EC move to boost strategic oil, gas stocks draws fire

Nov. 24, 2003
The European Union is embroiled in controversy over proposals to increase mandatory levels for strategic stocks of oil and natural gas.

The European Union is embroiled in controversy over proposals to increase mandatory levels for strategic stocks of oil and natural gas.

The European Commission has encountered strong opposition from members of the European Parliament (MEPs) during debate in recent months on EC oil and gas strategic supply proposals. Among other measures, the EC had proposed that member states increase their minimum petroleum and natural gas reserves to 120 days from 90 days and that member states share their oil and gas supplies with other members during future shortages to prevent market price fluctuations.

Committee members have already drastically amended or rejected outright much of the current text concerning the reserves supply increase and the idea of harmonized rules across member states, formally calling on the EC either to withdraw the current proposal or to draft a totally new one.

Members also introduced measures to prevent competition distortions that would affect small and medium-size firms, and they expressed support for the system already set up by the International Energy Agency to ensure security of energy supplies.

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"Why is the commissioner seeking to reinvent the wheel when there are already satisfactory arrangements in place with the IEA for a regime of maintaining oil reserves?" asked Giles Chichester (Conservative, South West, UK) during the debate. "It was established in the 1970s in response to the crisis then and it has served us in good stead ever since, so why replace it?

"I have even more concern about and difficulty with proposals to use reserves to intervene in the market for purposes of price smoothing, when experience shows—and recent experience in the United States in particular shows —that it does not work. It would be a distortion of a market that has worked well for a very long time. I think this is an unnecessary measure," Chichester said.

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Catherine Stihler (Labor, Scotland) voiced other concerns: "Recently the Institution of Civil Engineers said that the UK could face power cuts in 20 years' time because of its dependency on foreign energy sources," she said. "It has also estimated that in the UK alone 80% of the gas needed to fuel British power stations will come from distant and politically unstable countries. Although member states certainly have responsibilities for securing their own energy supplies, the need for cooperation early in a crisis situation will be vital.

"New threats from terrorism and sabotage—as we have seen in Iraq—and our increasing dependence on energy from outside the EU pose huge challenges. The key to energy security lies in diversity of supply," Stihler emphasized.

The proposal

The EC proposal, submitted to the EU on Sept. 23, 2002, was referred last October by the president of the EU Parliament to several committees, three of which rendered opinions: the Committee on Industry, External Trade, Research, and Energy (ITRE), the Committee on Economic and Monetary Affairs (ECON), and the Committee on the Environment, Public Health, and Consumer Policy (ENVI).

ITRE

All experts heard by the ITRE committee expressed doubts about the effectiveness of increasing strategic oil stocks to 120 days from 90 and of measures aiming at influencing oil prices through the maintenance of or the increase in oil stocks. "Bearing in mind the considerable cost of these measures, there should be no obligation on the member states to release their oil stocks in the case of price rises," they stated in an amendment.

ITRE reported that the EU's dependence on natural gas imports could reach 75% by 2020, increasing its supply risk proportionately. Part of this demand increase will result from the commission's Communication 547, written in 2001, which provides for 10% of all petroleum-based fuels in the EU to be replaced by natural gas by 2020. Natural gas, it said, is "one of the three medium-term options for the replacement of petroleum-based automotive fuels." Com 547 states: "Natural gas has great potentialUas a motor fuel" because it is cheap, clean, and meets current and future emission standards."

ITRE cautioned that such a great dependence on gas imports would come with risks. "Dependency carries risks arising from political instability in the producer countries, endangering the security of the gas supply," committee members reported. "The fact that natural gas is mainly transported via fixed pipeline systems, which are hard to protect, increases the risk in that not only the stability of the producer countries but also that of the countries of transit must be guaranteed."

The committee added natural gas pipelines to the list of facilities such as storage and LNG facilities that member states should protect with nondiscriminatory authorization procedures, and urged removal of obstacles to construction.

ITRE also emphasized that development of biogas should be encouraged to enhance security of supply in the internal EU gas market.

The committee said that no EU-wide standards for security of supply should be set because there are "major structural differences between the gas industries in the EU" and that "Existing rules on security of supply in the member states may not require any further action."

They also emphasized the importance of long-term contracts and their flexibility, saying such contracts "are essential instruments for the security of supply, of which insufficient account has so far been taken in the proposal for a directive."

ECON

One ECON amendment emphasized the pricing of oil in euros: "The European Union should aim at strengthening its currency and therefore, during negotiations, production and consuming countries should be encouraged to establish the oil price in [euros]. This would be beneficial for both the European Union and its currency."

Another urged more prudence in using petroleum resources: "On environmental grounds as well as in the light of probable supply shortages, a strategy for using the petroleum resource more prudently is required. In particular, the 18% energy saving potential in the European Union must be attained, and the conversion to renewable energy sources must be vigorously promoted," it said.

ECON added: "One of the European Union's long-term objectives should be the reduction of the dependence on crude oil and petroleum [products]." ECON said the EU's dependence on external supplies of oil likely would increase to more than 85% from the current 75% by 2020. About 80% of EU's imports of petroleum products come from the Persian Gulf region, likely to increase significantly over the next few decades, further exacerbating uncertainties surrounding EU energy supply, given the political instability of the gulf region. Because oil prices are so volatile, a slow-down in economic growth in the EU could occur, seriously disrupting the economy and producing a worldwide social backlash.

ENVI

The ENVI committee noted that the availability of petroleum worldwide since 2000 has been constantly decreasing, and by as early as 2010, oil output in the UK and Norway would fall to about 50% below the maximum output rate. "Sometime near 2020, it will drop to a maximum of about 20% of 2000 output," the committee warned.

They also agreed that dwindling oil reserves of the UK and Norway and the contrasting increase in consumption—in 2020, world oil consumption is estimated at 115 million b/d compared with about 77 million b/d in 2000, i.e., a sizable increase—will entail an increasing dependence on oil imports in the EU, threatening its energy supply.

ENVI said that, although the current proposal provides for the establishment of a European monitoring system, "its tasks should be expanded to include the worldwide monitoring and analysis of available petroleum resources."

ENVI also opposed the EC's proposal that member states increase minimum stocks to cover a 120-day period so that they could release petroleum products reserves. "Emergency oil stocks should not be released in order to pursue a particular pricing policy. Instead, the maintenance of emergency oil stocks must principally serve to guarantee security of energy supply," ENVI members said.

They urged the EC instead to "draw up a report in 2006 analyzing the efficacy of the directive on security of supply for petroleum products that calls for a 90-day emergency supply."