EU threatens Qatar over ESG policies

Qatar has threatened to cease supplying liquefied natural gas to the EU. This decision follows the implementation of the EU's new ESG directive, which aims to penalise companies that do not meet the required standards for carbon emissions. For Europe, which has been looking to alternatives to Russia as its main source of gas, this could be a significant setback, especially given Qatar's ample potential buyers. In this context, EU countries are increasing their gas supplies from Russia. Further details can be found in the Izvestia article.

This week, Qatar's Energy Minister Saad al-Kaabi told the Financial Times that if any EU member state imposes fines for failing to comply with the corporate responsibility directive, Doha will stop exporting its liquefied natural gas to Europe. The regulation, which was adopted in May 2024, requires companies conducting business in Europe to pay 5% of their revenue if they are found guilty of carbon emissions or labour abuses. It is anticipated that Qatar will face questions in both cases. It is important to note that the regulation will not come into effect until 2027, but this has already been sufficient to provoke a strong reaction.
Should it become apparent that he is losing 5% of his revenue by supplying gas to Europe, Kaabi stated that he would be unable to continue with this arrangement. "I'm not bluffing. This is because 5% of Qatar Energy's revenue is equivalent to 5% of the Qatari state's revenue. It's the people's money, and I can't lose that kind of money – and no one would agree to that." He stated that the rules governing his entity were not viable. These rules would require the company to audit the labor compliance of all its suppliers, whose global supply chain includes 100,000 different firms. The company has also highlighted the challenge of complying with carbon emissions regulations, given its primary focus on hydrocarbon production, which inherently emits CO2 during use.

The corporate responsibility rules form part of a wider set of requirements aimed at achieving the ambitious target of net zero carbon emissions by 2050. Non-EU companies with a net turnover in the bloc exceeding €450m will be subject to fines under the directive. From the outset, the directive was met with opposition from both foreign and domestic corporations, who viewed the rules as overly burdensome and placing them at a competitive disadvantage.
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For instance, the chemicals industry association Cefic cautioned that the directive "creates significant litigation risks." Chemical companies , who are most likely to be affected by the rules (for whom foreign gas and oil are vital), have called for the rules to be carefully assessed "to identify and address areas that require simplification and burden reduction to limit liability".
Consequently, the directive impacted a significant number of companies. Consequently, the Qataris adopted a less than diplomatic approach. It should be noted that this was not solely related to liquefied gas. Kaabi stated that the legislation would affect all Qatari exports to Europe, including fertilizers and petrochemicals. Furthermore, it could potentially influence the investment decisions of the Qatar Investment Authority, the country's sovereign wealth fund.

The company's CEO emphasised that contracts would not be violated. However, the corporation has indicated its intention to pursue legal action. There may be room for compromise only if the fine is imposed on the income received from exports to Europe. However, this would necessitate a comprehensive review of the current framework. In the meantime, European Commission President Ursula von der Leyen has promised to propose "common" legislation that would reduce reporting requirements in accordance with several of the bloc's "green" financial laws, including the Corporate Responsibility Directive.
The European Union finds Qatar's decision perplexing, particularly in light of the bloc's increasing reliance on Qatari LNG since 2022. This was intended to offset losses from reduced hydrocarbon gas supplies from Russia.Two years ago, the EU celebrated significant progress in negotiations with Qatar. However, the introduction of stringent ESG regulations, which the US has recently begun to ease, has presented a substantial challenge for European importers.

While Qatar's role in the EU's energy mix is relatively modest, supplying 15.5 billion cubic metres of LNG in 2023, equivalent to around 5% of total gas imports, it is important to note that Norway's contribution is six times larger.However, it should be noted that these figures may be misleading due to the increased reliance on LNG, which is more susceptible to external market fluctuations. The disappearance of even small volumes could lead to a critical price hike, which would deal a further blow to European industry, which has already been seriously damaged by the upheavals of the past three years.
It is also important to note that other suppliers may have concerns regarding the directive. The US, under the new administration, is unlikely to adhere to the ESG guidelines, and the Trump government will provide support to its companies if they have concerns regarding European consumers.

As for Qatar itself, the EU is not its most significant client. The key importers of local LNG are India and East Asian countries. The conclusion of long-term contracts and the requirement for significant effort to revise them creates a challenging situation for all parties.
Meanwhile, the EU is compelled to increase its gas purchases from Russia, with which all ties have been formally severed. Analysts from Bruegel calculated that over 11 months, exports from Russia to the EU amounted to 49.6 billion cubic metres, which is a quarter more than in the same period last year. Our country accounted for 18% of deliveries compared to 14% a year earlier. Furthermore, an increasing share is accounted for by Russian LNG, which is always more expensive than pipeline gas from the same country. This growth is occurring despite the overall reduction in gas consumption in the European Union, with ongoing challenges in key industries such as Germany and France persisting and worsening.

The EU is currently experiencing a situation where its own laws and regulations are repeatedly compromising the region's energy security. As the example of Russia demonstrates, it is necessary to constantly look for solutions that circumvent the rules and sanctions imposed by the Europeans themselves. While a modest reduction in reliance on foreign suppliers has been observed, it is evident that this shift is not attributable to energy conservation or domestic resource utilisation. Instead, it is primarily driven by the financial losses experienced by the European Union's national economies.