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CEE oil & gas companies embrace Energy Union

By working together, regional energy markets can feel the benefit of scale economics

As the CEE’s oil and gas sector rapidly reduces its dependence on high-priced Russian supplies, it’s moving closer into the European embrace through the so-called Energy Union that aims to create a self-sufficient, zero-carbon future.

In tandem with the linking up of pipelines in the Baltics, Central Europe and the Balkans, European Member States are adopting European regulatory systems to facilitate the completion of internal market functioning, and the flow of natural gas without administrative barriers. Energy community members like Ukraine are also aligning their legal systems so that national companies can harmonise more easily with the EU. “Many countries have recently undergone significant reforms or expect to implement them shortly,” explains Nilüfer Evrenle, technical consultant to Azerbaijan’s SOCAR Energy group.

As Miguel Arias Cañete, European Commissioner for Climate Action and Energy pointed out in October, there’s a lot at stake. Thanks to a more efficient oil and gas sector, improved pipeline networks and lower prices, the EU as a whole saved $27bn in imports in 2015 compared with the year before. The commissioner thinks the EU can do more provided regions such as the CEE continue to cooperate within the Energy Union, citing by way of example the “huge potential” waiting to be tapped in existing interconnectors.

“We will no longer tolerate a situation where bottlenecks are artificially pushed to the border, as is still the reality,” he warned.

Meantime consumers are benefiting from lower prices. In the gas market, for instance, according to a recent European Commission report, the estimated import bill for the EU in the first quarter of 2016 plummeted to €14bn. That compares with the average quarterly bill of €18bn in 2015. And as the region is becoming better connected and LNG becomes accessible, prices should continue to fall further. In the first quarter of 2016, spot prices at European gas hubs fell to €12-15 per megawatt hour, the lowest in seven years. CEE-based consumers in particular are reaping the rewards. According to the European Commission, the price of imported natural gas in the Czech Republic fell late last year to the unprecedented point where it’s only 4.5% higher than at the hubs in Germany.

However refineries in Europe are under pressure, not only to ramp up production but also to meet tougher standards in efficiency and pollution. Since 2008 EU refining capacity has decreased by 10%, according to the IEA. The oil refining fitness check – completed by the European comission in 2015 – evaluates how ten pieces of the most relevant EU legislation drawn from a variety of fields including environment, climate action, taxation and energy, influence the sector. The ten-point check list is by general agreement hurting margins and competitiveness, particularly against higher-producing refineries in North America and the Middle East. In July, the European Commission’s own research conceded this was the case, noting that “the average cumulative cost resulting from the impact of legislation… is estimated to account for up to 25% of the total net loss of competitiveness of the sector in terms of the decline in the observed net margin.”

But refineries shouldn’t expect any reprieve. “The costs can be considered proportionate relative to the benefits achieved,” argues the report, which also insists that regulatory costs have stabilised in the last four years.

There’s no sign that the EU’s energy czar will back down on fitness checks. Commissioner Cañete is on a mission to lead an “energy revolution”, that converts the CEE and the rest of Europe into a carbon-free energy sector by 2050.

This article is part of a report, produced in association with MOL Group. To download the report in full, click here.

 

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