EU Methane Regulation: Azerbaijan well-positioned for methane intensity challenge

Methane was high on the agenda at the UN Climate Change Conference, or COP29, in Baku, Azerbaijan. In COP29 President Mukhtar Babayev's initial Letter to Parties, he wrote that the event would "put a spotlight on how all Parties can integrate non-carbon dioxide emissions into their upcoming NDCs [nationally determined contributions]." Azerbaijan co-hosted a pre-COP methane workshop as well as a summit during the conference on methane and non-CO2 gases with the US and China.

This is not the first time a COP has focused on methane. COP26 led to the creation of the Global Methane Pledge, which aims to reduce global methane emissions by 30% from 2020 levels by 2030. The initiative now involves 158 countries, including Azerbaijan.

Azerbaijan's oil and gas sector has taken voluntary steps to improve its methane performance. In 2023, national oil company SOCAR joined the Oil and Gas Decarbonization Charter. OGDC states that "virtually all methane emissions can be avoided," and signatories pledge to aim for near-zero upstream methane emissions and zero routine flaring by 2030. BP, which operates the Azeri-Chirag-Guneshli (ACG) and Shah Deniz fields -- Azerbaijan's primary sources of oil and gas exports, respectively -- also signed the OGDC. Both companies are members of the Oil and Gas Methane Partnership 2.0 (OGMP 2.0), a UN program designed to improve measurement and reporting.

While ambitious, these voluntary efforts do not impose material consequences for failing to meet pledged goals. However, a new environmental regulation passed in June by the EU -- a crucial market for Azeri oil and gas -- will enforce methane reporting requirements and impose financial penalties for non-compliance.

Azerbaijan's compliance to new methane regulation crucial

The EU Methane Regulation aims to reduce methane emissions and improve reporting of both domestically produced and imported oil, gas and coal. It requires that by 2027, oil and gas importers prove operators have monitored, reported and verified methane emissions at the source and site level, in line with OGMP 2.0 level 4 and 5 reporting. By 2028, importers will have to report the methane intensity of fuels placed on the EU market, and from 2030, the methane intensity must be below an EU-wide maximum threshold. Importers who fail to comply will face financial penalties.

The regulation could have significant consequences for Azerbaijan, which earns 72% of its crude export revenue and 70% of its gas export revenue from the EU. That interdependence will only deepen if Azerbaijan and Europe can deliver on their July 2022 agreement to double their gas trade by 2027.

While the EU has yet to finalize its monitoring, reporting and verification, or MRV, requirements and methane intensity threshold, Azerbaijan's readiness can be evaluated by assessing its upstream assets' methane intensity and current MRV practices.

Methane intensity of Azerbaijan's oil and gas assets

Upstream assets in Azerbaijan can be categorized by their level of exposure to the EU Methane Regulation as follows:

1. Exporting assets: These assets must comply with the EU Methane Regulation to avoid penalties on exports to the European market. Operators of these fields should ensure that their MRV practices align with the new regulation by January 2027. These assets exhibit relatively low methane intensities, meaning they should be well-positioned to meet the methane intensity threshold when it comes into effect in 2030.
2. Non-exporting assets: These assets are exempt from the EU Methane Regulation. SOCAR's non-exporting Soviet-era legacy assets, which have higher methane intensity due to aging and less efficient infrastructure, would not currently be subject to this regulation.

Azerbaijan's oil and gas exports depend primarily on the ACG and Shah Deniz fields. In 2023, ACG produced 18 million mt of oil, while Shah Deniz was a key gas supplier, producing 26 billion cu m. In addition to these two fields, Absheron may contribute 1.5 Bcm, and further development could potentially add another 5 Bcm-6 Bcm for export. Umid, currently producing 1 Bcm for the domestic market, could export 8 Bcm-9 Bcm, according to S&P Global Commodity Insights analysts.

These fields exhibit methane intensities below the national average of 2.2 kgCO2e/boe, with Shah Deniz leading in efficiency. Notably, Shah Deniz's share in total oil and gas production is set to grow, while ACG's will decrease, increasing the proportion of the lower-emission output available for export.

According to BP Azerbaijan sustainability reports, BP implemented several measures to reduce methane emissions at Shah Deniz and ACG. Both projects used gas detectors for early leak detection and systems to capture and redirect flare gas. Operational practices aimed to avoid routine flaring use associated gas as fuel, re-inject it to maintain reservoir pressure and deliver it to SOCAR for the national grid. Process optimization was vital, focusing on the quick resolution of equipment issues, managing gas-to-oil ratios to minimize excess gas, and enhancing planning for high-flaring-risk activities. Proactive maintenance also improved operational efficiency.

SOCAR reported a threefold reduction in methane intensity from 2013 to 2023 (including operated and non-operated assets). However, it acknowledged that its reported emission figures may need to be revised due to a "company-wide baselining exercise of methane emissions across our upstream and midstream assets" incorporating site-level instrumental analysis and satellite measurements set to be completed by the end of 2024.

While a significant step forward, SOCAR must pair its site-level measurements with source-level "bottom-up" methane intensity monitoring and reporting to comply with the EU regulation.

On non-exporting assets, several lower-productivity fields operated by SOCAR have methane intensities well above the national average. These assets primarily produce oil, so they would not meaningfully contribute to meeting Europe's gas demand. Thus, SOCAR has little incentive to make them compliant with the EU regulation. The assets will, however, determine whether SOCAR and Azerbaijan keep to their voluntary methane pledges and targets.

Further reading: Not in my backyard... or yours: What the new EU Methane Rule means for Kazakh crude oil exports