The outcome of ongoing Greek and Iranian negotiations will affect the future of European Union (EU) and its Eurozone subset hydrocarbon consumption as well as the national origin of imported raw and refined products.
Eurozone will need Significant Imports of Raw & Refined Hydrocarbon Products for Foreseeable Future
Although EU primary energy consumption has decreased by 0.2% since 1990, the EU-28 dependency on energy imports has increased from less than 40% of gross energy consumption in the 1980’s to reach 53.2% in recent years. According to the European Commission Directorate General for Energy, even after taking into account best efforts to substitute renewal energy and efficient energy use for fossil fuel consumption, the future of the EU economy remains inextricably tied to cost-effective imports of refined and raw hydrocarbon products.
Effect of Greek Decision on Value of Euro versus Dollar
Imported crude oil and most refined products are priced globally in US Dollars. The value of the Euro versus the Dollar therefore significantly influences the ultimate retail price paid by EU consumers. While Greece consumes a tiny percentage of global oil & gas, the ultimate decision to continue membership in the Eurozone will affect EU hydrocarbon imports due to its effect on the value of the Euro. Largely due to its unprecedented nature, currency analysts are divided on the effect of a Grexit on the value of the Euro. Should the Euro strengthen long-term, Eurozone hydrocarbon imports may well increase, particularly as the EU seeks to substitute more natural gas for coal and as the EU refining sector continues to downsize.
Future of EU Refining Sector
Although thriving recently due to the significant global decline in crude oil prices, the EU’s failure to invest in new refining technology and efficiency upgrades as well as global structural changes in crude pricing by gravity and sulfur content hinder its ability to compete with new and expanded export capacity from North America and the Middle East. North American exports to the EU continue to grow, and North American refiners are taking market share from EU exports in regions such as West Africa. Continued North American investment in midstream infrastructure to bring unconventional production to export-oriented and expanded downstream refineries and petrochemical plants make continuing growth in exports to Eurozone customers more likely.
North American LNG exports to EU Probable?
Although originally conceived as platforms to export LNG to Asia, developers of US LNG trains are now looking to the EU as an important market. US LNG exporters are ready, willing, and able to make the EU market work. Many leaders in the EU see imported LNG as a long-term strategy relieving much of Western Europe from its dependence on imports from its less than reliable Russian suppliers.
Effect of Iranian Decision on Eurozone imports of Iranian Crude
Although significant speculative ink has been spilled on the effect of any possible nuclear accord with Iran on the global price of crude oil, any short-term increase of exports from Iran to the EU looks unlikely. For example, it is legal for Iran to export condensate, but most of the condensate sitting in oil tankers off the coast of Iran remains unsold because of its high sulfur content. US exports of its low-sulfur, light condensate, on the other hand, has surged since the Obama administration instituted a regulatory change allowing its export, taking away market share that Iran may have met if its condensate had met importing refiners standards. Lifting sanction again Iran would likely increase Iranian crude oil exports to the EU in the longer term.
While the EU refining sector is currently enjoying high margins and run rates, its future decline due to lack of investment and any renewed West Texas Intermediate discount to Brent could yield market share to US and Middle Eastern refined product exporters.
While a possible Grexit could affect short-term imports due to its effect on the Euro, any Iranian accord would not likely be felt until the Iranian domestic infrastructure is rebuilt and sanctions are lifted.
Regardless of the mix of refined versus raw products and currency value, EU and its Eurozone components will need significant imports of oil & gas and derivative products to maintain its standard of living and international economic competitiveness for the foreseeable future.
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