Why the EU should enact methane regulation for imported oil and gas

• Emissions associated with domestic production of oil and gas from within the EU are material and need to be reduced to enable the EU to meet its net-zero aspirations.  In particular, the avoidable waste from flaring, venting and leaking gas from within Europe amounts to 4 BCM per year, and 120 million CO2-equivalent tonnes.  We expect that the upcoming legislative programme in the EU will provide the much-needed regulation to materially reduce emissions towards net zero.

• But there is a much bigger elephant in the room: imports.  The EU today imports 80% of consumed gas and 95% of consumed oil.  And in addition to importing hydrocarbons, the EU is also effectively importing the supply chain emissions associated with hydrocarbon production.  These emissions not only come from energy used in production and transportation, but also the emissions from waste, which includes gas that is flared, vented and leaked.  Since venting and leaking (and some of flaring) is methane, the climate impact is very large.

• The emissions associated with imported oil for flaring alone, are 40% higher than the global average – driven by the uniquely high dependency on oil from countries with high “flaring intensities” (including Libya, Algeria and Nigeria).  Flaring-related emissions associated with oil and gas imports are 5.5 and 33 times greater than those from domestic production, respectively.

• We need urgent action.  The EU’s environmental policies – which are demonstrably leading the world – not only need to be strengthened within the EU, but also need to extend to imported emissions.  In doing so, the EU can not only create a “level playing field” (and stop “carbon leakage”), but also stimulate material reductions in emissions throughout its supply chain.  We outline a few tangible ways that this could happen.

Europe has a “methane” problem

The European Union has bold ambitions articulated in the European Green Deal which defines a pathway consistent with becoming net-zero by 2050.  Reduction in methane emissions is core to delivering this mission and is central to the EU’s joint leadership of the Global Methane Pledge (a commitment by >108 countries to reduce emission by 30%, vs 2020 levels, by 2030).  A set of legislative proposals are being considered to support the delivery of the Green Deal and the aspired 55% reduction in net greenhouse gas emissions within the EU by 2030).    

But Europe has a “methane problem” – driven by the flaring, venting and leaking[1] of natural gas from domestic oil and gas production.  These emissions sources within Europe account for almost 4 BCM of gas per year (equivalent to the annual consumption of the Philippines or South Africa), a potential loss of nearly $700 million per year[2] and a greenhouse gas emission load close to 120 million CO2-equivalent tonnes[3] (equivalent to 15% of all the emissions from the aviation industry) – see Table 1.  The CO2-equivalent impact is particularly high because 54% of the total volume that is emitted in the form of methane accounts for 93% of the greenhouse gas load.  This is because methane is a particularly potent greenhouse gas that is 83x more damaging than CO2 (on a mass basis) over a 20-year period).  It is notable that flaring is also a significant source of methane from “methane slip” generated by inefficient combustion of gas at the flare tip (see our paper “flaring’s billion-tonne secret“).

Emissions from flaring, venting and leaking are, rightly, large enough to draw attention to policymakers to act to improve regulation and industry performance.  Indeed, they underpin the upcoming EU regulation (expected in December 2021), and follow directly from the EU’s methane strategy.  But there is an elephant in the room: imports, as Figure 1 demonstrates clearly.

Indeed, the emission from oil and gas operations from within the EU are dwarfed the emissions associated with oil and gas imports (Figure 2).

Taking flaring specifically (which is where our research is deepest), our analysis highlights that the “flaring intensity”[1] for imported oil is 5.5 times greater than indigenously-produced oil.  Imported crude oil is also 40% higher than the global average, at some 7.2 m3 per barrel, and significantly higher than imported oil into other major comparable blocks, including India, China, US and Japan.

Within Europe, countries like Spain, Switzerland and France have particularly high embedded flaring emissions.  In contrast, Japan’s imported emissions associated with oil are low (some 2.2 m3 per barrel), due to the dominance of low-flaring regions, including UAE, Saudi Arabia and Kuwait.  For further reading and analysis, see our paper “how the EU’s CBAM will impact energy imports from countries that flare gas“.  The situation is similar for gas (Figure 2).

[1] Meaning the volume of gas flared per barrel of oil produced.  This metric is a useful proxy for operational performance, which is turn is driven by the effectiveness of domestic regulation.

Taking a more gas-centric view, gas imported to the EU has an associated flaring rate that is 33 times greater than domestic production.  Countries that are material suppliers to the EU (including Libya, Algeria and Russia) also have particularly high levels of flaring (Figure 2). We explore this topic in greater depth in our paper “twelve things the EU should do about gas flaring“.

Given the scale of the imported emissions problem, we think that the policy recommendations in the legislative package should be extended to cover the flaring, venting and leaking within the countries that export oil and gas to the EU.  And by extending the policy to imports, a “level playing field” can be set which doesn’t encourage “carbon leakage” or undermine the competitiveness of EU producers.  We explore some specific recommendations in the next section.

Legislation is key – especially applied to imports

We expect the legislation will propose that legally-binding regulation should be coherently applied across the EU.  This will be a major improvement, as today’s regulations show little consistency and coordination between member states (and create many market distortions).

We very much hope that the legislation will contain measures including, for example:

• Set clear standards around measurement, reporting and verification (MRV) for both methane emissions from each of flaring, venting and leaking;
• Ensure strict limits on routine flaring and venting, with very few exceptions;
• Mandate clear reporting of all flaring, venting and leaking events (whether routine or non-routine);
• Mandate that flares, where present, operate with very high levels of combustion efficiency (e.g. 98%), coupled with actual monitoring and reporting (and not just assumptions) to confirm their compliance;
• Define requirements that operators conduct regular leak detection and repair (LDAR) inspections;
• Set robust penalties for non-compliance (with an implied carbon price of at least $50 per tonne of CO2) with proper enforcement and disclosure;
• Develop voluntary certification programmes that differentiate between sources based on their supply-chain emissions;
• Encourage third-party challenge using independent datasets (Sentinel-2, Sentinel-5, VIIRs or others).

These policy recommendations should be phased in within the EU urgently.  But based on its published methane strategy, we know that the EU has intentions to go further with diplomatic efforts to accelerate the adoption of similar measures in the countries that supply oil and gas to the EU.  For gas, key challenging countries with high gas flaring rates (and therefore, very likely other methane emissions) include Libya, Nigeria, Algeria, Russia, the UK and the US.

We believe that the EU should extend its influence to supplying countries by:

• Encouraging host nations to adopt a similar set of prescriptive measures and a performance standard within their countries;
• Ensuring that buyers of imported oil and gas can verify that the purchased hydrocarbons meet the same standards required for domestic production;
• Creating a level playing field by imposing financial penalties equivalent to a border tax on all imported oil and gas unless the buyer can positively demonstrate that standards equivalent to the EU’s have been validated by the competent authorities in the producing countries;
• Encouraging exporting nations to develop and adopt independent assessment methodologies (such as satellite tracking of flaring, venting and leaking), in collaboration with the International Methane Observatory.

Many of these initiatives are already available today.  To stick with the “elephant” theme, Figure 3 illustrates profiles of gas flaring detected by satellite (using Capterio’s flare-tracking tool FlareIntel Pro) associated with production from the Elephant field in Libya (which is a major supplier of oil to the EU).

We imagine that the EU may be concerned that any extra-territorial commitments may create at least three problems.  Firstly some suggest that there may be legal challenges over breaching WTO rules; secondly, there may be concerns over imposing significantly higher costs on European importers (and therefore European consumers).  Thirdly, the EU may be reticent to add costs to the operations within producing countries.  However, we think each of these concerns are overstated.

Firstly, our proposed approach is simply trying to externalise the EU’s own internal carbon pricing.  Because it is non-discriminative, it is consistent with the WTO rules

Secondly, we have attempted to quantify the quantum of the impact of penalties levied on imported oil and gas (shown for flared gas only) using a carbon price of EUR 50 per tonne.  Whilst the headline figure is large (the penalty is some EUR 2 billion per year), we think it is also feasible as it represents only 1-2% of the underlying commodity price[1].  A similar analysis also applies to gas imports (see our paper). 

Thirdly, the good news is that the proposed policy will actually help to make producers more competitive, whilst also creating value and jobs.  Indeed, we have identified that a significant majority of flare capture projects in countries that supply gas to the EU can create real commercial value (with investable rates of return) simply by applying proven technical solutions.  Flare projects often create a true “win-win”, especially when supported by committed leadership and policy reform.

We outline some of the “how” in our recent paper “accelerating the transition by eliminating flaring: an Algerian roadmap“.  With six practical steps, governments and National Oil Companies can accelerate flare reduction programmes and reduce emissions, boost national revenues and accelerate the energy transition.

Gas flaring – and more generally, methane emissions – is a significant global problem that can be solved.  The EU has a unique opportunity in its upcoming methane legislation to show bold decisive leadership to act not only on emissions from operations within the EU, but also on those it imports from countries outside the EU.

Whilst new policies such as the “carbon border adjustment mechanism” are in the offing, in the shorter term, the EU can accelerate change by being bold with its methane legislation and ensuring that new regulation is also applied to imports.

[1] This figure would be higher if emissions from venting and leaking were also to be incorporated.

[1] “Flaring” is the deliberate combustion of gas.  “Venting” is the deliberate or known release of gas (from storage tanks, from pumps and valves) associated with operations, and “leaking” is the accidental release of gas from facilities and pipelines.

[2] At a conversative prices of $5 per mmbtu and $75 per barrel for liquids that are entrained during flaring.

[3] Flaring is derived from the World Bank. Venting and leaking is derived from the IEA’s methane tracker.