Bloomberg News

U.S. Shale Boom Prompts EU to Press for Single Energy Market (3)

May 22, 2013

European Union leaders urged faster integration of the bloc’s power and natural-gas markets to lower energy prices as the U.S. shale-gas revolution widens the EU’s cost gap with its largest trading partner.

The 27-nation EU must accelerate efforts to implement energy legislation aimed at breaking down national barriers by 2014 and develop interconnections to end the isolation of some member states from networks by 2015, according to a statement adopted by the leaders’ summit in Brussels today.

The summit initiative came after a record drop in private investment in Europe and the biggest-ever slump in the EU carbon market, designed to cut pollution and stimulate a shift to cleaner fuels.

“The EU’s energy policy must ensure security of supply for households and companies at affordable and competitive prices and costs, in a safe and sustainable manner,” according to the conclusions. “This is particularly important for Europe’s competitiveness in the light of increasing energy demand from major economies and high energy prices and costs.”

At stake is an EU campaign to win energy-policy authority from national officials that compares with existing European powers over monetary, antitrust, trade and agriculture matters. Some governments, including the U.K., are lagging behind in introducing rules in line with EU legislation more than two years after a deadline passed.

Price Gap

If the EU becomes a fully integrated market, it could save as much as 35 billion euros ($45 billion) a year in electricity costs in 2015 compared with 2012, according to the European Commission, the bloc’s regulatory arm.

Shale-gas production has contributed to a widening gap between U.S. and EU industrial prices for energy, according to a commission report prepared for the summit. “In 2012, industry gas prices were more than four times lower in the U.S. than in Europe,” the report said.

As the EU’s oil and gas import dependency is set to increase to more than 80 percent until 2035, the U.S. is on its way to become a net exporter, according to the International Energy Agency.

The increase in European energy prices is linked to the inconsistency of EU policies to boost the share of renewable energy, increase energy efficiency and cut greenhouse gases, as well as to national policies that distort the internal market, according to a study commissioned by BusinessEurope, a Brussels-based employers’ federation.

‘Cost Burdens’

“The U.S. industry already has a head start on global markets -- this means that any additional cost burdens on European industry should be avoided if competitiveness is to be ensured,” Frontier Economics Ltd. said in the study.

While companies such as Chevron Corp. (CVX:US) have begun drilling exploration wells in countries including Poland, shale-gas production in Europe won’t make the region self-sufficient in natural gas, according to a 2012 study by the EU Joint Research Centre. Under the best-case scenario declining conventional production could be replaced and import dependence maintained at a level around 60 percent, it said.

Indigenous Resources

As some policy makers and environmental groups are seeking stricter controls on shale gas exploration, EU leaders agreed it’s crucial to “further intensify the diversification of Europe’s energy supply and develop indigenous energy resources,” according to the conclusions.

Poland’s Prime Minister Donald Tusk told reporters today before the summit that he was satisfied with the wording as it treats shale gas as an opportunity and lets countries explore it as an option in national energy mixes.

Europe needs to diversify its energy sources, boost efficiency, modernize infrastructure and complete the internal market, although shale gas development in Europe may not be a “silver bullet,” according to lobby group Shale Gas Europe, which is supported by companies including Royal Dutch Shell Plc (RDSA), Halliburton Co. (HAL:US) and Statoil ASA. (STL)

Energy costs in the EU will remain above the U.S. because of differences related to infrastructure, rock structure and legislation, Iain Conn, head of BP Plc (BP/)’s refining and marketing unit, said March 16.

‘Cheap Coal’

“Europe is more dependent on imported energy and although Europe is benefiting -- if I can call it that -- from cheap coal coming from the U.S. as a result of this, Europe’s cost of energy for the economy is going to be higher than in the U.S. for the foreseeable future,” he said.

As a net importer, Europe can boost energy efficiency, create a market based on smart infrastructure, exploit conventional and unconventional energy sources and bet on innovation in order to ensure secure and competitive prices, according to the commission. By 2020, the region needs to invest 1 trillion euros to reach its goal, the commission said.

Financing investment in “new and intelligent infrastructure” should primarily come from the market, according to the summit conclusions. Private investment in Europe tumbled by a record 350 billion euros in 2007-2011, 20 times the drop in private consumption and four times the decline in real gross domestic product, according to a report by the McKinsey Global Institute published last year.

Carbon Market

“This makes it all the more important to have a well-functioning carbon market and a predictable climate and energy policy framework post-2020 which is conducive to mobilizing private capital and to bringing down costs for energy investment,” according to the summit conclusions today.

EU leaders will return to the issue of 2030 energy and climate rules in March 2014, after the commission comes forward with a “more concrete proposals,” they said in the document. They will then discuss policy options, taking into account objectives set for a global climate deal sought in 2015.

The leaders’ statement showed that while it is “extremely” important to address the issues of competitiveness and energy costs, they also realize that the climate challenge remains urgent, EU Climate Commissioner Connie Hedegaard said.

“The commission has now also got the green light to present concrete proposals before the end of this year,” she said in an e-mailed statement.

Prices in the European emissions trading system tumbled to a record low of 2.46 euros a metric ton last month amid a surplus of allowances and concerns that lawmakers may fail to reduce the glut. That compares with 25-30 euros expected by policy makers when the cap-and-trade system was created in 2005.

Carbon permits for December fell 6.7 percent today to 3.32 euros a ton, the lowest closing price in more than a week and the biggest one-day decline since May 10.

EU leaders also called on the commission to study how energy prices are affecting Europe’s competitiveness and what response is needed. The EU will need to look at innovative financing methods, improved liquidity in the energy market and the issue of the contractual linkage of gas and oil prices, they said in the statement.

To contact the reporter on this story: Ewa Krukowska in Brussels at ekrukowska@bloomberg.net

To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net


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