Europe Should Get Over Oil Storage and Look to Gas, OIES Says

(Bloomberg) -- Europe’s strategic energy reserves shouldn’t be all about oil.

As natural gas gains ground in the global energy transition, the cleanest fossil fuel should be allowed to replace some compulsory crude and oil product storage, according to Thierry Bros, a senior research fellow at the Oxford Institute for Energy Studies. That would help the region use some of its redundant gas storage and could even help meet soaring Chinese demand.

“With gas becoming more important than oil, it would therefore make absolutely no sense to close European gas storage capacity while continuing to have large strategic oil stocks that are very seldom used,” Bros said in an OIES quarterly gas report. “If in 1974 oil stocks were needed due to the oil intensity of the EU economy, this is much less the case today.”

Europe Should Get Over Oil Storage and Look to Gas, OIES Says

Strategic oil stocks, developed in the 1970s as a measure to mitigate the impact of supply disruptions, are still crucial even if the share of the commodity in the European Union’s energy mix has dropped to 38 percent from more than 50 percent. Gas storage sites are being closed due to high costs and low profitability, even if the fuel has more than doubled its share to 24 percent.

As the world is becoming more electrified and extreme weather patterns are more likely, gas inventories are much more useful than oil stocks that cannot be used to generate power in the EU, Bros said. Before closing about 10 percent of gas storage, the EU should think about alternative mechanisms that could be profitable and increase security of supply.

For example, the bloc should consider transforming the actual crude and refined products strategic obligations into an energy storage obligation, allowing all fuels to come up with the cheapest way to provide the required energy storage buffer, Bros said. Military purposes for oil storage should be viewed separately from civilian energy storage with its obligations to prevent blackouts.

Storage sites in Europe can also serve a global purpose as liquefied natural gas trade expands and the increasing number of LNG tankers on the water can be used as floating storage, similarly to how oil markets work.

Traders are increasingly using LNG storage tanks in Europe to supply the fuel to areas where it’s needed most, such as China, which lacks storage capacity. Russia’s Arctic Yamal LNG project uses northwestern European import terminals as transfer points for its cargoes and such transshipments and reloads are often done via terminal storage tanks. Traditional underground caverns can then be used to even out supply and demand in the region.

“If LNG is reloaded away from EU tanks to higher priced markets, EU storage will be called more to balance the domestic supply-demand balance,” Bros said. “Before China manages to build its storage capacity the European gas industry could provide this service to China.”

©2018 Bloomberg L.P.