhile initial steps that can be taken, questions immediately come to the fore. What methane intensities will be determined and for what scale? How will the methane intensity of the overall supply chain be determined? How will reported numbers be verified and will the use of a credible third party be required? Will the methane intensity limits apply to LNG shipments as well as gas transported to Europe on pipelines?
The methane performance profile of a country or company is interesting, and perhaps of utility, but it is questionable as to whether this information will be useful to regulators and utility gas buyers. Especially in the LNG space, gas is not purchased from a country or an overall corporation. A gas trader in Europe does not negotiate a gas contract with ‘Canada’ or with ‘Shell.’ Rather, the trader will purchase LNG on either a long-term basis or on the spot market from a particular shipper or an operating unit within a corporation, for example, from BP’s North Sea offshore assets. The framework as released by the EU does not provide for reporting requirements that are at the level of detail to allow gas traders to make LNG purchase decisions on a shipment-by-shipment basis, and to subsequently provide the incentives to change operator and shipper behavior.
As the EU’s provisional agreement is framed out and the details are developed, what could European policymakers do to put some real methane-reducing teeth into this presently paper tiger?
Given that the vast majority of Europe’s natural gas supply comes from outside of the EU, the central issue is the emissions intensity of supply chain. Determining that – and having the EU methane policy hinge on this – will allow Europe to meet its methane reduction goals, will provide its regulators with actionable information, and will allow natural gas buyers to make purchasing decisions based on the actual emissions intensities of LNG shipments on a cargo-by-cargo basis.
Determining a supply chain emissions profile that is actionable is a complex task – but by no means an insurmountable one.
The key is supply chain-based methane performance certification at the asset level – all equipment and operations within a basin. Such a certification framework can measure the methane performance – or methane intensity – at the asset level (which is the unit at which gas is bought and sold) and will add the methane emissions of any subsequent leakage as it makes its way through the natural gas supply chain all the way through the LNG shipment. In other words, as the gas goes from wellsite, through the gathering, boosting, processing, transmission and storage stages, into the natural gas liquefaction facility, and onto the LNG ship, the methane emissions can be summed as the gas moves through the supply chain – providing a unique emissions profile for each LNG shipment.
The other key element is the audit process. Auditing for methane performance certification is a formal and prescribed process that entails operational field audits that are conducted against a methane performance standard. This process avoids gaming the system – otherwise any operator with emissions above a certain threshold will be incentivized to not report their actual emissions profile.
Why is supply-chain certification useful? Imagine a hypothetical natural gas producer that operates two separate facilities in two different basins or countries. In this scenario, the average methane intensity for the entire company might be 1.0%. Under a reporting program that simply requires a company-wide methane intensity report, this is the only number that would be produced. Interesting, but not very useful. Under a certification framework, however, we might learn that facility has a methane intensity of 0.2%, while the other facility has a very poor intensity of 1.8%. The level of information from certification provides actionable information that allows a European gas buyer to only buy from the better performing facility and to eschew gas purchases from the poorer performing facility. Not only does this better realize the goals of European policy-makers, but it also puts internal market pressure on the natural gas producer to clean up operations at its poor performing facility and reduce methane leakage.
This type of methane performance certification is already being used in some places in the United States. In a similar vein, U.S. regulators already require greenhouse gas reporting at the asset level. With European requirements to require supply chain methane performance certification, significant demand-side pressures will be placed on U.S. operators (as well as producers around the world) to certify their methane performance and lower their methane leaks. If European policy-makers, however, insist on only utilizing reporting frameworks that require information at the country or company level, not only will they build an unworkable system that cannot measure what is most important – supply chain emissions – they will cement in a slow-down of the methane emission reductions that are so necessary to aid our warming planet.
European policymakers need to give its regulators and its gas buyers the tools to allow them to actually take a meaningful bite out of the methane problem.