European industry awaits EC proposals

Much depends on what form the EC's methane legislation will take

What: The European Commission is drafting a proposal for methane legislation.

Why: The EU introduced a methane strategy last year and wants rules to help achieve its goals.

What next: It remains to be seen if the EC will be more prescriptive or performance-based in its legislation, how non-compliance will be penalised and how the rules will affect third-party suppliers.

The European Commission (EC) is drafting new legislation this year that will have a significant impact on the gas market and how it develops in the coming years.

Methane rules

The EU introduced its methane strategy last year, and the hope is that it will encourage oil and gas companies to invest in satellites and other technologies to improve leak detection. But critics say the plan does not go far enough with enforcing rules on the gas industry in order to deliver results. Instead, they argue, it largely relies on companies making voluntary commitments.

The EC is looking to introduce legislation by the end of the year that would require oil and gas firms to monitor and report methane emissions and take steps to avoid them, such as by repairing or avoiding leaks. The final details are currently being drafted after a public consultation ended on May 1. The EC will publish its regulatory proposal later this year, and final adoption by the European Parliament and the EU Council could come in 2022.

Methane emissions are already addressed by the EU’s Effort Sharing Regulation, but this only covers sectors not included in the EU’s Emissions Trading System (ETS). There are also voluntary agreements in place, such as the UN and EU-backed Oil and Gas Methane Partnership (OGMP). But with pressure from the public and various groups, the EC is looking to propose binding rules to monitor and mitigate methane emissions.

Under existing policies, methane emissions in Europe are expected to fall by 29% by 2030, but it is estimated that a 35-37% reduction will be needed by the end of the decade to achieve the bloc’s goal of a 55% reduction in overall greenhouse gas (GHG) emissions.

Unanswered questions

What shape this legislation will take is unclear at this stage. But Europe’s oil and gas industry is waiting to find out whether the EC’s proposal will simply focus on reporting and monitoring or whether it will put in place binding targets for reducing emissions.

Many in the industry argue that binding targets would be greatly problematic, given the difficulty of quantifying how much methane is emitted into the atmosphere. For instance, quantifying depends greatly on whether a bottom-up approach, involving estimates on the ground of how much methane is escaping, or a top-down approach, involving satellites, is used.

The next issue is whether the regulations will be more performance-based or compliance-oriented. This is to say, will companies receive an incentive for improving monitoring and reducing emissions according to specific targets, or will the regulations be more prescriptive, setting out rules that companies must follow, with less focus on the resulting outcome. Furthermore, companies will want to know what the consequences would be for non-compliance with either the rules or the targets.

Companies will also be waiting to hear the EC’s position on what role gas can play in the European Green Deal, once the issue of methane emissions is better addressed. It remains to be seen whether the EC will also put in place regulations for other economic sectors that emit methane such as coal, agriculture and waste.

Another concern is where the cost of reducing emissions will be borne and what subsidies might be available to help companies do so. The argument is frequently made that many reductions can pay for themselves, as the resulting gas that is saved can be sold. But this can be problematic. Companies that bear the cost of addressing emissions may not be the ones that benefit. A pipeline operator, for example, may fix a leak, but does not own the gas that is consequently saved.

The EU is a major gas import market and its dependence on foreign supplies is only anticipated to grow as its indigenous production declines. Another point of uncertainty is how the legislation will address methane emissions from gas produced in third countries such as Russia, Algeria, Nigeria and the US.

New gases

The gas industry is also waiting other legislative movements. In autumn, the EC will propose amendments to the 2009 Gas Directive, which covers EU market rules on issues like ownership, unbundling and competition. The EC wants to update the legislation to outline how renewable, synthetic and decarbonised gases will be incorporated into the market.

The EU is looking to have 40 GW of electrolyser capacity up and running by 2030 to produce so-called green hydrogen. The concern is ensure the same fair access and competition in the hydrogen market as there is in the gas market. The EC wants to avoid a situation where there are high barriers to entry for new players wanting to enter the hydrogen market, for example. The question has been raised whether transmission system operators (TSOs) should be allowed to produce hydrogen and operate the networks to transmit it. Some argue they are best placed to make investments in hydrogen production, while others argue this would risk creating monopolies.