European Affairs

European Affairs

Winter 2003


Special Report: New Challenges to Energy Security
Shaping an EU Energy Strategy Has Become More Urgent
By Marcel Rommerts


Recent developments have made the European Union's efforts to fashion a forward-looking new energy strategy timely and important. Two years ago, with its Green Paper Towards a European Strategy for Energy Supply, the European Commission launched a wide-ranging debate on a future EU energy strategy, of which one aim was to determine where common policies might be needed.

Today that debate has become even more urgent. Firstly, since September 11, 2001, the security of energy supplies has become an even bigger concern. Secondly, there is a need for immediate action to mitigate the emission of greenhouse gases that cause climate change.

Climate change is now an accepted fact. Ninety-four percent of carbon dioxide emissions arising from human activity come from the energy and transportation sectors. In the near future, major investment decisions will have to be made in Europe, and those investments will be influenced by the energy and transportation solutions we choose for the future.

The third factor is the ongoing liberalization of EU electricity and gas markets, which makes it even more urgent to develop a coherent energy strategy at European level.

The fourth consideration is the imminent enlargement of the European Union to include ten more members. The entry of these countries, many of which use energy more intensively than the existing member states, will make the European Union more dependent on energy imports. But it will also offer new opportunities to improve energy efficiency and increase the use of renewable sources.

EU member states and the prospective new entrants also often have different solutions for common problems in the energy sector. As we seek to meet our common environmental goals in the least costly way, and complete the single energy market, energy policy decisions taken by one member state will increasingly affect the energy markets of other members. Energy policy has thus obtained a new European dimension.

The Commission Green Paper arrived at a number of key conclusions. It predicted that the European Union would become increasingly dependent on external energy sources in the coming years, and even more so after the admission of the new members.

Our forecasts suggest that if strong measures are not taken, the European Union will depend on imports for 70 percent of its energy by 2030, against 50 percent today.

As for climate change, increases in European emissions of greenhouse gas are making it difficult for us to meet our common European commitments under the Kyoto Protocol to reduce emissions by eight percent by 2010, compared to 1990. Instead, these emissions may, according to some forecasts, grow by at least five percent by the target date, if further measures are not taken.

We know that we must make efforts to counter this trend, and that those efforts must continue beyond 2010. The most cost-effective way to close this gap is to invest where the cost of mitigation is the lowest, irrespective of national boundaries. This creates another EU-wide dimension and underscores the value of tradable emission rights.

We also face difficulties in influencing energy supply conditions in the short and medium term, as possible alternatives are unfortunately rather limited. Renewable and alternative energies are coming on line at an encouraging rate, but this process will nevertheless take time, and it will need additional help.

In the meantime, our short-term options for achieving greater efficiency are clearly on the demand side. We must better manage our energy demand, especially in buildings and in transportation.

There are huge returns to be obtained on investments in energy efficiency in these sectors. It is also clear that we need new initiatives at EU level, including legislative action, to reduce the growth in energy demand, an objective that is also supported by our member states.

Improved energy efficiency has already made an astonishing contribution to reducing our energy imports. According to some estimates, improvements in efficiency over the past two decades have contributed as much to the energy balance as all the solid fuels, such as coal, and nuclear power produced inside the European Union. The contribution of energy efficiency is expected to remain equally significant in future.

We must discuss the contribution of nuclear power, which is and will remain important in a number of member states. Many of them, however, are divided on the use of nuclear energy as a means of diversifying energy supply.

Based on the discussions that followed the publication of the Green Paper, the Commission is taking the initiative in five fields: improved energy efficiency, an alternative transportation policy, the use of renewable energy sources, maintaining autonomy in security of supply and solutions at EU level to common problems in member states.

To improve energy efficiency the Green Paper called for a genuine change in consumer behavior and a transformation of the market on the demand side. In order to begin this process, the Commission has proposed and begun implementing active policies for improved energy efficiency and demand management.

In spring 2000, for instance, the Commission adopted an action plan for energy efficiency and a European climate change program. Many of the plan's proposals are now being implemented.

For appliances and equipment, for example, the existing EU energy efficiency-labeling scheme is being expanded and strengthened and voluntary agreements are being finalized. Proposals are expected soon on minimum efficiency requirements for most appliances and equipment.

A directive on the energy performance of buildings has been adopted by the European Parliament and will soon be approved by the European Council. The Commission recently adopted a proposal on combined heat and power, or co-generation, which is now under discussion by the European Parliament and the Council.

In the transportation sector, if current trends continue, emissions will be up by 40 percent by 2010 compared with 1990. To prevent this, our railroads must be revitalized. Investments in railroads need to be refocused, private car use has to be rationalized and the road transportation sector has to be reorganized.

The Commission published a White Paper European Transportation Policy for 2010 last year. An agreement on engine efficiency has been concluded with the automobile manufacturers, and fuel efficiency labeling has been made mandatory in the member states.

The Commission last year also called for an alternative engine fuel strategy and adopted a proposal to promote the use of biofuels in road transportation by means of tax incentives. This proposal is now under discussion in the European Parliament and the Council.

The aim of the proposal on biofuels is to increase the share of these fuels in road transportation to six percent in 2010. In the medium and longer term, however, we see natural gas and hydrogen becoming mature engine fuels.

An action plan for renewable energies was adopted by the Commission and presented to the Council and the Parliament as far back as 1997. Considerable progress is being made. Wind power, for example, is doing well. The plan calls for doubling the share of renewables in EU energy consumption from six percent to 12 percent by 2010.

A directive setting targets for the production of electricity from renewable energy sources became law last year. If these targets are met by the member states, about 22 percent of EU electricity consumption in 2010 will be provided by renewables, compared to 14 percent today.

We are continuing to work on plans to establish EU energy autonomy in the medium term by increasing security of supply. We are currently analyzing the contributions that could come from different energy sources, including nuclear power, natural gas and renewables, as well as from energy efficiency. We are looking into our relationships with gas and oil-producing countries and into the different means we might have to secure supplies.

In our search for common solutions to common problems, we are in the process of agreeing on ways to strengthen strategic stocks of oil and gas. We are also seeking a common approach toward strengthening and diversifying our supply and transmission networks.

We must also accelerate the completion of the European single market for energy, which has been under discussion for some time in the European Council. Now that agreement has been reached, we shall create the world's largest internal, integrated energy market.

We are also heavily engaged in financial support programs. In addition to legislative measures, policy initiatives and a new non-technological energy efficiency and renewables support program, which is called Intelligent Energy for Europe, the European Union has also started a new five-year technological research framework program, running from 2002 to 2006.

The plan provides more than $400 million for long-term technological research into energy efficiency, alternative fuels and renewable energy sources over the five-year period. Another $400 million will go to activities with a short- to medium-term impact.

Of the activities with a short- to medium-term impact, the integration of renewable energy sources into the energy system will receive about 45 percent of the budget. Alternative transportation fuels, especially fuel cells for road vehicles, will receive about 20 percent. The remaining 35 percent will go to energy savings and energy efficiency.

Together with the roughly $200 million allocated to the Intelligent Energy for Europe program, the European Union will spend more than $1 billion to develop and implement its energy policy in the five-year period that began last year.

Marcel Rommerts is Principal Administrator in the Transport and Energy Directorate- General of the European Commission, and before that he was Scientific Officer (1994-2002) in the same DG, covering urban transport policy, vehicle technology and alternative fuels. He holds a degree in transport planning and public transport from the National Academy for Traffic and Transport, Tilburg, the Netherlands.


Laura Sikes

The United States and Europe represent less that than 20 percent of the world's total population. Together, however, they account for:

By 2020, the U.S. Department of Energy projects that:

Over the next 20 years, it is estimated that:

Source: U.S. Department of Energy

Robert C. McNally, Jr. is Special Assistant to the President on the White House National Economic Council. Previously, he was a Vice President of Tudor Investment Corporation where he was responsible for monitoring and evaluating fiscal and monetary policies in G7 and emerging market countries.

The goal of U.S. international energy security policy is to ensure access to reliable, affordable energy supplies, which are absolutely necessary to maintain America's standard of living and to protect its national security.

There are three ways in which we work toward that goal: a continuing dialogue with major energy producers; the increase and diversification of supplies on a global basis; and measures to deal with any potential oil supply disruption.

The United States is both a major producer and consumer of energy, producing more than 70 percent of its total energy consumption. We are self-sufficient in virtually all our energy resources except for natural gas and oil, and natural gas imports come mainly from Canada. By far the most important shortfall is in the oil sector, where we import over half of our needs.

Following the oil shocks of the 1970s, the United States and other leading economies have diversified their sources of supply, largely through increased production in the Western Hemisphere, the North Sea and West Africa. Today, U.S. oil imports come from four key countries - Canada, Mexico, Venezuela and Saudi Arabia.

The rate of growth in U.S. oil demand has slowed significantly since the first oil shocks because of substantial increases in energy efficiency, particularly with regard to transportation, buildings and appliances.

The energy intensity of the U.S. economy has declined by 30 percent since 1970, meaning that we have reduced the amount of energy required to produce each unit of economic output by nearly one third. Nevertheless, based on current trends, the United States will be importing around two thirds of its oil requirements by 2020, even assuming increased efficiencies.

That trend is evidence of a larger problem, which is a geopolitical market problem. The bulk of the world's low-cost reserves and the spare capacity lie in a very volatile region of the world.

We must think long term. We are not interested in setting arbitrary, near-term targets for import dependency that are unachievable.

We would prefer to develop energy technology, achieve the breakthroughs and reduce the cost of alternative technologies, while facing the reality that we must increase domestic supplies of energy to accommodate America's projected economic and population growth in coming decades, ultimately relying on free energy and technology markets to set the optimal outcomes.

In any case, our energy security concerns extend beyond the availability of our own oil imports, a fact that often gets lost in the debate. The oil market is global, and energy security for the United States is linked not only to our energy supplies, but to those of our trading partners.

Any serious and prolonged disruption in energy flows from any one region in the world could adversely affect our economy and those of our trading partners, even if our own energy trade was not physically disrupted.

The world oil market, not the U.S. oil market, sets the world oil price. And the world oil price strongly influences U.S. domestic gasoline prices and, through a substitution effect, the price for natural gas.

In our dialogue with major oil producers we have repeatedly received assurances that they oppose the use of oil supply as a political weapon. Oil market instability harms producers and consumers alike, and we are confident that producers would work for market stability.

There are other measures that consuming countries could take, if needed. In the United States, for instance, President Bush has directed that the Strategic Petroleum Reserve be filled to its 700-million barrel capacity, a level that it has never reached before. It is now at over 600 million barrels, the highest level ever, and climbing.

We are currently in the process of filling the Strategic Petroleum Reserve (SPR) through a royalty in-kind program, whereby the federal government receives royalty payments from production on federal leases in the form of oil, rather than cash. The oil is then deposited in the SPR.

Working with its allies in the International Energy Agency (IEA), the United States also participates in an emergency response system that can put strategic stocks on the market to mitigate any cut-off of physical supplies. The IEA member countries currently hold stocks representing about 114 days of imports.

Forecasts for oil export capacity growth by country show that among the fastest growing sources will be the countries of the Caspian Basin, Nigeria, Canada and Russia. While there are exciting developments in these areas, however, the Middle East still holds some 67 percent of the world's proven oil reserves, and the Persian Gulf holds 90 percent of the spare oil production capacity.

With its huge, low-cost reserves and spare production capacity, the Middle East will continue to play a pivotal role in the world oil market for years to come. That is one reason why, in our ongoing dialogue with suppliers, our contacts with Saudi Arabia, the world's largest oil exporter, are of prime importance.

One place for productive discussions with Saudi Arabia is the International Energy Forum (IEF), which seeks to bring consuming and producing countries together to share perspectives. We are pleased that the IEF's secretariat will be based in Riyadh, at the invitation of the Saudi government.

While the main role of the secretariat will be to further the dialogue between producers and consumers through support of the IEF process, it also plans to focus on improving the data that serves as a basis for the functioning of the world oil market.

The IEF has been instrumental in building support for oil market transparency through better data and has lent its support to the Joint Oil Data Initiative, the goal of which is to accelerate and improve the availability and timeliness of data and to harmonize key data across countries.

In our efforts to increase and diversify sources of global energy, we welcome Saudi Arabia's desire to negotiate a $25 billion natural gas investment program with several international oil companies. The project has had some fits and starts, but we remain hopeful that the negotiations will prove successful.

This initiative could serve as a bellwether for foreign direct investment in other sectors of the Saudi economy, and should help to expand economic growth and employment opportunities for Saudi Arabia's growing population.

We are also optimistic about Kuwait's $7 billion plan for foreign oil companies to develop Northern Kuwaiti oil fields; and we think Qatar serves as a good example of the progress that can be made through opening an economy to outside investment.

Qatar offers a good business climate for foreign investors, and its national oil company, the Qatar Petroleum Corporation, has a long history of joint ventures with U.S. companies. Most of the approximately $10 billion in direct investment in Qatar's economy is in the energy industry.

The United States also recognizes Russia's pivotal role in the global energy market. Russia has vast oil and gas resources, and the development of those resources significantly increases the diversity of supplies to the world market. Russia is the second largest oil exporter after Saudi Arabia.

Last May, President Bush and President Vladimir Putin launched the U.S.-Russian Energy Dialogue. Under it, we have engaged Russia in an in-depth energy dialogue through energy and commercial energy working groups.

We are also planning annual Commercial Energy Summits, the first of which was held in Houston in early October. That meeting brought together not only officials of our two governments, but also Russian and U.S. energy executives, to talk about deals and opportunities that we think will bear fruit.

In the Caspian, we actively support creating an East-West energy corridor that will allow energy from Azerbaijan, Kazakhstan and Turkmenistan to reach world markets at competitive prices. We support efforts to build multiple pipelines so that the Caspian Basin will continue to be a rapidly growing source of reliable new energy supplies.

These efforts are intended to complement, not distract from, our support for Russia's efforts to develop its energy export potential. President Bush has stressed cooperation with Russia on Caspian energy development, and we view this as a win-win situation.

West Africa also has significant potential. Offshore, deep-water operations in Nigeria, Angola and Equatorial Guinea look increasingly promising. Some experts believe that West Africa's production capacity could rise by 58 percent by 2010, from 4.3 million to 6.8 million barrels a day. West Africa is a particularly attractive source of energy because of the quality of its crude.

Venezuela is our fourth largest oil supplier and one of our largest regional trading partners. In our energy dialogue with Venezuela, we support U.S. energy investors and encourage the liberalization of Venezuelan rules on foreign direct investment. We support Venezuelan moves to open up the natural gas sector with the participation of U.S. companies.

Our objectives are to further the concept of a free trade area of the Americas, underscore the importance to Venezuela of a good investment climate, and advance talks about a bilateral investment treaty.

There is also a robust energy dialogue between the United States and the European Union and its member states, such as Britain and France. There are many similarities in our approaches, for example, to nuclear power and promoting technology as a means to address the long-term challenge of global climate change.

Finally, we put a lot of emphasis closer to home in North America. We would like to see Canada develop its full oil and gas potential and expand its energy trade with the United States.

We have moved to expedite the authorization of cross-border energy projects, with both Canada and Mexico, which we view as extremely important. We will do all in our power to make sure that Canada and Mexico develop their domestic energy resources, each in their own way, at their own speed and in full respect of their sovereignty.

The United States has the infrastructure and the capability to expedite construction of the facilities required to bring gas, electricity and oil efficiently over our borders from these two neighboring countries.

As part of our longer-term program to diversify our energy supplies, we are funding research into advanced fuel technologies, particularly hydrogen fuel cell technology. The Department of Energy has implemented a new partnership with automakers to accelerate the development of advanced, fuel-efficient technologies such as hybrid gas-electric and hydrogen fuel cells.

And the fiscal centerpiece of the tax incentives in the President's National Energy Plan - which were devoted only to renewable and emissions-free energy - is a consumer tax credit for a hybrid and fuel cell vehicles.