Uncertain Times for the EU Methane Regulation

The European Union Methane Regulation (EU) 2024/1787 (EUMR) targets the reduction of methane emissions from fossil fuel operations. The EUMR applies, among others, to EU importers that place crude oil, natural gas/LNG and coal products on the EU market. To ensure compliance, importers will need to pass obligations (and associated costs) up the supply chain to upstream producers, transportation and processing infrastructure owners, and other upstream participants. Upstream parties may need to design and retrofit infrastructure to not only enable data capture but also to reduce methane emissions.

Provisions requiring EU importers to provide producer information, methane reporting measures and third-party verification are already in force (Phase 1). From 1 January 2027 (Phase 2), importers are required to demonstrate that the product (e.g. imported LNG) is subject to EU-equivalent monitoring, reporting and verification (MRV). Phase 2 applies to all contracts concluded after 4 August 2024 and importers are required to use all reasonable efforts to ensure that contracts concluded prior to that date comply with Phase 2. Penalties for failure to comply with Phase 2 may include fines up to 20% of the importer’s annual turnover.

Recent Developments

With the tap on Russian LNG and Russian piped gas imminently closing, and the ongoing crisis impacting the Strait of Hormuz, the EU’s commitment to its climate goals is being tested against its need to secure its gas supply. At the same time, global, European and US industry groups, US exporters, the US Government and others have repeatedly pushed back asking for exemptions, dilution or delays to Phase 2 requirements. A “leaked” EU Commission draft purportedly states that the EU Commission will issue non-binding guidance recommending member states waive penalties until 2029.

What does this mean?

Although the reported voluntary suspension of penalties means that the EUMR would not take punitive effect (save for instances of undefined “large fraudulent breaches”) until 2029, importers risk non-compliance from 1 January 2027. Many EU importers may be unwilling to knowingly remain non-compliant with an EU regulation. A recommendation or guidance from the EU Commission is not legally binding and competent authorities (several of which have not yet been nominated by member states) could take different approaches to penalties.

The EUMR also lacks supporting infrastructure as various implementing acts, standards, methodologies and resources are yet to be developed/notified. Potential pricing divergence may emerge between “EUMR-compliant” and non-compliant supply. Sellers under FOB contracts (where title and risk pass to the buyer at the loading port, i.e. outside the EU) may continue to push-back on taking any EUMR cost or risk, leaving buyers to avoid taking/re-selling cargoes to the EU. Where gas markets are liquid, such as the US, it may not be possible to identify producers, making data collection and sharing difficult. Many practical challenges therefore remain.

What do you need to do?

• Watch this space: The EU’s position on strictly imposing Phase 2 requirements and penalties is in limbo. As pressure continues to mount, more is expected from the EU Commission in coming weeks. To the extent that the EU Commission only issues “guidance” to member states (whether to suspend penalties or otherwise), each member state’s approach will become relevant. Plenty of implementing acts, standards, etc. are also expected, including the Methane Transparency Database, which is scheduled for launch in September 2026.
• Contract structuring: Take advice before signing new supply contracts for relevant products destined for the EU market. As an EU importer, conduct a comprehensive review of your long-term contractual portfolios to be better prepared, especially if the implementation of Phase 2 is not deferred (even where penalties may be suspended for a grace period). Provisions regarding data sharing, site inspection rights and MRV compliance throughout the supply chain will eventually need to be negotiated.
• Investment: To eventually comply with Phase 2, significant capital expenditure will be required by those in the supply chain to retrofit infrastructure for source-level methane measurement and data capture. Parties are likely to heavily negotiate who bears these costs (and the costs of ongoing compliance) and how much data can be shared.

Current Compliance Timeline

For assistance with risk assessment, contract review or revising/negotiating new offtake contracts in light of the EUMR, please contact:

• Anna Howell (London)
• Mitasha Chandok (London)
• Emma Turton (London)

Connect with Orrick’s Global Oil & Gas team at [email protected] to discuss your next project, investment or strategic initiative.