Oil and Gas in the Capitals

	Vol. 232 No. 4
ØYSTEIN NORENG, CONTRIBUTING EDITOR, NORTH SEA

Despite falling domestic output, Europe’s low-carbon ambitions depend on gas

The European Commission has published a brief, ambitious policy document, titled “Roadmap for moving to a competitive low-carbon economy in 2050,” aiming to make the European economy more climate-friendly and less energy-demanding, so that by 2050 the continent will have cut most of its greenhouse gas emissions. The key is in clean technologies. Economic constraints get less attention.

The EC focuses on two milestones: 2020 and 2050. Its 2020 ambitions are to reduce CO2 emissions by 20% below the 1990 level, to raise the share of renewables in the European energy mix to 20%, and to enhance energy efficiency 20%. These so-called “20-20-20” targets—already made law in the European Union in June 2009 after being passed by the European Parliament and Council—may be difficult to reach. From 1990 to 2009, CO2 emissions were cut by 9.3%. By 2009, renewables accounted for no more than 6–7% of the EU energy balance.

From 1990 to 2009, EU primary energy consumption barely decreased, by 1.3%, but during the same period real GDP increased 42%. Thus, while demand stayed relatively constant, remarkable progress was made in energy efficiency—largely resulting from Eastern Europe’s transition, as old, heavy and energy-intensive industries were abandoned for the benefit of light industries and services, and coal was replaced by natural gas in power generation. During this period, EU coal consumption fell 40% and gas consumption rose 41%. Thus, natural gas has been the main driver for energy efficiency and emission cuts in Europe. Nevertheless, the EC is reluctant to promote natural gas in the future.

The vision for 2050 is a low-carbon society of low-energy and low-emission buildings, intelligent heating and cooling systems, electric and hybrid cars, and cleaner cities with less air pollution and better public transport. The argument is that the move will boost Europe’s economy thanks to increased investment in clean technologies and clean energy. The ambition is to reduce CO2 emissions 80–90% by 2050, from the 1990 level. In power generation, the aim is to cut CO2 emissions almost entirely, meaning that by 2050 hardly any natural gas would be used in power generation. Energy efficiency and renewable energy are the major tools. The EC is also worried about the import bill, arguing that oil and gas prices are due to rise further, enhancing risks of inflationary pressures, trade deficits and unemployment.

So far, the member states do not seem to be falling in line—and the European energy industry even less so. A major reason is that energy efficiency and renewable energy do not come free of charge. Europe already has the world’s most efficient energy usage, as compared to economic output, meaning that the easy part of energy conservation has already been largely carried out. To further increase efficiency will require considerable investment: Electric and hybrid cars are costly, and public transportation systems are capital intensive to build and expensive to operate. Renewable energy—whether windmills, solar panels or ethanol—requires government subsidies and protection in the marketplace to be competitive.

At a time when most European governments are preoccupied with budget deficits, subsidies for new energy sources are easy prey. Instead of a profound energy change, the likelihood is that the European economy will continue slowly along a path of energy efficiency and emission reduction, and that natural gas will gain EU energy market share.

One reason for the European Commission’s reluctance toward natural gas may be the depletion of domestic reserves. As natural gas output subsides in the UK, the Netherlands and other countries, import dependence increases, and promoting natural gas means promoting imports even further. Europe is surrounded by natural gas in North Africa, the Middle East, the Caspian region and Russia, in addition to access to LNG by tankers. All of the natural gas exporters need outlets, markets and export revenues. Moreover, with the rapid development of shale gas, the US is unlikely to become a major LNG importer, as was the outlook only a few years ago. Consequently, natural gas prices are under downward pressure throughout the world.

Against this backdrop, the EC’s worries about rising import prices for natural gas may be misplaced. A stronger euro against the US dollar would help moderate oil and natural gas prices. The problem is that with moderate natural gas prices, the renewable energy sources favored by the EC become even less competitive. Briefly, natural gas can do what wind power, solar panels and ethanol can do, but at significantly lower cost and with less emissions than oil and especially coal.

A more constructive approach would be to replace the remaining coal use in Europe with natural gas and to phase out fuel oil from stationary uses in power generation and heating. The complement should be a policy of closer cooperation with the natural gas exporters aimed at balancing trade and securing supply diversification.

The countdown has started for all the authoritarian regimes in North Africa and the Middle East. The emerging democracies will need export revenues—i.e., outlets for their natural gas—in order to pay for (largely European) imports, as democracy will hopefully lead to less unfair income distribution and higher living standards for the bulk of the population. Democratic developments in the Middle East will enhance Turkey’s importance to Europe, as the political and natural gas transit corridor. An enhanced profile for natural gas is likewise an occasion to boost trade with Russia, with a large domestic market and interesting investment opportunities.

In this respect, Europe needs to get its house in order. The present trade regime of bilateral deals enhances supply risk for buyers and market risk for sellers. To achieve a well-functioning natural gas market, the EU should impose transparent, low-cost access to the grid, preferably under the supervision of a common regulator, and complete the high-pressure pipeline network. Diversified supplies to a common pool of users would enhance security of supply, making natural gas even more attractive. WO