The EU's Methane Emission Regulation (MER) creates "significant challenges for ensuring the flexibility, affordability and security of the EU's gas supply", industry association Eurogas told Argus.
The legislation, adopted in 2024, aims to reduce methane emissions in the EU's energy sector and from energy imports. It requires that from 2027 new and renewed import contracts demonstrate that, at the point of production, the producing country has rules equivalent to those of the EU on how to monitor, report and verify information on methane emissions, while by 2028 methane intensity will have to be reported, Eurogas summarised. By 2030, imports will have to demonstrate compliance with the methane intensity threshold set by the European Commission.
Eurogas "fully supports" the MER's overarching goals of reducing methane emissions and ensuring sustainable energy imports, with the law representing an "important step in aligning climate ambitions with global energy trade", it said.
But the regulation's "timeline, uncertainties and extraterritorial implications for importers" create significant challenges for EU gas supply, a particularly acute problem as the EU seeks to replace all Russian gas imports by 2027, Eurogas said. "Multiple challenges" such as the equivalence of systems for monitoring, reporting and verification of methane emissions, as well as the tracking of the origin and emission intensity of deliveries need to be addressed, the association said, noting that "several of the EU's suppliers have expressed major concerns regarding the MER". Ultimately, by significantly increasing the administrative burden on both exporters and importers, disincentivising the signing of long-term contracts, the MER may result in firms turning more towards intra-EU spot trade on hubs, which is "subject to its volatility and supply risks", Eurogas said.
Compliance with the regulation becomes particularly difficult in complex cases, such as in the US, where gas can be produced by one company, transported by another, liquefied by a third and imported by a fourth, making it extremely difficult to track emissions across the entire value chain. This problem is compounded if gas is bought on a liquid hub such as the US' Henry Hub, as is frequently the case with US LNG tolling contracts, because there is no system for verifying the origin of gas bought on a hub. From there, gas then frequently co-mingles in pipelines and at the liquefaction facility, further complicating tracing efforts. Unless you are an integrated company that controls the entire route to market, from production to liquefaction to export, it is "very difficult to comply", Eurogas said.
Additionally, uncertainties regarding compliance with requirements yet to be defined, liability risks and potential penalties as high as up to 20pc of the importer's annual turnover, make it "difficult for parties to assess risks and move forward with agreements", Eurogas said. Without concrete solutions in place to deliver such tracking and monitoring, the regulation will "limit Europe's potential pool of buyers" and is already "preventing certain gas supply contracts from being signed". Eurogas therefore recommends adopting a "pragmatic approach regarding regulatory equivalence and origin tracking, to ensure compliance can be achieved without endangering Europe's security of supply and avoid distortion between supply routes".
Another consideration is that the MER does not specify any direct EU funding to support the implementation of necessary measures. These measures will "inevitably involve significant investments" in advanced monitoring equipment, upgrades of existing facilities to minimise emissions and administrative efforts needed for reporting, the association said. When it comes to EU regulated entities, the regulation clarifies that costs associated with such investments shall be taken into account in tariff setting, subject to efficiency and transparency criteria.
The US Department of Energy in October requested the "initiation of an equivalence determination process for importers/third countries" in order to "ensure the continued reliable and stable supply" of gas from the US to Europe. Earlier this month EU officials held technical talks with US firms to support "mutual understanding" on implementation, the European Commission said. The "real challenge" lies in the fact that the commission has not yet formulated the methodology for calculating methane emissions, so the compliance of existing third-party reporting "cannot be assessed", Eurogas said. It should be ensured that the detrimental impact on current gas trading practices and on security of supply "remains limited and to avoid market framework reforms in third countries". Any solution must work in existing pipeline and LNG gas markets and should be "efficient and effective with low cost to industry and consumers" to enable large-scale adoption by the market, the association said.
To this end, Eurogas recommends that the possibility of relying on a voluntary certification system based on book-and-claim, or alternatively an adapted mass balancing approach, should be explored. Such an approach would imply accepting foreign interconnected gas systems as a single mass balancing at a global level, where the focus should be on the injections and withdrawals from such systems, rather than on the tracking of the molecules or certificates and their trade within such systems, the association noted. This approach would be necessary in order to minimise the impact on trading and avoid market framework reforms in producers' countries, it said.
