Changing Supply Fundamentals Could Be the Key To Easing Europe’s Energy Constraints

As far as dependencies are concerned, the European Union is at the mercy of its energy suppliers to meet the majority of the monetary union’s demand. Although some of its supply is sourced from oil and gas production in the North Sea, Europe is primarily reliant on imports to satisfy the continent’s thirst for fossil fuel. Although this structure works to an extent, as changing geopolitics are wont to dictate, some of Europe’s main suppliers face increasingly difficult circumstances which underscore a need to assure more dependable supplies.

Tumult Among Key Suppliers Stresses Need For New Partners

Europe’s relationships with energy suppliers have been subject to the whims of geopolitics, as evidenced by the resumption of Iranian sanctions and elimination of purchase waivers. Efforts to circumvent sanctions through the special-purpose INSTEX vehicle have not yet come to fruition, and Iran’s latest ultimatum to the EU regarding compliance with the JCPOA and subsequent rejection suggest that the EU intends to toe Washington’s line on the matter.

Meanwhile, the additional sanctions on Venezuelan output combined with years of neglected investment in aging infrastructure means that European energy imports from South America are also tumbling. Notwithstanding the political backdrop, tensions in the Persian Gulf are on the rise following allegations that Iran sabotaged Saudi Arabian oil tankers and commercial vessels in the UAE’s port of Fujairah. Other noteworthy suppliers like Libya, Nigeria, and Algeria are experiencing domestic turmoil of their own, given delicate political conditions that threaten to diminish production and exports, and add to the EU’s energy headache further. Between all these mounting risk factors, the EU is being forced to search for new suppliers that are both reliable and less susceptible to external risks.

Looking Westward for Solutions

With nearly 54% of all EU energy requirements imported during 2016 alone, the current energy dynamics of the region grant ample leverage to suppliers. Considering that the region’s energy bill has been on the climb during 2017-2018 after falling to multi-year lows in 2016, there has never been a more prescient time for the region to forge new supplier agreements.  One of the main beneficiaries of the search for partners lies across the Atlantic, as North American production continues to climb while other producers pump the brakes.

While doubts about its sustainability are certainly merited, the North American shale renaissance is showing no signs of slowing, especially as oil prices remain well-above breakeven levels for marginal producers. According to the latest forecasts published by the US Energy Information Administration, oil output alone is projected to reach an average of 12.45 million barrels per day in 2019 and is anticipated to rise to 13.38 million bpd in 2020. Investment decisions by supermajors like Exxon Mobil and Chevron in the Permian Basin suggest that integrated oil and gas companies recognize the value in these tight-energy plays. The EIA underscores this point with predictions of US exports outstripping imports by the fourth quarter of 2019.

Despite Europe’s general disdain for US President Donald Trump, there is no denying the ongoing shift in American energy extraction dynamics and its potential to satisfy a piece of Europe’s demand.  Since the announcement of efforts to improve energy cooperation issued by Trump and the EU President Jean Claude Juncker in 2018, exports of liquified natural gas alone have risen by a stunning 272%, reaching 1.4 billion cubic meters in March.  

Notwithstanding this development, the ongoing construction of more LNG export terminals in the US complements the lifted export ban, meaning that Europe might be able to replace some of its less reliable suppliers. Most importantly, American LNG is much more cost-effective relative to other European gas suppliers.

Matching Infrastructure With Energy Demands

Just as important as a steady supply of energy is the infrastructure need to store, mix, and transit oil and gas products throughout the EU.  This has proven another massive obstacle course for the EU amid the showdown between the US and Germany over the planned Nord Stream 2 gas pipeline from Russia.  Amid Germany’s push to eliminate coal and nuclear power from the country’s energy mix, the outcome is heightened dependence on gas and oil, primarily from Russia. The move echoes other plans drawn up in European capitals to increase the use of renewable energy.

Yet, fossil fuels are not going anywhere, and renewables remain but a small portion of current energy mix and are not forecast to outright replace oil and gas. Consequently, Nord Stream 2 has drawn consternation from the Trump Administration which is trying to quash the project. However, it highlights the important role infrastructure plays in certifying the region’s energy demand is met and the bright future for companies engaged in storage and transit as the energy product mix changes.

Refineries, storage facilities, and transit pipelines are set to be the biggest beneficiaries of the EU’s transition away from coal towards oil and gas. Take for example GTL Terminals which operates a storage facility in one of Europe’s major transit arteries. The firm, which owns Dan-Balt Tank Lager A/S in the Danish port of Aabenraa, is near major European shipping hubs including Amsterdam, Rotterdam, and Antwerp, and is set to benefit from changing regional energy trends thanks to its capabilities for handling gas oil and fuel oil storage and loading.

GTL Terminals is also active in Russia, another major European energy supplier, with its oil storage site in Kaliningrad which is conveniently located near railroad and road transit infrastructure.  According to GTL Terminals Chairman Khofiz Shakhidi, “Europe’s changing energy landscape presents a unique opportunity for the continent’s oil and gas infrastructure providers. Our business in particular is poised to capitalize on these trends thanks to our ability to handle energy storage and transshipment flows arriving from both the east and the west.”

Khofiz  Shakhidi, who also manages Tades and Jefferson Capital, added, “with our terminals positioned close to major European transit channels, we foresee greater profitability as the transformation of the continent’s existing energy mix takes shape.”

The transition towards more low-carbon energy sources, namely gas and LNG, also suggests that Europe must do more to improve its existing storage resources.  A recent interview with Ilaria Conti of the European University Institute highlights that greater gas storage resources adds to insurance in the case of supply disruptions of temporary demand dislocations during seasonal weather fluctuations.  Furthermore, these storage facilities could be easily converted to store other energy products, like hydrogen, depending on the future energy mix. Per the International Energy Agency (IEA), green hydrogen is expected to play a growing role in the future global energy paradigm, and the existing storage infrastructure could be readily adapted over the long-term to satisfy this push.

Transforming The EU’s Energy Supply Outlook

Although the push for energy independence is still a ways off for the European Union, the relevancy of fossil fuels has not been diminished despite efforts to focus on renewable sources. Instead, increased competition to supply the region’s demand might very well offset the other risks that could drive prices higher over the interim. Between US integrated oil and gas companies entering the picture and vying for a slice of the market, more competition entering the European energy picture will likely lead to better pricing and improved energy security.

As the fireworks begin in the Persian Gulf, the focus on the stability of supply but also the infrastructure that stores and transits energy products will come into greater focus, possibly displacing many of Europe’s long term relationships. With key suppliers facing renewed uncertainty, Europe will be forced to source its energy needs elsewhere by identifying more reliable partners and increasingly relying upon on infrastructure like efficient transit and storage to ensure uninterrupted supply.