The Pembina Institute has long argued that reducing emissions from Canada’s oil and gas production is a competitiveness issue. Global demand for fossil fuels is widely modelled to decline after 2030 in net-zero aligned scenarios, and as governments around the world design policies to drive emissions down to net-zero, oil and gas companies with the lowest carbon intensity products will be best-placed to compete for remaining demand.
A new regulatory development seems to confirm this is indeed the global market we’re headed towards.
In late May, the European Union approved strong new regulations for energy sector methane emissions (for example, those that come from oil and gas production, gas transmission and distribution, and coal mining). As the largest importer of oil and gas in the world, the EU’s decision to not only require its Member States to adopt the rules, but also to apply key elements of the rules to energy imports is a game-changer.
Methane is a potent greenhouse gas with over 80 times the warming power of carbon dioxide in a 20-year period, and is associated with severe air quality problems and health harms. Solutions to drive down methane emissions from energy production are proven and cost-effective. Leading jurisdictions such as Canada, the U.S., and the EU are leveraging those solutions to dramatically reduce the harmful greenhouse gas.
World-leading standards
Europe’s new regulations take a risk-based approach to methane leak detection and repair, meaning equipment that is more prone to leaks must be inspected more frequently. The rules also severely restrict routine venting and flaring, which companies do as part of routine or maintenance operations or to dispose of what they regard as waste gas, and which contributes to climate change and compromises air quality. In these respects, the regulations align with proposed amendments to federal regulations for oil and gas methane in Canada.
Other aspects of the regulations, however, take the EU a big step ahead of Canada. The EU’s regulations require its Member States to establish mitigation plans for inactive oil and gas wells (which can be significant sources of methane) and significantly strengthen measurement, reporting, and verification (MRV) requirements. They build on OGMP 2.0, a leading international reporting framework that integrates site-level measurement, by requiring a shift from estimation to direct source-level measurement that must be independently verified. This is an important step, because it will help to address the well-known underestimation and underreporting of oil and gas methane emissions. MRV data will also be published in a publicly accessible methane transparency database.
The most potentially consequential aspect of the new regulations is the decision to empower the European Commission to establish a maximum methane intensity standard (a maximum proportion of methane leakage to production volumes) that applies to imports starting in 2030 and to penalize importers that fail to comply.
The intensity standard won’t be legally defined by the European Commission until late this decade and won’t be implemented until 2030. However, the international industry standard for methane intensity is 0.2 per cent. Given the sheer volume of oil and gas imports that Europe is responsible for, according to a Clean Air Task Force analysis a 0.2 per cent methane intensity standard on European imports could reduce more than 30 per cent of global methane emissions from the oil and gas sector.
What it means for Canada’s oil and gas industry
These standards are a sign of things to come. This regulation sets an important precedent and sends a clear signal from the world's largest natural gas importer that high-carbon fuels may not have full market access, much less remain competitive, in tomorrow’s low-carbon energy economy. In our view, other jurisdictions (such as Japan, the U.K., and U.S.) will likely follow suit, and we expect standards will become increasingly stringent in the decades to come.
Canada and its oil and gas producers must prepare for a future in which having low carbon-intensity products – and credibly proving it – is a prerequisite of doing business. On average, Canada’s natural gas methane intensity is about four times the 0.2 per cent standard noted above (0.8 per cent, according to official emissions estimates reported in the national inventory for 2022 and total raw natural gas production). Even Canada’s cleanest natural gas production – that of B.C. – is still about twice as methane-intensive as the standard, according to measurement data. So, Canadian producers have improvements to make, and strong national and subnational policies will continue to be essential.
This is another reminder that the Government of Canada must urgently move forward with its proposed amendments to the federal oil and gas methane regulations, and that oil and gas producing provinces should prioritise making equivalent updates to their rules. More broadly, the EU regulations highlight the importance not only of tackling methane, but of ensuring Canadian oil and gas has the lowest emissions possible. This will give Canadian companies the best chance of competing in a world where governments striving to meet net-zero pledges are increasingly concerned with the emissions intensity of energy imports.
