Occasional Paper Series, No. 40 Europe relies on energy imports The European Union: Currently, Europe is about as dependent on imported oil as is the United States, and is more Energy Security and the Periphery dependent on imported natural gas.1 For purposes of our forward-looking analysis of security issues, we treat Europe as it will probably John Gault become over the next ten to twenty years – an President, Energy Project Development, enlarged version of the present European Union, John Gault, SA, Geneva including not only the present EU but also candidate members and some countries not yet formal candidates (e.g. Norway, Switzerland). Europe relies upon imported energy, and the Thus, we treat here all the countries of Europe degree of this reliance will increase in coming (excluding Russia, Belarus, Ukraine) as an entity, decades. Internal (primarily North Sea) and the ‘periphery’ under consideration here production of liquid fuels will decline, and includes Russia, the Caspian region and the production of natural gas will reach a plateau, so Mediterranean Basin – the ‘neighborhood’ of an that incremental hydrocarbon requirements will expanded EU. necessarily come from external sources. This trend of rising energy imports has important Europe managed to reduce its dependence on 2 security implications. imported oil during the 1990s (Figure 1 ) by expanding production from the Norwegian sector European energy security requires, first, that the of the North Sea and by delaying the inevitable incremental resources be developed in a timely decline of production in the U.K. sector. manner along with adequate transportation Substantial increases in natural gas production systems to deliver the energy to European from both Norway and the U.K. restrained markets. European security then requires that the natural gas imports below 40% throughout the likelihood of interruptions to such supplies is decade (Figure 23) in spite of rapid growth in minimized, and, in the event of an interruption, European gas consumption. the consequences for European consumers are moderated. Oil and gas production capacities in countries neighboring Europe are being enlarged, and Europe’s energy import dependence transportation systems are being planned and will grow constructed to provide additional supplies to Europe. For the most part, private companies from both importing and exporting countries, and Plausible assumptions about European rates of in some cases the national oil companies of the economic growth, energy prices, environmental exporting countries, are making these regulations, and other factors over the coming investments, often as joint ventures. two decades lead to projections of increasing energy import dependence. All forecasts agree The European Union is trying to define a that natural gas consumption will grow rapidly, comprehensive energy security policy and is still striving to achieve fully integrated and liberalized energy markets. Nevertheless, the EU already 1 We focus on hydrocarbons because hydrocarbons helps to provide the favorable business climate in constitute the largest energy imports by far (whether which private energy infrastructure investments measured in terms of heating value or monetary value), and take place. because they present substantial security issues. Other potential European energy security issues not discussed here To some extent, energy security can be addressed include nuclear fuel cycle security in Periphery countries directly through energy-specific policies, but and electrical grid interconnections with the Periphery (especially in the Mediterranean region). ultimately energy security is inextricable from 2 Source of data underlying Figures 1 & 2: BP p.l.c., BP broader economic and foreign policy challenges Statistical Review of World Energy, annual (various years). and solutions. 3 In Figure 2, the region ‘Asia-Pacific’ includes Japan, which is also shown separately. 3 and oil consumption will also expand though not Europe’s oil and gas imports already quite as fast as natural gas. come from Europe’s Periphery Projections made by the International Energy Agency4 are shown in Figures 3 and 4. While these projections were prepared just prior to the Much of the oil currently imported into Europe 2001 global economic recession, other (roughly 40%) comes from the Middle East Gulf. projections5 made more recently reveal similar But an even larger proportion originates in trends. Of course, the rates of growth of oil and regions closer to Europe, especially the Former gas consumption could be moderated by Soviet Union (FSU) and North Africa, which together account for about 48% of Europe’s oil European policies concerning market 7 liberalization and competition, encouragement of imports (Figure 6 ). renewable energy, excise taxes, the rate of Sources of Europe’s natural gas imports are even retirement of nuclear power plants and other more concentrated, with the FSU and North policies. Africa accounting for some 96% of Europe’s European oil production, primarily in the North imports, including both gas imported via pipeline Sea, is expected to decline from nearly 7 million and in the form of LNG (Figure 7). barrels per day (mmbd) currently to less than 4 In any consideration of where additional oil and mmbd by 2020. Internal natural gas production, gas imports may originate, these periphery also primarily from the North Sea, will not rise regions deserve particular attention. much above current levels of around 300 billion cubic meters per year (bcm/yr) in the foreseeable future. Higher energy prices and/or new production technologies could extend the life of Where will the additional supplies existing fields somewhat, but substantial come from? expansion beyond the projected levels is unlikely. Under the most plausible scenarios, Europe will import about 5.5 mmbd of additional oil and at There are a number of reasons to expect that least 300 bcm/yr (and quite possibly more) of additional energy supplies for Europe will come additional natural gas in 2020 compared with first from the periphery. today’s import levels. This implies increasing Resources from the Middle East Gulf will be levels of import dependence as shown in Figure drawn toward faster-growing markets in Asia. 5.6 Recent increases in China’s imports of oil are shown in Figure 1. Asian markets will draw Middle East resources away from Europe and will tap hydrocarbons in Eastern Siberia and in Central Asia.8 At the margin, Europe will 4 Source of data underlying Figures 3, 4 & 5: International Energy Agency, World Energy Outlook 2000 (Paris: compete with China and other Asian markets for 9 International Energy Agency, 2000), and International oil and gas supplies from these sources. Energy Agency, World Energy Outlook 2001 Insights (Paris: International Energy Agency, 2001). ‘Europe’ here refers to OECD Europe. 5 See, for example, United States Department of Energy, 7 Sources of data underlying Figures 6 & 7: BP Statistical Energy Information Administration, International Energy Review of World Energy (annual), and International Energy Outlook 2002 (Washington, DC: DOE / EIA, 2002). Three Agency, Monthly Oil Report (monthly). Various issues. scenarios are offered by Jonathan Stern, Traditionalists 8 James P. Dorian, “Oil, gas in FSU Central Asia, Versus the New Economy: Competing Agendas for northwestern China”, Oil and Gas Journal, September 10, European Gas Markets to 2020, (London: Royal Institute of 2001, pp 20-32. See also: Julia Nanay, “Prospects for International Affairs, Briefing Paper 26, November 2001). Alternative Export Routes for Caspian Oil: Turkey, Iran and 6 Similar conclusions about increasing European import China”, Middle East Economic Survey, 17 September 2001, dependency are expressed in Commission of the European pp. D4-D7. Communities, Green Paper: Towards a European strategy 9 See Kang Wu, “Asia-Pacific oil dependence, imports to for security of energy supply, Brussels, 29 November 2000, grow”, Oil and Gas Journal, April 15, 2002, pp. 20-23. Wu Document COM(2000) 769 final (hereafter referred to as projects that Asia-Pacific crude oil imports could increase ‘Green Paper’), at pp. 20-21. Were the projections extended by 6 mmbd between 2000 and 2010, and that by 2010 the to 2030, the levels of import dependence could be even Middle East will supply 84% of all Asian country imports, higher (Green Paper at p. 80). up from 74% in 2000. 4 The gradual shift in direction of Middle East oil • Qatargas will supply ENEL (Italy) and exports from western to eastern destinations has Repsol (Spain) 4.8 mmtpy LNG;15 and been taking place gradually for a long time, as 10 • Iran has announced its intention to sell LNG shown in Figure 8 . In 1980, nearly two-thirds of 16 Middle East oil exports went to Atlantic Basin to Repsol (Spain). markets (North and South America, and Europe). In addition, Qatar Petroleum and ExxonMobil Today, only about one-third of Middle East have announced a project (Qatargas-2) to deliver exports reach those markets. up to 14 mmtpy of LNG to the U.K. with startup 17 This trend will continue, as illustrated in Figure scheduled for 2006 or 2007. 9.11 By 2020, according to projections by the These new trades have been influenced by the United States Department of Energy, only about current economic slowdown in some Asian 25% of Middle East oil exports will flow to the markets, almost certainly a transient effect. The Western Hemisphere and Europe. Middle East, however, will not be the primary Oil has tended