By Steven Craig*
Europe’s energy sector is in a perilous state. The recent divestments of Shell, ExxonMobil, Total and other major oil companies from key European markets, combined with the permanent closure of some 1.8 million barrels per day of European refining capacity since January 2010, have highlighted the severity of decline in Europe’s energy sector. Eroding demand, saturated markets and stringent regulatory policy have transformed Europe’s once robust energy sector into barren wastelands of European industry. These developments threaten to usher in an era of prolonged energy dependency.
From 2008 through 2011, the consumption of petroleum products in OECD Europe fell by nearly 8% following two economic crises and prolonged economic turmoil. During this same time period, however, European imports of refined petroleum products increased by nearly 5%, demonstrating Europe’s widening energy imbalance. The domestic capacity to fulfill Europe’s energy requirements has entered a prolonged period of structural decline, with no respite in sight. Ongoing investments in petroleum refining in the Middle East and India are increasingly introducing more competitively priced petroleum products into European markets, further undermining Europe’s remaining refiners. Efforts to diversify natural gas supplies, a clean burning energy source increasingly being used in everything from electricity generation to home heating, are also yielding disappointing results. Europe is falling far behind Russia in the “Great Game” for control of the vast natural gas reserves of the Caspian region, and is poised to remain overly dependent on Russian natural gas supplies for the long term.
The accelerating decline of Europe’s energy sector begs the question of whether Europe is heading off of the cliff of long-term energy dependency, or if it is in the painful process of a long overdue structural overhaul of its energy sector. Ultimately, the long term outlook for Europe’s energy scenario will be defined by its ability to wane itself off of crude and crude-derived products, autonomously secure natural gas, and implement policies that attract, rather than detour, private side investments in the energy sector.
Unfortunately, the pace of European political reforms in the energy sector has outpaced private side investments for the past decade, imposing a combination of stringent fuel specifications, and aggressive biofuel blending and renewable energy targets, on Europe’s downstream operators. As a result, major oil companies and key energy players have opted to divest rather than invest in Europe’s difficult downstream markets, tripping over each other to find the exit. The vast majority of current investments in Europe’s energy sector are coming from foreign national owned oil companies (NOCs) and Russian oil traders, all seeking to pick up Europe’s distressed energy assets at bargain prices. This year alone, Russian oil trader Gunvor has picked up two failed refineries from Europe’s largest independent (and recently bankrupted) refiner Petroplus, with the clear intention of trading rather than distributing fuel products to European markets.
Given these trends, Europe’s energy supply imbalance is poised to widen in the long term, exacerbating Europe’s already sensitive supply and security issues. The recent fallout of nuclear energy projects following the Fukushima disaster, combined with Europe’s failure to diversify and autonomously secure natural gas as a substitute for nuclear power generation, paint a bleak outlook for Europe’s energy future. While across the Atlantic the United States is embarking on the dawn of its own energy revolution, Europe finds its energy sector hanging from a cliff, with its options limited. On one hand, Europe can let go, fall off, and try to survive the hard landing. On the other hand, however, it can slowly, carefully, and arduously climb its way back up the cliff by combining practical energy policy with private side incentives and regulatory reforms. Yet, the latter option requires a clearly thought out path, stable footing, and backtracking on some of the steps that have led Europe’s energy sector to the brink of long term dependency.
*Steven Craig holds an MA in International Affairs from the American University of Paris and a degree in Economics from Drake University. He works in Paris as an Oil Markets Analyst for an international energy consultancy and writes about the relationship between energy and international affairs. You can follow Steven at https://twitter.com/#!/energyaffairs.