energy in western europe

Energy in Western Europe

Elizabeth Taylor and William G. Davey

Western Europe is exceptionally dependent on imports for Its energy supplies and accounts for about half the world's energy imports. Although the countries of the region have widely differing energy resources and a diversity of energy policies, they all share the fundamental policy objectives of reducing energy cost and, particularly, minimizing oll imports as well as diversifying sources. Although projections of future use are notoriously unreliable, there is a projected reliance upon imports in the year 2000 for over 50% of fossil fuel needs. Thus continued, firm programmes and policies are essential to meet this chal- lenge.

Keywords: Western Europe; Energy policy; Energy imports.

The authors are with the Los Alamos National Laboratory, PO Box 1663, Los Alamos, NM 87545, USA.

Despite their wide diversity, the countries of Western Europe share a fundamental objective common to all their energy policies. Each is endowed with different energy resources, has a different pattern of energy requirements, and relies traditionally on a different mix of fuels. Finally, each has a different political system with different objectives and constraints governing the formation of energy policy.

Nevertheless, there is a strong common thread running through the energy policies of all the individual countries of the region. All became very heavily dependent on oil during the growth period of the 1960s and early 1970s. The great majority are heavily dependent on energy imports, especially oil. Only three (the UK, Norway, and the Netherlands) are self-sufficient in energy production, and only two of these (the UK and Norway) are net exporters of oil. Every country has been severely affected by the impact of escalating oil prices in 1973/74 and again in 1979 on the growth of their economies, and for most there have also been concerns over massive oil import bills and security of oil supplies. All therefore share the same primary objective - to reduce dependence on oil. Only a limited number of realistic options are available for achieving this objective and inevitably a survey of individual countries' energy programmes ~ reveals similar policies recurring throughout Western Europe.

Further, Western Europe plays an extremely significant role in determining the pattern of world energy trade and it depends on imported fuels for some 50% of its primary energy supply. As a result, it is the importer of half of the world's energy exports.

We therefore believe that it is valuable to consider the energy situation of Western Europe as a whole, and against this background to outline the policies adopted throughout the region by many different governments.

1Individual national energy balances and energy policies are outlined in the Appen- dix to this paper. Detailed assessments are available as Reports 6-8 and 11-16 in the Los Alamos Policy Research Series, from Los Alamos National Laboratory, Los Alamos, NM 87545, USA.

European energy situation Long-term trends Figure 1 illustrates the changing pattern of energy consumption in Western Europe as a whole from 1960 to 1980, and includes projections for 1990 and 2000 (see the section on future trends). Figure 2 shows the ratio of indigenous production to consumption for each of the fossil fuels over the same period, also for the region as a whole.

0301-4215/84/040409-16503.00 ~ 1984 Butterworth & Co (Publishers) Ltd 4 0 9


Figure 1. European annual primary energy consumption by fuel (million toe), actual and projected.

Sources: United Nations, World Energy Supplies 1950-1974, United Nations, N e w York, 1976. International Energy Agency, Energy Policies and Programmes of the lEA Countries: 1981 Review, OECD, Paris, 1982. International Energy Agency, Energy Balances of the OECD Countries 1976-1980, OECD, Paris, 1982.

Figure 2. Ratio of European indigenous production by fuel, actual and projected.

Sources: S e e sources for Figure 1.

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In 1960, coal was still the dominant fuel, with an annual coal consumption of some 350 million toe accounting for almost 60% of total primary energy use. Over 90% of this coal was produced within the region, but in several countries not well endowed with coal resources (for example, Italy and Sweden) oil had already overtaken coal as the premier fuel.

In Western Europe as a whole, oil accounted for some 30% of total primary energy use. The only other energy source of any significance was hydropower, and natural gas consumption was low (respectively 9% and 2% of total primary energy use).

During the 1960s, rapid economic expansion in Western Europe was matched by rapid growth in energy demand and by 1973 total primary energy consumption in the region as a whole was almost double that recorded in 1960. In particular, demand for oil had multiplied almost four-fold to some 700 million toe, and oil - almost wholly imported - now re )resented some 60% of total primary energy consumption. In

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410 ENERGY POLICY December 1984


individual countries much higher levels of oil dependence were reached; in Denmark, for example, oil dependence in 1973 was almost 90%.

Domestic coal production could not compete with imported oil. Demand for coal declined steadily and by 1973, at some 260 million toe, represented only 22% of total primary energy demand. Domestic coal production declined accordingly. The only domestically produced fuel whose use also expanded during the 1960s and early 1970s was natural gas, with the discovery and development of large offshore reserves in the Netherlands and the UK. By 1973 gas (almost entirely produced within Western Europe) accounted for 11% of total primary energy use. Several countries had nuclear power plants in operation, but the nuclear contribution to total energy supply remained insignificant at that time. Development of hydropower capacity was not able to keep pace with growth in energy demand during the 1960s, and hydro production in 1973 met only 6% of total primary energy demand compared with 9% in 1960.

Western Europe was thus 60% dependent on imported oil and the majority of this oil came from the Middle Eastern and North African countries which had joined with other producers to form the OPEC cartel. The Arab boycott of 1973 and the subsequent price escalations of 1973/74 therefore hit Western Europe particularly hard. As a result of economic recession, and of deliberate attempts to conserve energy and substitute alternative fuels for oil, demand for oil came down and stayed down, never again reaching its 1973 level. Total energy demand was also depressed in the years immediately following this first 'oil crisis' but recovered gradually in the late 1970s, with other fuels substituting increasingly for oil.

By 1980, demand for natural gas had increased to 15% of total primary energy use. The decline in demand for coal was arrested, and coal use grew steadily, more or less keeping pace with the modest growth in total energy demand. Both nuclear and hydro generating capacity were dramatically increased, although their contributions remained at a fairly low level - 4% and 9%, respectively, of total energy supply. Oil dependence in the region as a whole had declined to 51% and in addition there had been rapid development of Western Europe's domestic oil reserves so that domestic production was now able to meet some 20% of regional demand.

Nevertheless, the second series of oil price increases in 1979/80 again severely affected West European economies. It contributed critically to the industrial recession from which most West European countries are only now beginning to recover. Partly as a result of reduced industrial activity and partly as a result of increased efficiency of energy use, demand for all fuels was depressed in 1981 and 1982, with the most significant decline being in the demand for oil.

Oil - still the dominan t fue l

Despite the substitution of other fuels, oil still accounts for almost 50% of total primary energy demand in the region. Western Europe's only sizeable oil reserves are under the North Sea and production was running in early 1983 at around 2.9 million barrels per day (140 million toe per year), or about one-quarter of demand. The great bulk of oil imports from outside the region come from the OPEC countries of the Middle East and North Africa. OPEC imports supplied over 70% of total oil demand in Western Europe in 1980 and most countries

ENERGY POLICY December 1984 411


remained dependent on OPEC supplies for anything from 70 to 90% of their oil requirements in 1981. Notably, in 1981 Saudi Arabia supplied over 40% of oil import requirements in the European Community.

Most West European countries identify two prime concerns associ- ated with the continuing high level of oil imports: the economic cost, and vulnerability to an interruption of supplies, particularly that from OPEC countries. Almost all European governments have therefore adopted policies designed to:

• reduce dependence on oil as a proportion of energy use, if possible by conservation and substitution of other fuels, mainly natural gas and increasingly coal;

• increase security of supply, primarily by diversification of import sources. 2

2Most countries have made some effort to increase the proportion of supplies from non-OPEC sources, in particular the North Sea and to a lesser extent the USSR, but dependence on OPEC suppliers remains high. Several countries have attempted to improve oil supply security by entering into government-to-government contracts with producer countries (frequently OPEC members).

The other fossil fuels: natural gas and coal

By 1980, natural gas represented 15% of total primary energy demand in Western Europe as a whole. Growth of demand for natural gas during the 1960s and 1970s reflected both its desirability as a fuel and at least after 1973, a deliberate policy of oil substitution in many West European countries. But it was also largely attributable to increased availability of indigenous West European supplies. The UK exploited large reserves of gas in the North Sea, but the main source of gas in Westdrn Europe during the 1970s was the Netherlands, where the discovery and development of the massive Groningen field had a profound influence on the pattern of gas supply and use throughout the European Community (outside the UK). The Netherlands supplied over 50% of the Community's demand during the 1970s, and continues to do so today. In addition, Dutch exports were the raison d'etre for the European natural gas grid. The only major West European consumer of natural gas not connected to the grid is the UK.

More recently, Norwegian natural gas reserves have begun to be developed and this has helped to boost West European production, as reserves and production elsewhere have begun to decline. The main factor in declining production has been the output of Groningen gas, which peaked in 1977 and has since been falling gradually, in response to a deliberate policy of the Dutch government to control depletion rates and preserve some Groningen gas as a strategic reserve.

Nonetheless, West European production still accounts for the great majority of natural gas consumption in the region and the only significant non-European suppliers are the USSR and Algeria. In 1980, the USSR and Algeria accounted for only 10% and 3%, respectively, of total West European natural gas supplies.

Although coal demand throughout Western Europe slumped from the mid-1950s to the mid-1970s, this trend has now been reversed with increasing substitution for oil, especially in electricity generation. In 1980 coal accounted for 21% of total primary energy use in Western Europe as a whole, and for over 30% in the UK and FR Germany. Other countries are pursuing programmes designed to increase coal use. For example Denmark, with no indigenous coal reserves, has achieved a remarkable conversion of electricity generating capacity from 62% oil-based in 1973 to 82% coal-based in 1980. Other nations which depend entirely on imported coal (Sweden, Italy, the Netherlands) are pursuing plans to increase coal use greatly.

412 E N E R G Y P O L I C Y December 1984


Production within the region as a whole meets 80% of coal demand. However, coal production in Northern Europe is very expensive relative to imports from countries outside the region. Many West European governments are anxious to preserve their national coal-mining industries, in part because they offer a secure domestically produced source of energy supply, but in the main for social and political reasons. Thus a market for nationally produced coal has been preserved in the UK, FR Germany, France and Belgium.

Imports from outside the region represent some 20% of West European consumption. Major sources of imports at present are the USA (38% of total imports in 1980), South Africa (20%), and Poland (21% in 1980 but greatly reduced in 1981 by Poland's political upheavals).

Primary electricity: nuclear, hydro and the 'new' energy sources

Many European nations saw nuclear power as the perfect solution for their relatively resource-poor and energy-intensive economies, and several embarked on ambitious nuclear programmes in the 1960s and early 1970s. Already nuclear power accounts for a significant proportion of electricity generation in several countries: over 30% in 1981 in France, Sweden and Finland, and over 25% in Belgium and Switzer- land. In Europe as a whole, however, nuclear power contributed only 4% to total primary energy supply in 1980, and nuclear construction programmes have been stalled due to a variety of factors including:

Q public opposition to nuclear power for environmental and safety re aso ns;

• multiplication of licensing requirements and hence costs; • oversupply of generating capacity in the light of declining forecasts

of electricity demand; and • lack of the necessary financial and management resources.

There are some signs that prospects for the construction of new nuclear stations are improving in some countries. For example, efforts have been made to speed up the licensing process in FR Germany, and in Italy plans for two new stations are going ahead. Such cases may, however, reflect special pressures: West German industries are concerned that the cheap nuclear electricity available to firms in France is undercutting their competitive position, and Italy has over the past few years suffered from a chronic shortage of generating capacity.

On the whole, the situation for nuclear power in Europe remains bleak. Examples include the UK's planned 10-year programme of reactor construction, which has been held up by the long-running inquiry into the first proposed PWR site (Sizewell B). Given the stagnant electricity demand, prospects for any more than two additional reactor starts over the next 10 years now seem unlikely. In Sweden, the referendum of 1980 resulted in a decision to phase out nuclear power by 2010; no new stations will be constructed. In Austria, the Zwentendorf power station remains mothballed, without ever having operated, following a 1978 referendum banning the exploitation of nuclear power. Ambitious Spanish plans to build up nuclear capacity have been drastically trimmed. In Turkey, where there is considerable interest in the introduction of nuclear power, the necessary finances have not been available.



aN. J. D. Lucas, Energy and the European Communities, Europa, London, 1977.

Hydroelectric power is very significant in much of Western Europe, especially Scandinavia, Austria and Switzerland where it accounts for up to 70% of electricity generation and almost 30% of total primary energy supply. Apart from hydropower, few countries expect the renewable energy sources to contribute more than a few percent to national energy requirements this century.

International relationships - collective European energy policy?

With many common interests and common problems, it might seem that collective action by the nations of Western Europe would clearly be advantageous in their pursuit of common policy objectives. Individual countries do participate in several government-level organizations dealing with energy matters, and these are described below. However, progress towards more effective and widespread collective action has been slow. The basic approach of most countries has been to solve their problems independently and with minimal consideration of their partners in the region.

European Community (EC). When the original six-member European Economic Community was established in 1957 one of the prime objectives was a unified European energy policy, based on large-scale development of nuclear power: indeed, those who viewed real political union as the final objective of the EC saw the 'United States of Europe [as] a ° federal power linked to the peaceful exploitation of atomic energy'. 3

The intervening years, however, have produced little in the way of a common energy policy. Broadly speaking, they have seen a continuing struggle between the Commission who have proposed many energy policy initiatives, and the Council of Ministers who have been unable to reach unanimous agreement on many major issues because of the wide diversity of interests of the countries they represent.

While opposing national interests have held back the development of a common energy policy, a united approach has not proved possible even where member states share a commonality of interest, for example:

• emergency arrangements in an oil or gas supply stoppage (some oil supply arrangements were finally agreed after their institution by the lEA);

• a Europe-wide rationalization of excess oil refinery capacity; and • the development of nuclear power - the main objectives of Euratom

have never been achieved and Euratom's R and D programme has been insignificant compared to national programmes.

International Energy Agency (lEA). The lEA was formed in 1974 to counter the OPEC oil cartel through a joint programme of

• cooperation to reduce oil dependence (including energy R and D programmes);

• information collection; • cooperation with other countries (including OPEC countries) to

stabilize international energy trade and optimize use of world energy resources; and

• emergency planning for any disruption of oil supply.

In two of these areas, the Agency has had a notable impact on its



member countries' energy programmes. Through the lEA, many multilateral R and D programmes have been initiated, notably in the fields of coal utilization and the renewable technologies. The IEA's emergency programme has not so far been triggered by the oil supply situation but a network of oil stocking and oil sharing requirements is now in place against such an emergency.

In the eight years of its existence, the lEA has arguably had a more significant influence on its members' energy programmes than the EC in its 25 years, perhaps because it has adopted a more pragmatic approach, seeking to deal only with issues of common and immediate interest to its members, and has avoided any concern over intrusion into areas of national sovereignty. One of the greatest limitations on the lEA as a forum for European energy policy-making has been the refusal of France to participate.

Other international organizations. West European governments also participate in other energy-related international organizations. All are members, along with the Eastern bloc countries, of the United Nations Economic Commission for Europe. In the energy field, this is primarily an information gathering organization. The Nordic Council (comprising Denmark, Iceland, Norway, Finland and Sweden) is a consultative body on issues of joint action and/or common interest in the Scandinavian area and deals with relevant energy issues, for example, the integration of these countries' (excluding Iceland) electricity grids in the Nordel network, and oil import policies. West European nations are also represented in several government level organizations in the nuclear sector, notably the International Atomic Energy Agency, and the OECD's Nuclear Energy Agency.

• op cJt, Ret I . Slntemational Energy Agency, World Ener- gy Outlook, OECD, Paris, 1982, pp 466 and 470. 6'Europe acts to inch out of energy dol- drum', European Energy Report, Financial Times, London, 21 January 1983, pp 1-3.

Future trends

Consumption Projections of future energy consumption are notoriously unreliable. They depend critically on predicted rates of economic growth and, to a lesser extent, on fuel prices and government programmes of energy conservation and fuel substitution. Projections made in the early 1970s grossly overstated 1980s demand but, equally, current projections based on the high and apparently rising oil price of 1980/81 may understate the actual outcome in 1990/2000, in the light of the depressed oil prices now prevailing. 'Best estimate' for 1990 and 2000 (based on referenced Los Alamos reports 4) are included in Figure 1. These are consistent with estimates published during 1982 by the IEA 5 and DRI 6 for the year 2000.

However imprecise the actual figures, the general trends are clear, provided that two basic assumptions are correct: that Western Europe returns to positive but limited economic growth rates, and that no radical changes in overall regional policy occur over the rest of this century.

On this basis, the developments which may be anticipated for the year 2000 are:

• an increase in total primary energy demand to a level perhaps 50% above 1980 requirements. The highest growth rates will tend to be in the least developed countries of Western Europe, notably in the Mediterranean region;



• little change in the absolute level of oil use. Growth in total demand will therefore be accommodated by other fuels and, as a result, oil's share of total primary energy demand may decrease to approximately 35% by the turn of the century;

• significant increases in consumption of natural gas (by approximately 60%), coal (by approximately 70%), and hydroelectricity (by approximately 100%) which together will more than keep pace with growth in total demand; and

• a five to six fold increase in the nuclear contribution, making it equivalent to natural gas in terms of its contribution to total supply.

Production

Western Europe's principal oil fields, those in the UK sector of the North Sea, are predicted to peak in production in the late 1980s. The maximum increase in Norwegian oil production which may be expected to the turn of the century is some 15 million tonnes per year. Thus there seems to be little chance that oil production will not decline steadily in the 1990s and beyond. Total West European oil production is therefore expected to increase from its 1980 level (some 120 million toe) to a level in 1990 of almost 150 million toe, but by the turn of the century it is most likely to have fallen back to under 120 million toe, meeting less than 20% of anticipated European oil demand.

Natural gas production may also be lower by 2000 than at present. However, it should be noted that the potential rate of production is a matter of some debate, especially for the UK and Norway where reserves are large and not yet firmly established. Production will of course depend - as for oil - on the price obtainable for gas and on the general fiscal and regulatory regime imposed by the relevant national government.

The level of West European natural gas production in the medium term will depend critically on whether the Netherlands maintains its stated policy of phasing out gas exports in this century and conserving remaining gas as a strategic reserve, and there are indications that this policy may be revised in the light of falling gas demand. If not, Dutch production would decline from 65 million toe in 1980, when over half was exported to the Netherlands' European neighbours. Recent estimates of production in 2000 are highly variable but in any case do not envisage any significant excess above the Netherlands' own requirements being available for export.

Of the other natural gas producers, the UK is expected to maintain its current level of production, which is sufficient only to meet some 70% of projected UK demand. Indigenous production in FR Germany, Italy and France is expected to decline steadily throughout the 1980s and 1990s and gas from other countries is not likely to make a significant or lasting contribution to European supplies.

Only Norway offers any prospect of filling the gap left by the expiration of Dutch export contracts. Norwegian reserves are vast but very expensive to exploit and are projected to increase from current levels (25 million toe) to only just over 30 million toe by 2000. They therefore represent no substitute for declining Dutch supplies. Norwe- gian policy concerns itself with the need to impose a maximum depletion rate to prolong oil and gas production and to minimize its impact on Norwegian society; however, there is no likelihood that the theoretical



ceiling (90 million toe combined oil and gas production) would in any case be reached before 2000.

With coal there is no technical limit on the continuing exploitation of European reserves, but the relative cost of production makes it unlikely that European coal will be able to compete with non-European imports. However, it seems probable that policies of subsidizing production to preserve coal mining jobs will continue to be applied by most European producer governments and the most likely outcome therefore is that production will be maintained at or near to current levels.

Imports

Imports are, of course, determined by the net effects of demand and indigenous production, and the uncertainties of each are compounded in attempting to estimate future import levels. However, we can be reasonably confident in predicting the following trends.

First, there is likely to be a gradual increase in oil import requirements as West European production falls off. The most obvious sources will be the OPEC countries of the Middle East and North Africa which have vast reserves and are relatively close geographically.

Second, an increase in natural gas imports is probable, with the size of that increase depending on the eventual decision of the Dutch government on phasing out gas exports. The natural gas market is a long-term one and existing 10- to 20-year contracts largely determine the pattern of supply for 1990, when imports will be dominated by those from the USSR and Algeria. A projection for the European Community as a whole 7 indicates that Soviet imports in 1990 will account for a maximum of 22% of natural gas consumption. Algeria already supplies LNG to France, Italy and Spain. With new contracts, Algeria's role as a natural gas supplier will become much more significant. Estimates for 1990 indicate that Algeria may supply as much as 16% of total European Community requirements.

Other potential sources are limited. Plans for augmenting supplies by developing LNG production facilities in Nigeria, Cameroon, Qatar and even the Canadian Arctic have been mooted by several European governments or utilities, and there has even been a recent proposal for a pipeline from Nigeria across North Africa to Spain and hence the European grid, but such developments are questionable in a weakened energy market. Without such developments, the USSR and Algeria will almost inevitably come to play an even more significant role in Europe's gas supply by the year 2000. The projections used in Figures 1 and 2 imply collective import dependence in 2000 of 65%, which could conceivably be supplied totally by the USSR and Algeria.

Third, there is likely to be a trend towards increased coal imports. Projections for European coal trade in the year 2000 envisage a greatly increased role for all four of the major current suppliers - the USA, Poland, South Africa and Australia. Minor market shares are also expected to be supplied by Colombia, Canada and China.

~'Communication from the Commission to the Council concerning natural gas', Com- mission of the European Communities Communication COM(81)530, Brussels, October 1981.

Major policy issues Despite the present state of the oil market, with surplus supplies and depressed prices, the future regional energy issues in their broadest sense are likely to be identical to the current issues - cost of energy and

E N E R G Y P O L I C Y December 1984 417


8There is some debate about the relative costs of nuclear and coal-fired generation. A Unipede study in 1982 showed total generation costs to be between 30 and 59% higher for coal than nuclear power, averaged over five countries in Western Europe. Oil-based generation is significantly more expensive than coal-based generation in Western Europe.

security of supplies. After all, oil prices in 1983 are still substantially higher in real terms than those prevailing before the 1979 price increases, and most West European countries are still highly dependent on external and not always reliable sources of energy supply. These two issues can cause conflicts and some balance between them will generally be necessary.

Policies already exist in most European countries to address these issues; namely energy conservation, oil substitution, diversification of supplies and increased indigenous energy production. However, supply diversification and indigenous production can result, at least in the short term, in increased costs. For this and other reasons these policies, which are discussed below, may not be easy to put into practice.

Energy conservation

Conservation is both cost effective and a security benefit in reducing import requirements and most countries have pursued energy conservation programmes since the mid-1970s. Different approaches have been adopted by different countries. Some (eg, the UK and FR Germany) have relied heavily on the impact of energy prices, reflecting real and increasing costs to the consumer, while making available information and advice on energy saving measures. Others (eg France) have introduced extensive regulatory requirements governing the use of energy by all sectors of consumers. Others (eg the Netherlands) have acted mainly through the provision of subsidies towards energy saving investment.

Most other West European countries have adopted some combina- tion of these different approaches. However, the situation is somewhat different in the poorer nations (Turkey, Portugal and Greece and to a lesser extent, Spain and Ireland) where energy consumption per capita is relatively low and substantial growth in energy demand will be necessary for planned economic growth to take place. However, it is in precisely these nations where controlled fuel prices have buffered consumer reaction, and where the scope for government measures to promote energy conservation remains large. In other countries too, government controls on energy prices - in particular, petroleum product prices - have resulted in underpricing; for example, in Italy (which, overall, has a poor record on energy conservation) and in France.

Oil substitution

Substitution of coal, natural gas and nuclear power for oil increases security by diversifying the sources of imported energy. To date, it has also reduced costs and, even with the lower oil prices prevailing in 1983, it seems likely to continue to do so. Most natural gas contract prices are indexed to a mixture of oils and oil products and should fall in parallel with oil prices. As for coal and nuclear power, it seems very unlikely that oil prices would again fall to a level where they could undercut coal or the costs of nuclear generation. 8

Diversification of supplies

Over-dependence on a limited number of sources of supply represents a very real danger, particularly for oil supplies, in view of Europe's continuing heavy dependence on the OPEC producers. In this case,

4 1 8 E N E R G Y P O L I C Y D e c e m b e r 1 9 8 4


diversification does not generally conflict with minimizing costs. The world oil market is fairly flexible and prices tend to be relatively uniform, so Europe's choice of oil supply sources is going to be determined by availability rather than cost. In the long term, a return to greater dependence on OPEC oil seems most probable in view of the vast reserves and low production costs of Europe's traditional suppliers in the Persian Gulf and North Africa.

When we consider Western Europe's growing dependence on imported gas and coal, a possible conflict between cost and security seems more likely to arise. The USSR and Algeria will clearly dominate Europe's natural gas imports around 1990. The main concern now must be that gas imports are expected to more than double between 1990 and 2000. Current base prices for Soviet and even Algerian gas are significantly below those for Norwegian gas at present, and are likely to remain so late in the 1980s and in the 1990s. 9 Alternative third country suppliers of LNG are also likely to prove expensive. It therefore seems probable that additional Soviet and Algerian supplies will be attractive to West European utilities later in the 1980s, from the point of view of price at least.

Coal imports represent less of a security risk, even though there is a limited number of main producers. These are the seven noted earlier - the USA, Poland, South Africa, Australia, Colombia, Canada and China - with potential contributions also from the smaller countries of Southern Africa and India. However, of the seven, three are members of the OECD and may be assumed to share West European interests, and there are no strong political or economic ties between them and Poland, South Africa, Colombia or China, making an 'Organization of Coal Exporting Countries' seem likely.

9International Energy Agency, Natural Gas - Prospects to 2000, OECD, Paris, 1982, pp 134-135. '°'Statistical trends: West Germany', Financial Times, London, 15 February 1982, p 6. 11international Energy Agency, Energy Policies and Programmes of the lEA Coun- tries: 1981 Review, OECD, Paris, 1982.

Enhancing indigenous energy production

The best guarantee of security of supply for Western Europe would be a much higher degree of self sufficiency in energy production. In addition, energy imports impose a very significant burden on the balance of payments of the great majority of West European nations. As an example, FR Germany is Europe's largest consumer of energy by a considerable margin and, although the bulk of West German coal demand and one third of natural gas demand are met by domestic production, the value of energy imports - and hence the cost to the balance of payments - is the highest in Western Europe. In 1980, total energy imports cost some US $60 billion. Energy accounted for 23% of all imports, and net energy imports were equivalent to over 4% of GNP. FR Germany's import bill is generally believed to be primarily responsible for recent balance of payments deficits: some $4 billion in 1980 and $8 billion in 1981. l° At the other end of the scale, Turkey has a relatively low level of dependence on imported oil (40%), but the cost of oil imports in 1980 was equivalent to well over total export earnings. 1 l The impact of energy imports on the balance of payments of West European nations is of course exacerbated by the fact that world prices are in US dollars, at least at the present time while the US dollar is exceptionally strong against all European currencies.

As far as the fossil fuels are concerned, we have noted that European reserves of oil and gas are limited and new finds are increasingly likely to be economically marginal to exploit. Their development is a clear

E N E R G Y P O L I C Y December 1984 419


case of conflict between cost and security of supply. Similar arguments apply to high cost European coal production. The conversion of indigenous coal to synthetic oil and gas is another option for increasing self sufficiency, but even at 1981 oil prices synthetic gas looked only marginally economic, and coal liquefaction was expected to require substantial government subsidy.

There is still considerable scope for some fossil fuel replacement by increased use of primary (indigenous) electricity, both by displacing fossil fuels from present electricity generating capacity and, in the longer term, by increasing electricity's share of final energy use. Western Europe already has a high level of hydroelectricity production and the scope for an increase in this level is limited both by availability of water and environmental concerns. The contribution of the other renewable energy sources, such as solar, geothermal, wind or tides, will remain insignificant for the immediate future.

In the medium term, the most economic and secure prospect for Western Europe would appear to be increased reliance on nuclear power. Nuclear power offers a secure form of energy supply, essentially independent of foreign suppliers, but for a variety of reasons nuclear development throughout Western Europe has been seriously delayed. The extent to which current plans for increased nuclear capacity can be implemented or expanded must be one of the critical issues related to energy dependence in Western Europe.

Perspectives Perhaps the main implication to be drawn, from this review is that Europe's energy import dependence will persist for the foreseeable future. The potential degree of import dependence is very large and many of the producer countries tend to be unstable or otherwise unreliable sources of supply. Most European governments take this view, and their energy policies reflect their attempts to minimize import dependence and to protect themselves against interruption of supply. However, the effectiveness of governments' response to their situation is constrained by the following factors:

• ineffectual central government; • limited fuel availability; • lack of financial and manpower resources; and • environmental opposition.

On the whole, energy issues have remained relatively non-politicized and major political parties in different countries have shared a consensus on most policies. Only the nuclear issue has tended to a party-line approach. However, the rise of specifically environmental parties in several European countries may herald the demise of this bipartisan approach.

Only time can resolve many of these contraints, although it is possible to identify three policy developments which would be influential in improving Western Europe's energy supply base.

(1) Collective action The development of a collective European approach would be most desirable for the security of Western Europe's energy supply, and hence



for the continued economic and political stability of the region. This might be achieved through the European Community but, given the failure of previous EC initiatives and the limited membership of the Community, a less formal structure might be a more pragmatic approach. Such a structure might be based on lEA Europe, but would need to include non-lEA France. Specific and immediate issues which could be assessed are:

• expansion of the natural gas network; • increased electricity interconnection; • cooperative arrangements for the transport of imported coal; • resource sharing in emergencies; • collective R and D; • cooperative development of new overseas supply sources; and • collective political action if supplies are threatened.

(2) Continued pursuit of alternatives to oil As noted above, the continued pursuit of alternatives to oil makes sense both economically and in enhancing security of supply. In the short to medium term, only three alternative fuels represent realistic options - gas, coal, and nuclear. Natural gas has lost two of its main attractions as an oil substitute. The growing tendency to link gas and oil prices is eroding the cost advantage of gas over oil. At the same time, two non-European producers (the USSR and Algeria) are emerging to dominate the natural gas import market in 1990, and perhaps beyond, and it is questionable whether this represents any real advantage over oil imports dominated by OPEC supplies.

Most countries recognize the advantages of coal and/or nuclear power, and it is particularly important for governments to continue to pursue these programmes, accepting as a prerequisite the cost of improved pollution controls and safety requirements.

(3) Long-term self-sufficiency

Finally, it is essential to take the long view and argue that Western Europe should strive to become energy self-sufficent. It is likely that world fossil fuel resources will be acceptably abundant and of reasonable cost well into the next century and it can be hoped that world trade will allow free use of these resources where they are needed. However, the major energy resources are located in relatively few places and many, if not most, are likely to be threatened by political or military events over the next half century.

Thus a long-term collective effort to evaluate the potential for technical energy self-sufficiency is not only justified but essential. All technologies could be assessed, including:

• nuclear technologies; • the renewable technologies (solar power, geothermal resources,

biomass, wind, tide and ocean power); and • the development of premium uses for Europe's high-cost coal

(underground gasification, synthetic fuel production).

None offers a single solution, but all offer the potential of contributing in varying degrees to overall success. It is essential in all cases that the effort be steady and not deflected by short-term consideration.



Conclusions Western Europe is very heavily dependent on imported energy and recent experience has demonstrated how vulnerable this makes the region, both to actual or threatened supply stoppages, and to the economic impact of steep price increases. Almost all countries in Western Europe have policies in place which in one way or another reflect FR Germany's slogan 'away from oil'. These policies look to more efficient use of energy as a whole, but emphasize minimizing oil use before all else, by conservation, oil substitution, diversification of sources of imported fuel and, where possible, enhancement of indigenous energy production.

Despite these policies, oil imports are expected to remain essentially constant throughout the rest of this century and a strong increase in dependence on imported gas and coal is anticipated. Even assuming that current plans for exploitation of indigenous energy sources can all be implemented, Western Europe is still expected to be over 50% dependent on imports for its fossil fuel needs by the year 2000.

There is a potential conflict which may arise between the dual objectives of maximizing security and minimizing costs of energy supplies and many factors which constrain the effectiveness of each government 's response. However , the importance of collective action, continued and determined pursuit of alternatives to oil and natural gas and the maximization of long-term regional self-sufficiency is clear.

Appendix Country summaries

UK The UK consumed some 201 million toe in 1980, 16% of total European demand. The UK is currently a net exporter of energy, with North Sea oil production some 25% above the level of national oil demand. North Sea gas production is augmented by imports from the Norwegian sector, but remaining UK reserves are thought to be substantial. Coal reserves are large and coal production is effectively limited by the level of national demand. There is a well established, if limited nuclear contribution. North Sea production was previously expected to peak in the 1980s and national policy was geared to prolonging the period of self-sufficiency by increased emphasis on coal, nuclear and conservation. However, increased estimates of oil and gas reserves, together with depressed demand forcasts, have pushed back the date at which a return to net imports may be required, and national policy increasingly relies on a free world energy market.

France Energy consumption in France in 1980 was 192 million toe, 16% of European demand. France is dependent on imports for some 70% of its energy and essentially 100%

of its oil. French energy policy is dominated by the need for security of supply. Efforts to develop indigenous resources have concentrated on nuclear power which by 1990 is expected to provide 70% of electricity generation. The French commitment to nuclear power, including fuel cycle and breeder technologies, remains firm despite falling electricity demand forecasts. An attempt is also being made (somewhat unsuccessfully) to revive coal production which is uneconomic and in decline. A policy of diversifying sources of supply has been pursued; however French dependence on OPEC oil remains high and projections of natural gas supply show a high level of dependence on the USSR and Algeria. Investment in conservation is being intensified.

FR Germany FR Germany is the largest energy consumer in Western Europe (272 million toe in 1980, 22% of the European total) and, despite domestic coal and natural gas production, German energy imports are also Europe's highest. Minimizing the cost of these imports has been Germany's main objective in pursuing a policy of oil substitution,


mainly by conservation and increased use of natural gas. The successful conservation programme relies mainly on the price mechanism. Two thirds of gas supplies are currently based on cheap and secure domestic and Dutch gas, but by 1990 other sources, mainly Norway and the USSR, will account for 50% of demand. German production of hard coal and lignite more or less matches national demand, but it is heavily subsidized and import quota are imposed. The nuclear programme has been largely frozen since 1975 by multiplying licensing requirements reflecting concern over safety and the environment, but there are indications of a renewed, modest nuclear commitment.

Norway The Norwegian sector of the North Sea contains very substantial reserves of oil and natural gas. Norway's own energy requirements are small (23 million toe in 1980, 2% of the European total, and over 40% supplied by hydropower) and Norway is a significant oil and gas exporter. Norwegian gas is all exported either to the European grid or to the UK, and currently meets some 14% of total demand in the region. Norwegian petroleum policy has been concerned to maximize the benefits of production to the national economy, partly by imposing a maximum depletion rate. In practice, production has not approached the theoretical ceiling of 90 million toe per year, and is currently some 50 million toe. New fields now under development are expected to allow Norwegian gas to maintain its current share of the expanding European market up to 1990, but maintaining or increasing this level during the 1990s will require the development of further fields, including gas discoveries in the hostile waters of the northern North Sea.

~taZy Italy consumed 142 million toe in 1980, 12% of Europe's total demand. Italy imports 99% of its oil, all its coal, and over 50% of its natural gas, as well as minor quantities of electricity. The resulting level of import dependence of over 80% is among the highest of the major industrial nations. The latest National Energy Plan (previous programmes have never been implemented) aims to provide a much needed increase in electricity supplies by substantial increases in coal-fired and nuclear generating capacity, and also includes wide-ranging conservation measures. Italy remains heavily dependent on OPEC oil and dependence on imports of natural gas is increasing - by 1990 the USSR and Algeria will each supply around 30% of Italian requirements. Imports of coal are expected to reach three times current levels by 1990. The nuclear power programme has been severely delayed and it is doubtful whether, despite current plans, construction of nuclear and coal- fired stations can be completed on the timescale envisaged or whether the massive financing required will be available.

The Netherlands Energy consumption in the Netherlands was 67 million toe in 1980, 5% of European demand. Dutch gas reserves are


estimated at 1900 million toe. Annual production is currently some 65 million toe and over half of this is exported to other consumers on the European grid. Dutch gas meets over 50% of requirement3 in the EEC (excluding the UK). Dutch energy supply is dominated by two fuels - oil and gas - and national energy policy aims to reduce oil and gas consumption by conservation and increased substitution of other fuels, primarily coal. It also aims to prolong the life of the Groningen gas field as a strategic reserve, mainly by restricting exports to current contracts which are due to run out in the 1990s, although the Dutch government has been reviewing this policy and renewing export commitments. Plans to reduce oil and gas dependence are threatened by delays in the coal substitution programme and indecision on whether to build additional nuclear power plants in the 1990s.

Spain Unlike the other major consumers, Spain expects energy demand (70 million toe in 1980, 6% of Europe's total) to continue to grow rapidly throughout the 1980s, with continued development of the Spanish economy. The 1979 National Energy Plan established several main objectives - reducing oil dependence, increasing indigenous production, improving energy efficiency and promoting new technologies. Dependence on imported oil has already been reduced but is still high by European standards. Both coal use and production are increasing and additional imports have been secured. Intensive offshore exploration has not discovered oil, but has established reserves of natural gas which should somewhat reduce dependence on imports and help cope with the planned expansion of gas use. Ambitious plans for additional nuclear capacity have been cut back. Some increase in hydroelectric capacity is planned but the potential is limited. Conservation measures, including more realistic fuel prices, have been introduced.

Sweden Sweden consumed 46 million toe in 1980, 4% of the European total. Dependence on imported oil was very high during the 1970s and the main objective of Swedish energy policy became the reduction of oil demand. There has already been a substantial reduction, due to intensive conservation measures and substitution of nuclear power which supplies some 20% of total energy requirements. However, the nuclear programme became a highly political issue in the late 1970s and a referendum in 1980 led to a decision to commission no reactors after those then operating or under construction and to phase out nuclear power altogether in the first decade of the next century. Swedish energy plans call for increasing use of improved coal and indigenous peat and forest fuels, the introduction of natural gas, and intensive R and D of the renewable technologies, with a very ambitious target of reducing oil dependence to 25% by 1990. This may be difficult to achieve, but the real problems for Swedish energy supply will begin in the 1990s when substitutes will need to be found for the nuclear contribution.



Belgium and Luxembourg Energy consumption in Belgium and Luxembourg in 1980 was 50 million toe, 4% of the European total. Belgium and Luxembourg are dependent on imports for 90% of their energy supply, and totally dependent on imports of oil and natural gas. Although oil dependence has successfully been reduced to below 50% of total demand, the proportion of OPEC supplies remains high. Belgian gas supplies, on the other hand, are dominated by relatively secure Dutch and Norwegian imports. Domestic coal production in Belgium is the most heavily subsidized in Europe; already imports supply 60% of coal demand and this figure is expected to increase. The nuclear programme has been successful to date and by 1985 nuclear power will account for over half of Belgium's electricity generation. However, parliament has postponed any decision on

continuing the nuclear construction programme and further nuclear expansion seems unlikely for the moment. Other European countries Nine smaller countries account for the remaining 13% (166 million toe in 1980) of European energy requirements. However, by 1990 a substantial increase is projected, attributable mainly to growth in the three least developed countries - Greece, Portugal, and especially Turkey. For most of these nine countries the fuel options available are much more limited than those of their larger European neighbours. Most face problems of import dependence and vulnerability to potential interruption of supplies. In many cases, development of alternative resources has been held up by environmental concern in the more developed countries and lack of financial and administrative resources in the others.


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