Glimpses of hybris appear to emerge in the European energy policy and the debate surrounding it. Or, at least, evidence of a new assertiveness. Once upon a time, it was just fear of supply insecurity. Ten years ago it would have been unthinkable, or at least scary, to face a disruption from any of our significant energy suppliers. And no policy, or even political statement, that could potentially put supply at risk could be allowed (some barking about despotism was obviously welcome; provided however that it was just barking).
The situation today is almost entirely different. Take just two examples: EU attitudes towards Russia, and the debate on the prospect that, by buying oil, we may be financing terrorists.
Let’s start with the EU, namely from the gas infrastructure policy. Via interconnectors and otherwise, the pipelines that were born to transport Russian gas westwards may now be used to bring it to the East. A few finishing details, and it will be possible to move significant gas volumes from Berlin to Kiev. Antitrust policy, then: since 2012, Gazprom is under investigation, and results are expected in the next few weeks. Last, but not least, sanctions. Gazprom, it is true, has not been touched (hybris may be beautiful, but cautiousness is of the essence), but the overall package looks more than assertive. A policy is in place; and is proactively implemented.
Moving on to terrorism, the idea is that hydrocarbon revenues may be used to buy weapons that could eventually end up in the wrong hands. But wasn’t it always so? The suggestion, as a countermeasure, is to boycott production coming from countries where domestic money flows are hard or impossible to monitor. The proposal by Alessandro Pansa (Corriere della Sera, March 2) to boycott Libya by suspending gas imports into Italy is the latest, authoritative example of this line of thinking.
The idea that, overnight, Italy could do without a significant producer/supplier was simply an exercise in imagination until just a few years ago; it has now become a policy proposal. The change in attitude is an evident change in the European energy paradigm. Once, forecasts were suggesting increasing energy demand; and discourse revolved around the fact that we should increase supply security by diversification through addition, i.e. increase the number of suppliers in order to increase our risk-management capacity. Now that security as such instead of security of supply has made it to the top of the political agenda, we can increase security by diversification through subtraction, i.e. by deleting countries from our vendor’s list.
The apparent paradigm change needs some strong mitigation. Its main drivers are oversupply, on one side, and demand reduction on the other. This is not the place to discuss oversupply; except to note that oversupply will not be a permanent condition, and that, if and when it will swing back to undersupply, the paradigm could swing back accordingly.
As to the reduction in demand, and the redundancy in import infrastructure it helped to generate, the EU28 and the Italian figures are self-explanatory.
Consider oil first. Or, even better, consider oil products (so that we can fully account for the refined products market). EU28 consumption was at 712 million tonnes (Mt) in 2004, and at 604 Mt in 2014: an overall 15% demand reduction. Italy did even better than that, from 92 Mt down to 58 Mt, a 37% contraction. Decrease demand in an oversupplied world, and you are left with the fact that you can afford to pick your supplier – revising your vendor list accordingly.
Then, take natural gas. EU 28 consumption was at 519 billion cubic metres (Bcm) in 2004, and at 409 in 2014. A 21% contraction, slightly outperformed by Italy (-23%, down from 80.6 to 61.9 Bcm). Some may argue that the reduction in consumption does not correspond to a decrease in imports, as EU production in the decade went down by around 90 Bcm as well. This is true, but in the meantime – expecting stronger demand – the EU has expanded its own gas infrastructure. In Italy, for example, import capacity is well over twice actually imported volumes, and the country started to import Libyan gas only in late 2004.
An even better example is liquefied natural gas (LNG). Record LNG imports so far were recorded in 2011 (83 Bcm). Overall capacity (net of Turkey) stands at 198 Bcm. Utilisation rate in 2014 has even decreased, and stands at 23%, i.e. 45 Bcm. This corresponds to over 150 Bcm of unused regasification capacity, and is roughly the same as overall gas volumes actually sold by Russia to the EU in the reference period.
We already have, at least on paper, the necessary infrastructure to “diversify”. From paper to practice, we must introduce two caveats. The first is that EU infrastructure is not perfectly integrated. EU’s priority has been to connect Bulgaria, Romania and Hungary; but it simply forgot to connect Spain with Europe, and is now hurrying to plug that gaping hole. We have LNG capacity amounting to 65 Bcm installed in the Iberian Peninsula; and we can “import” into other parts of Europe no more than 5 of these. EU’s worries to be assertive with Russia mixed up some priorities. We can move gas from Berlin to Kiev but we cannot move gas from Madrid to Paris.
The second caveat has to do with price. Regasification capacity has been left idle and EU countries have continued to buy from Russia on top of take or pay volumes simply because Russian gas is marginally cheaper than LNG. Until this remains true, the decision to diversify will have to take into account that this will come at a price.
All this comes down to a consideration: being a weaker market, the EU is stronger in its ability to negotiate contracts and diversify sources; but only up to a point. Can we, then, embargo Libya?
The question could soon become moot, in case disruptions are caused by conflict in the country. Until then, however, we should consider oil and gas as two separate issues. As to oil, an embargo over Libyan exports would simply amount to the disappearance of some of the global overproduction (unless Libya exports it elsewhere). Most of the exporting countries would be grateful if we did it. Gas is a more troublesome issue. While Italian consumption has declined, gas imports from Libya have increased, approaching 13% of its overall imports. In principle, it should not be difficult to replace some 6 Bcm/year. There are, however, some clouds in the sky. Algerian exports have decreased dramatically, and the idea is that this may be more the result of production problems than marketing strategies; and the Netherlands has announced it will slow down production at its largest gas field. Italy could have to deal with a number of sources of supply contracting at the same time, albeit temporarily – and it could be painful. In order to properly assess the technical feasibility of such a move, it would be advisable to talk to ENI first, to make sure that everybody gets out unharmed.
Doing without Russia does not look sustainable; and doing without Libya may imply some risk. It is however true that, in terms of security of supply, in the past these questions would not even have emerged – while today we can bring them to the table at least as potentially feasible prospects. Energy consumption declines has given us room to play with our vendor’s list: if not to brutally erase some of these vendors, at least to reshape their respective volumes and enjoy some portfolio management.
The weaker, the stronger. But we should be cautious, as this could simply be evidence of the inexorable European decline.