FEATURE: European buyers trending toward 'greener' gas in contracting

London — European gas buyers are increasingly factoring in the methane footprint of the supplies they secure amid growing concerns over methane emissions associated with upstream and midstream activity.

Along with the need to tackle CO2 emissions, methane leakage is now rising to the top of the agenda of the energy sector, with many gas and LNG buyers in Europe set to consider the issue in contractual negotiations with suppliers.

Methane is significantly more polluting than carbon dioxide, with estimates suggesting it is 84 times more potent than CO2 over a 20-year timeframe.

According to the International Energy Agency, oil and gas operations worldwide emitted some 72 million mt of methane into the atmosphere in 2020, broadly equivalent to the total energy-related CO2 emissions from the entire EU.

The biggest two emitters, the IEA said, were Russia -- Europe's biggest gas supplier -- and the US, which too has emerged as a significant supplier of LNG to Europe.

A number of initiatives are underway -- including the MiQ partnership launched in late 2020 -- that seek to certify gas supply based on its methane emissions performance.

It is thought this could become a key component in global gas trade in the future, with supplies from individual producing assets graded accordingly.

But how important to buyers of gas in Europe will the ability to differentiate supply based on methane emissions be?

S&P Global Platts reached out to dozens of major European gas buyers to gauge the mood.

Naturgy, Uniper views

Spain's Naturgy -- the country's biggest gas buyer with a wide portfolio of LNG and pipeline gas import contracts -- signaled a clear intent.

"This topic will be part of the negotiations in purchase and sale transactions in the future," a company spokeswoman said.

"The issue has already been observed in the market and Naturgy is committed to further exploring it," she said.

Germany's Uniper -- another of Europe's biggest gas buyers -- said methane emissions was "one of the most material issues" for the gas industry and its stakeholders worldwide.

"In the near future, we expect to screen our potential suppliers also in regard of their carbon and methane emissions intensities," a Uniper spokesman said.

"Currently, our focus is on better transparency and more accurate emission measurements. These activities are currently underway in our global LNG activities across the whole value chain," it said.

Austria's OMV -- a major buyer of Russian gas as well as LNG into Gate in the Netherlands -- also said the issue was a factor to consider.

"OMV is monitoring the 'greenness' of gas in terms of availability and market development and this will also be taken into account in the long-term supply portfolio," it said.

France's Engie -- which late last year pulled out of talks with US LNG supplier NextDecade amid pressure from the French government and environmentalist groups over the environmental credentials of fracked gas -- had a similar line.

"We have started to engage with our suppliers on this issue, not only methane intensity but also carbon footprint," a spokeswoman said, adding that new supply negotiations represented an opportunity to progress the debate.

However, Engie said methane leakage had no role to play in current hub trading practices or in its existing long-term contracts with the likes of Russia's Gazprom, Norway's Equinor, and Algeria's Sonatrach.

"On the hubs, the origin of the gas which is traded is not differentiated," the spokeswoman said, making it difficult to engage on methane with the original supplier.

"We have to think of other mechanisms that could be also applicable to term contracts, for example guarantees of origin. Also, we would need a database that gives the information. Such a recognized and reliable data base does not exist," she said.

Nonetheless, Engie is encouraged that big producers are "working together to report methane emissions more and more accurately."

Dutch gas trader GasTerra also questioned how hub traded gas could be differentiated.

"Buyers who buy gas on a hub don't know where their gas comes from," a GasTerra spokesman said. "To change that we would need to develop a trading system with guarantees of origin, comparable with the market for green electricity and green gas."

Legislative approach

The European Commission last October published its first ever strategy aimed at curbing methane emissions and plans to bring forward legislative proposals on the issue over the course of 2021.

It plans to focus its initial legislative proposals on "low-cost" initiatives for the energy sector such as methane emissions detection and repair, and the elimination of gas flaring.

But the strategy also includes plans for the EC to engage with producer countries on best practices for cutting methane emissions.

The EC said that if producing countries did not make significant commitments to cutting methane emissions, it would consider proposing legislation on targets, standards or other incentives to ensure lower emissions for fossil gas used in the EU.

Italy's Eni -- a major buyer of gas from Russia and North Africa -- said it was "fully committed" to reducing methane emissions and was actively working with partners worldwide on the subject.

"We are closely following the ongoing legislative process within the EU, including the application of possible standards for gas entering the EU," Eni said.

"We believe that new supply standards could potentially help tackle the methane issue. From a market perspective, we believe that such measures should be part of a wider initiative in order not to fragment the global LNG market," it said. "A global standard, applicable worldwide, would be more effective as all gas producers worldwide would have to comply with it."

Shell also believes the EU should legislate on a methane performance standard.

Speaking on an IP Week panel Feb. 24, Shell's head of integrated gas, Maarten Wetselaar, said Europe should put a performance standard in the legislation that is imposed on imported gas.

Then, "the EU can...make sure it only buys gas from geographies that also adopt policies like those in the EU," Wetselaar said.

Wetselaar said there were increasing signs that gas buyers were also becoming more exacting over the methane performance of the gas they buy.

"As customers become more mindful of the gas they buy, that will drive improvement," he said.

Mark Brownstein, from the Environmental Defense Fund, also said on the panel there were noticeable shifts in gas buying behavior.

"What we are starting to see is that customers for gas are beginning to ask important questions about where the gas is coming from and the environmental integrity with which it is being produced and shipped," Brownstein said.

Not everyone is in favor of the EU imposing legislation, however.

Speaking in an interview with Platts last month, James Watson, secretary general of industry body Eurogas, said the EU should bring its external gas suppliers to the table for dialogue, rather than look to impose any kind of penalty on significant emitters.

"As soon as you start trying to reward people for being good and punish people for being bad, they will retaliate," he said.

"It is much better to work with people. You've got a much better chance of getting people to the table and then taking action," Watson said.

LNG suppliers

To some extent, it will be up to the producers and exporters to make the necessary changes and eliminate methane leakage and curb other greenhouse gas emissions.

European buyers are certainly taking notice of what exporters are doing to mitigate leaks.

Jouni Liimatta, the head of trading at Finland's Gasum, said the company would favor LNG suppliers that took account of their carbon footprints, such as those whose LNG production facilities used renewable energy.

"That reduces the carbon footprint along the whole value chain, and we are looking for those kinds of LNG suppliers that consider those factors," Liimatta said.

An industry standard for methane emissions was one of the main issues raised by European buyers.

Portugal's EDP said: "EDP is supportive of the emergence of an industry standard regarding the measurement of supply chain methane intensity."

Initiatives such as MiQ are seen as helping support decarbonization issues given the varying levels of methane leakage across global gas suppliers, while the main challenge is seen as the rate of adoption by large gas producers and governments.

MiQ, in an interview with Platts in January, said it would be in producers' own interests to adopt its standardization.

"It could be considered a cost of running their business, a license to operate to get certified," MiQ senior adviser Georges Tijbosch said.

"I think that's where the market is probably going -- consumers are going to ask for gas to be certified as low-methane," Tijbosch said. "We think that utilities and consumers are no longer going to accept buying gas that is high in methane emissions or that is uncertified."

Trading houses

Europe-based global traders are also taking the issue of methane emissions increasingly seriously.

"The market is evolving and 'greenness' is a factor people are beginning to consider," a spokeswoman at Vitol said.

However, she said, "greenness" is determined by a number of factors, not just methane intensity.

These include the source of the feedgas, liquefaction technology, the length of voyage, regasification technology and end use, she said.

"In terms of mitigating emissions, we anticipate a growing demand for more accurate measurement of the carbon footprint of a cargo, alongside measures to maximize efficiencies and offset emissions," she said.

Global trader Trafigura also said methane slippage, as well as all greenhouse gas emissions, was a factor taken into consideration in its procurement strategy.

A company spokesperson said the industry, including Trafigura, was currently focused on data collection around emissions along the value chain, but that there was a "clear direction of travel" aimed at mitigating emissions.