Navigating Green Compliance

Biofuels, the EU’s Deforestation Regulation, and Digital Innovation

Are you curious how the European Union’s Deforestation Regulation (EUDR) might impact the global oil and gas industry? It will indirectly, thankfully, but in a specific instance and for a specific fuel type, very directly. The industry must be prepared to comply, which is best solved using digital innovations.

The EU’s New Deforestation Rules

Deforestation and forest degradation are big global issues. Forests are huge carbon sinks, and damaging them or cutting them down to free up the land for other uses can release that carbon back into the atmosphere. For example, wood is valued as a fuel but throws off CO2 when combusted, and all those waste branches and trimmings left to decay also release methane and CO2.

The EU is still some 39% forest, but cutting down its forests for food and fuel is now very highly regulated, to a point where it’s practically banned. And in any case, many highly desirable products, such as rubber and palm oil, cannot be grown in the EU—the plants are not native, preferring the high heat, humidity, heavy rainfall, and particular soil conditions closer to the equator.

To control for the possibility that EU companies would simply outsource deforestation to other countries with more lax environmental rules, the EU released the EUDR in June 2023, to take effect in December 2024.

A handful of specific products are named in the regulations because they tend to be associated with deforestation—cattle, cocoa, coffee, oil palm, rubber, soya, and wood, along with their derivatives such as leather, chocolate, and furniture.

Any company doing business within the EU need to prove that their products were not from recently deforested areas nor contribute to forest degradation. This is a bit tricky for reasons I’ll outline later. The companies will need to show that they follow the local laws about land use, environmental protection, human rights, and a host of other rules, all the way through their supply chains.

The penalties to FAFO (look it up) can be up to 4% of the company’s sales in the EU, a painful hit and run on the income statement, and the seizure of products, a slam to the balance sheet.

Sustainable Fuels and Deforestation: The Oil and Gas Link

Have you spotted the oil and gas problem here? It relates to sustainable fuels.