Possible European Commission legislation that aims to reduce sulfur emissions could stretch Europe's natural gas supplies too far and lead to closure of a number of European refineries. That is the warning of WEFA Energy, London. It said any move to reduce sulfur or carbon dioxide emissions will prompt industry and power generators to continue switching to gas from oil and solid fuels.
"The extent to which plant operators are forced to use gas and back out oil will depend upon limits set and the rigidity of the legislation " WEFA said.
"It is therefore vital that the commission is very careful in developing this legislation to avoid jeopardizing some of the other important goals of energy policy such as supply security and cost minimization."
GAS DEMAND
WEFA warned that severe environmental legislation may force European industry to use rapidly rising volumes of gas. This will need to be imported from increasingly remote locations at progressively higher prices.
"Such a move," WEFA said, "could push Europe toward a gas supply crisis early next century, possibly as serious as the two oil supply crises of the 1970s."
If forthcoming EC legislation is severe, WEFA reckons Europe could require a further 40 million tons of oil equivalent of gas in relation to the base case by 2020. This is said to be 15% of current consumption.
Such a large rise in demand "...would necessitate development of several new major projects and fully stretch the European gas infrastructure as currently planned. Over time, average prices for gas will be driven up and Europe will be forced to turn toward more distant and less reliable sources. "
Austere legislation also would force closure of a number of European refineries, WEFA said. This would result in the loss of several thousand jobs and cause Europe to be more dependent on oil products imports.
Refiners could be forced to spend $20 billion by 2010 on upgrading facilities, WEFA said, compared with less than half this sum under more lenient legislation (Table 1).
Refineries are already hard pressed to meet expected requirements for white products and local emissions, WEFA said. Excessively tough limits on sulfur content of oil products would be the last straw for some plants.
"This would be a mixed blessing as it could pave the way for some of the larger European refineries to start making more satisfactory returns after 2 decades during which full costs have not normally been covered," WEFA said.
"This means that some of the stronger refining companies could have a vested interest in seeing more severe legislation being introduced as the most effective means of driving the weaker players off the field."
WEFA notes that three sets of EC environmental legislation are under discussion:
- A revision to the United Nations/EC sulfur protocol.
- An EC directive limiting sulfur content in oil products.
- Revisions to emissions limits and global reduction targets in the EC 1987 large combustion plant directive.
EMISSIONS PERMITS
Twenty-six countries have signed the UN/EC protocol to reduce sulfur emissions 87% by 2005. European Petroleum Industry Association (Europia) said the agreement will achieve a 60% gap closure, although for many countries this would be by 2010 rather than 2000 as originally envisaged (Table 2).
The lowest cost means of reaching a given emissions target is the use of emissions permits that can be traded, WEFA said. "California has used this system since the late 1970s, and there have been some striking successes.,,
A limited number of permits would be issued, which would collectively guarantee that only a given level of emissions could be legally produced. Plant operators could trade permits among themselves, so any capital investment would be made on sites offering the best returns.
In California, tradable permits have been restricted to power utilities. WEFA says greater benefits would be realized if all energy sectors are brought into the system.
"Trading of permits between members will establish a mechanism which will determine whether environmentally oriented investments should be made at power stations or in refineries or whether more gas should be imported," said Graham Weale, manager of WEFA Energy.
"In view of the enormous cost burdens and supply risks which could result from excessively austere environmental legislation, it is vital that legislators should not set tougher limits than can be justified and offer plant operators maximum flexibility in meeting these limits."
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