US gas exporters face EU methane curbs after carbon tax reprieve

US oil and gas exporters have been warned that they face a further tightening of European anti-pollution rules despite energy’s exclusion from a swath of climate proposals introduced in Brussels last week.

The European Commission’s new climate strategy, unveiled on Wednesday, confirmed that while steel, fertilisers and other imports could face taxes based on the carbon emitted in their production, oil and natural gas would initially be left out.

But relief among US exporters of liquefied natural gas — a super-chilled form of the fuel shipped internationally — would be misplaced, said analysts, given separate rules on methane, a greenhouse gas with up to 80 times the warming effect of CO2, are expected in the coming months.

“LNG exporters largely won a reprieve in the EU package,” said Bob McNally, head of Rapidan Energy Group, a Washington energy consultancy, “but the commission is coming for them in methane regulations later this year”.

Soaring shale gas production in the past 15 years has made the US the world’s third-largest LNG exporter, behind Qatar and Australia. US exports to Europe hit about 26bn cubic metres last year, up tenfold since 2017, according to BP.

Touting its “freedom gas”, the US government argued that exports to Europe could break the continent’s heavy reliance on energy from Russia, a geopolitical rival, while earning considerable export revenue too.

But the US shale patch remains a large emitter of methane despite the Biden administration’s efforts to crack down on the pollution.

The commission’s methane proposals, which still need EU member states’ approval, could make energy’s exclusion from the new carbon border adjustment mechanism (CBAM) irrelevant, said Kevin Book, a managing director at advisory firm ClearView Energy Partners.

“Whether this becomes part of the CBAM, and that’s the axe that chops the wood, or whether it operates on a parallel plane doesn’t really matter,” he added. “What it says to anybody exporting gas from the US and looking at Europe is: ‘you better find a way to green up’.”

The commission said the new CBAM would “initially apply only” to certain goods, leaving open its expansion to energy and other sectors after 2025, when a first phase of implementation ends, said analysts.

“They’re looking before the end of the transition period to set scope that could be broader, including other products,” said Book. “This was in no way excluding.”

The methane associated with shale gas has become a mounting threat to further expansion. Unlike Qatar and other exporters, US LNG groups buy feedstock gas from scores of shale suppliers and can do little to control upstream pollution or leakage from pipelines and other infrastructure.

“The next wave of LNG [capacity construction] is already economically challenged by the likes of Qatar,” said Samer Mosis, head of LNG analytics at S&P Global Platts. “And they own the entire value chain — shipping, production, everything — so they can monitor across the entire chain.”

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At least three-quarters of the EU’s methane emissions from natural gas occurs outside the bloc’s borders, according to Carbon Limits, a consultancy in Oslo.

US upstream oil and gas production has a much higher methane intensity — a measure of emissions per barrel produced — than some other countries exporting gas to Europe, such as Norway and Qatar, according to the Oxford Institute for Energy Studies.

Some US shale producers have tried to mitigate their pollution by buying carbon offsets, curbing the burning of natural gas at the wellhead, or joining programmes that certify output that is less methane-intensive.

Those moves gained momentum after November, when Joe Biden’s election victory heralded a pollution crackdown and France’s Engie pulled out of a long-term contract to buy LNG from the US because of shale gas’s methane intensity.

But the sector needs to move faster ahead of further rule tightening across the Atlantic, said Jonathan Stern, head of gas research at the OIES.

“At least some of the US LNG has more GHG in it,” he said. “It’s not a sensible strategy to wait for something to be imposed.”

Additional reporting by Amanda Chu in New York



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