The EU rule could choke Europe’s fuel supply chain, as the bloc faces issues with securing oil and gas imports amidst a changing energy landscape.
- The EU rule could choke Europe's fuel supply chain, as the bloc faces issues with securing oil and gas imports amidst a changing energy landscape.
Fuel supply: Concerns Over Future Fuel Access
As tensions rise in the Strait of Hormuz, which has become a critical energy transit route, ExxonMobil has raised alarms about potential restrictions on the EU’s access to oil and gas starting next year. In a commentary from the company’s July 17 energy newsletter, Alice Wells highlighted that the EU’s impending methane regulations could escalate costs for consumers and challenge the competitiveness of European industries.
Impact of Methane Regulations
A study by Wood Mackenzie, commissioned by the International Association of Oil & Gas Producers (IOGP) Europe and Concawe, suggests that if the EU’s methane rules remain unchanged, up to 43 per cent of natural gas and 87 per cent of crude oil imports may not meet compliance by 2027. This could lead to significant quantities of fuel being excluded from the legally accessible market.
The upcoming regulations mandate that starting January 1, 2027, importers must demonstrate that their oil and gas supplies are produced in accordance with methane monitoring, reporting, and verification standards that align with EU requirements. Alternatively, they must meet the rigorous standards set by the UN-backed Oil and Gas Methane Partnership.
Timeline and Compliance Challenges
Importantly, contracts signed or renewed after August 4, 2024, will be subject to these regulations. Additional requirements will come into effect, with methane intensity reporting beginning in August 2028 and limitations on methane intensity of imported fuels starting in August 2030.
ExxonMobil has expressed concerns that the necessary infrastructure for compliance verification will not be operational by the 2027 deadline. The company, which operates two major refineries in Europe and sources supplies from over 15 countries, believes that only one of these nations may have the required monitoring systems in place by the time regulations kick in.
Financial Implications for the Energy Sector
The uncertainty surrounding compliance has already begun to affect purchasing strategies among energy companies. Importers face the threat of penalties that could reach as high as 20 per cent of their annual turnover, making them hesitant to commit to contracts without guaranteed compliance.
Wood Mackenzie anticipates that the new regulations could push European gas prices up to approximately $19 per million British thermal units, more than double the underlying forecast. Furthermore, petrol prices may increase by 24 per cent, while diesel prices could rise by 16 per cent compared to projections without these regulations.
Effect on European Refining Capacity
The study warns that EU refinery activity could decline by as much as 50 per cent during peak restrictions later in the decade. This decline would increase Europe’s reliance on imported refined fuels, potentially adding over $17 billion to fuel import costs.
ExxonMobil has indicated that these changes will not only affect everyday consumers but will also impact sectors such as steel manufacturing and chemical production, which are already grappling with high energy costs in Europe.
Industry Calls for Regulatory Revisions
The company has called for a “stop-the-clock” approach, urging EU authorities to reconsider the regulation without abandoning its methane reduction targets. ExxonMobil has also critiqued the European Commission’s proposal to address compliance challenges through guidance and flexible penalties, arguing that this approach still exposes companies to legal risks.
While ExxonMobil supports initiatives aimed at reducing methane emissions, it has pointed out the efficacy of its monitoring systems in the United States, which utilise advanced technologies to detect leaks across numerous sites. The firm claims to have cut methane emissions in Germany by over 95 per cent since 1998.
Support from Global Energy Authorities
Concerns expressed by industry players have been echoed by the International Energy Agency (IEA), which has warned that the volume of traded crude accessible to European refiners could diminish by more than 50 per cent under the proposed regulations. Although around 22.5 million barrels per day of global production may adhere to the required standards in 2027, the IEA notes that existing trade relationships and technical needs may hinder availability for Europe.
Member States Seeking Delay on Implementation
In light of these challenges, more than half of the EU member states, including Germany, Italy, and the Czech Republic, are advocating for a postponement of the new requirements. The European Commission has contemplated a waiver for certain breaches between 2027 and 2029 but has not yet moved to amend the legislation.
Debate Over the Future of Methane Regulation
Environmental advocates, however, contest the extent of the predicted disruptions. A separate analysis by Rystad, commissioned by the Environmental Defense Fund, suggests that gas meeting the highest UN reporting standards could exceed EU demand by 2027, with sufficient compliant crude also available for European refiners.
The central issue remains not whether methane emissions should be reduced but whether Europe can establish a functional global verification system before the rules take effect. As importers begin making decisions for 2027 and with ongoing instability in the Strait of Hormuz affecting energy markets, time is of the essence to resolve these concerns.
