EC energy security proposals meet skepticism

There is little enthusiasm within Europe for two new proposed directives advanced by the European Commission that aim to apply coordinated measures to bolster the security of European Union members' oil and gas supplies.

By an OGJ correspondent

PARIS, Sept. 18 -- There is little enthusiasm within Europe for two new proposed directives advanced by the European Commission that aim to apply coordinated measures to bolster the security of European Union members' oil and gas supplies.

The proposals, put forth Sept. 11, were greeted with skepticism by the International Energy Agency, oil companies, and some member governments (including France and the UK).

EC Energy Commissioner Loyola de Palacio said that she believes that the "framework of the IEA and (European) Community legislation introduced at the beginning of the 1970s is no longer relevant for the oil market." As for the natural gas market, there is no framework at all, she noted.

Pointing to the EU's vulnerability in "geopolitical, economic, and social terms" in external fossil fuel supplies—which account for four-fifths of energy consumption of which two-thirds are imported—the commission is proposing measures to deal with both "physical risks" (supply shortages due to infrastructure problems, political crises, and conflicts) and "economic risks," meaning price hikes spurred by panic buying.

The EC adds that these oil and gas supply safety measures "can be conceived only in coordination with producer countries."

So a "reinforced dialogue" with these countries will "help improve the price mechanism and the conclusion of satisfactory supply agreements."

Member states are invited to each set up a public body to own oil stocks representing at least 40 days consumption. Currently, most stocks are owned by the oil companies. The commission also wants the current volume of stocks, now set at 90 days consumption, to be gradually increased to 120 days. And the commission wants to be given power to manage these stocks in case of a crisis, with the help of a committee representing the member countries. The commission adds that, by gradually putting on the market stocks of products in the event of "a generalized perception of a supply shortfall," it will be able to reestablish market fluidity.

The EC also advocates gas supply safety measures, albeit in more vague terms, "based on a clear definition of the roles and responsibilities of the different market players."

No minimal gas stocks are suggested, but each state will have to combine a mix of such measures as gas storage, interruption of interruptible contracts , supply flexibility including in spot markets.

To deal with these "complex and technical tasks" involving monitoring international oil and gas markets and their impact on the security of supplies as well as watching security stocks, also "to develop more reliable price indexes reflecting better market realities," the commission proposes setting up, under its aegis, a European observation system of hydrocarbon supplies.

It said it might even consider, in the long run, setting up an agency that would take over from the commission these technical tasks.

IEA view
Commenting on these proposed directives that aim to take care of an increasingly integrated European market, a senior official of the IEA, who did not wish to be identified, pointed out that "the project of setting up additional stocks to manipulate prices was not new."

This is where it differs from what the IEA's emergency stocks system involves: "The purpose of strategic stocks is to use them in times of crises." He said does not see many governments agreeing to manage prices through stocks.

The official added that the IEA already has difficulty in getting its members to respect its own 90-day rule for stocks: "Before increasing them, one should see that this rule is applied."

Government opposition
Notwithstanding this aspect of the case, energy is an area where governments are loath to give up any of their power to an outside body.

The propositions on gas supply safety are also viewed warily. France, for one, has sufficient storage capacity to hold out for 1 year in the event of a major supply cut. Gas accounts for only 17% of France's primary energy use and very little of that to generate electricity. In addition, France has long-term gas supply contracts with Algeria, Russia, and Norway, which are the main EU suppliers.

As for the oil companies , France's trade group UFIP (Union Francaise de l'Industrie Petroliere) notes that increasing stocks by 30 days would only marginally improve oil supply safety, which is now well taken care of.

The oil companies and a few distributors already spend 350 million euros/year to fund maintenance of oil stocks, and they do not want to go beyond this. UFIP also expressed doubts about using stocks to manipulate prices.

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