Energy security: A new agenda for Europe
Written by Nick Butler, 01 October 2004
For almost 50 years, Europe's priority has been to achieve peace and prosperity by strengthening the ties between its nations. The last 20 years in particular have seen Europe focused on the internal challenges of German reunification, enlargement and the establishment of the single currency. Now it is time for the EU to look outwards. We cannot be secure and prosperous simply by looking after ourselves. The question of Europe's energy security illustrates the point.
There are two fundamental threats to energy security. The first is the risk to the climate caused by the world's increasing consumption of hydrocarbons. The evidence of the link between energy usage and climate change is now sufficient to justify precautionary action. In this area, the EU is in a position of leadership. It has said that it will apply the Kyoto protocol - ahead of formal ratification - and it has adopted internal emissions targets. Its new system for trading emission rights will have an impact beyond Europe, through demonstrating that climate change can be addressed without threatening competitiveness and prosperity.
The other risk to energy security is that available supply will not match growing demand. The demand for energy is driven by demography and economic performance. The world's population - at 6.3 billion today - is growing by almost 10,000 an hour. By 2015, there will be 7.2 billion people on the planet, according to UN predictions. More and more people will be able to afford the energy they need, especially in fast-growing countries such as China and India. China is already the world's second largest energy consumer after the US. The International Energy Agency (IEA) predicts that between now and 2015 world energy demand will rise by onethird, equivalent to 240 million barrels of oil per day.
How can that demand be met? Some people hope to see more energy generated from wind, waves or solar panels. Today alternative and renewable supplies provide just 2.5 per cent of world demand (and most of that is from biomass products such as straw, vegetable oil or sewage). Solar power accounts for just 0.001 per cent. Although the importance of renewables will continue to grow in the longer term, they will account for no more than 3.3 per cent of world demand by 2015, according to the IEA. The potential of nuclear energy - now supplying 7 per cent of world demand - looks similarly limited. The first generation nuclear stations are reaching the end of their natural lives, and in 2003 only two new ones were commissioned anywhere in the world. Given public concerns about safety, nuclear capacity will probably decline rather than increase over the next ten years.
Hydrocarbons - coal, oil and gas - will continue to provide the balance. The IEA predicts that global demand for oil will grow by 32 per cent by 2015, to 93 million barrels per day. Gas demand will rise even faster, by 45 per cent to the equivalent of 64 million barrels. In physical terms, oil and gas producers will be able to meet that demand. At current consumption rates, the world's known oil and gas reserves will last for 40 and 60 years, respectively.
The chief risk to energy security stems from the fact that the energy producing nations are not typically the largest users. Thus by 2015, some 70 per cent of world oil demand will be traded internationally. The major importers will be Europe, Japan, China and the United States. But 80 per cent of all traded oil (and 50 per cent of gas) will come from just three regions: the Persian Gulf, West Africa and Russia.
Although Europe's energy demand is not growing as fast as in other parts of the world, it will still be larger than that of China by 2015. With Europe's own oil and gas production declining, 75 to 80 per cent of the required oil and gas will have to be imported. Concerns about the security of these imports are justified, but they do not warrant a nervous retreat into self-sufficiency - which could impose huge costs on the environment and competitiveness. Instead, European governments and energy companies need to work together to ensure a smooth continuity of supply at a reasonable cost.
In particular, the EU needs to engage much more closely with Russia, which is likely to be the main supplier of oil and gas to Europe for decades to come. Plans for a 'common economic space' should be advanced and the EU should actively promote Russia's accession to the WTO.
The countries of North and West Africa and the Caspian region can contribute to the diversity of supply for Europe. The EU's engagement with countries such as Angola, Libya, Nigeria and Egypt will enhance European energy security. But Europe cannot achieve security through one or other region. Major energy shortages elsewhere would soon disrupt European supplies. The global energy market is a single entity. That reality gives Europe a direct interest in the stability of the Middle East and in the orderly development of resources in the major exporting states - including Iran, Iraq and Saudi Arabia.
External engagement and the projection of European influence is necessary to achieve energy security, but not sufficient. Europe must also improve its own internal energy markets and infrastructure to ensure that supplies flow freely into and across the continent. National barriers to trade in natural gas, for instance, remain a relic of a fragmented economy and should not be allowed to raise costs and prevent supplies reaching consumers. EU governments need to create a genuine single market for energy across the Union.
Meanwhile, private companies have to make the long-term investments that are necessary to develop new resources and bring them to market. Given the nature and scale of the energy market, such companies will be global. The role of governments in Europe is not to pick winners or to designate European champions. But EU competition policy should be founded on an understanding that it is in the long-term interests of European consumers to be served by businesses that have the strength and reach to invest in energy supplies and infrastructure. A competition policy with a global dimension would represent an important step forward in the development of Europe as an economic force in the world.
Nick Butler was Group Vice President, Strategy for BP p.l.c.