New Energy Import Security Index Highlights Challenging European Risk Landscape

Despite the European Commission’s unveiling of its Energy Union Framework Strategy in February of this year, progress towards achieving a common energy policy across the European Union (EU) and boosting the continent’s energy security is likely to be hampered by differing objectives at the national level. The findings of Verisk Maplecroft’s 2015 Energy Import Security Index (EISI) support this line of reasoning, highlighting the challenging risk landscape that will continue to threaten Europe’s energy security over the short-to-medium term.

The 2015 EISI assesses the degree to which countries rely on foreign energy imports to sustain and grow their economies, where greater reliance on imported energy supplies can create significant operational challenges for businesses. Just under half of the countries that are categorised as ‘extreme risk’ in the 2015 EISI are located inside the EU or in its periphery, with countries from the Baltics to the Balkans each found to be acutely at risk of energy supply disruption.

The key findings of this year’s index provide a salutary warning for businesses, underscoring the requirement for companies to regularly evaluate their business models to identify potential pinch points in energy supply chains. Multinationals with assets and operations in ‘high risk’ countries must continue to evaluate their contingency plans to ensure supply chains remain resilient to both energy supply disruptions and unanticipated price rises.

Instability in Europe’s neighbourhood presents supply disruption risks

The ongoing standoff between Russia and the European Union (EU) and US over the Ukraine and conflict in several North African hydrocarbon exporting nations has placed Europe’s ability to cope with energy supply disruption under the spotlight.

Despite the announcement in 2013 of its Energy Strategy 2030, which set long-term goals to meet the country’s energy import security challenges, Latvia is categorised as ‘extreme risk’ in the 2015 EISI. The Baltic republic is nearly 100% dependent upon neighbouring Russia for its oil and gas supply, while the country’s domestic energy production remains limited. Furthermore, Latvia remains isolated from EU energy networks, leaving it exposed to energy supply disruption should Russia cut off gas exports following an escalation of the current Ukraine crisis.

Import-reliant Italy is also categorised as ‘extreme’ risk in the 2015 EISI. The risk of energy supply disruption is likely to increase should the security environment in Italy’s key oil and gas supplier Libya continue to deteriorate, and likewise if there is a breakdown in gas transits between Russia and the Ukraine. If either of these scenarios occurs on a significant scale, Italy will be forced to fall back on stockpiled reserves. Rome would also be prompted into arranging potentially more costly gas shipments from alternative providers. In the worst case scenario, the government may have to order key industries to reduce outputs.

Macedonia, which is currently experiencing a period of severe political instability, is likewise categorised as ‘extreme’ risk in the 2015 EISI. For international investors, Macedonia’s energy infrastructure remains an acute concern, as domestic generation capacity is insufficient to meet peak demand loads. Chronic government underinvestment has diminished the country’s resilience to supply shocks. At present, the country imports upwards of a fifth of its energy supply, a trend that is unlikely to improve over the short-to-medium term.

Closer energy market integration to mitigate against supply disruption risks

By contrast, those European countries that have proved more resilient to potential energy supply disruptions in the 2015 EISI are characterised by their comparatively more diversified energy mixes and greater indigenous reserves of oil, natural gas and coal.

In addition, many of the European countries that are categorised as being ‘medium’ (France, Belgium, the United Kingdom) and ‘low’ (Denmark, Norway) risk in the 2015 EISI also boast greater regional gas connectivity and more competitive markets, which has in certain cases helped relieve dependence from major hydrocarbon exporting nations, such as Algeria and Russia. Others have also notably invested over the last decade in greater storage capacity and LNG infrastructure, drawing on the lessons of previous gas conflicts between Russia and Ukraine that affected much of the continent in 2006 and 2009.

Furthermore, integrating European energy markets and thus boosting the resilience of businesses to potential supply disruptions is a trend that is likely to continue. In February 2015 the European Commission announced proposals for a single market for electricity and gas, based on better and more connections between the bloc’s 28 members. The proposals now need to be approved by both the European Parliament and also EU member states, a legislative process that is likely to take 2-3 years.

It should also be noted that Europe’s electricity grids and gas hubs differ in terms of their stages of development and maturity. Moreover, the mode culture of trading these commodities varies from region to region. Whereas the trading market in North and Western Europe is already well established, it has yet to fully take root in Eastern, South East and Southern Europe.

Steps ahead for boosting energy supply resilience

While a number of European countries are likely to remain at risk of energy supply disruptions in the short-to-medium term, current developments to more closely align EU member states’ energy markets should be positively welcomed by investors from a security perspective. Developing cross-border and also offshore grid infrastructure will help reduce uncertainties over companies’ future investments. Achieving these objectives is however likely to be achieved over a longer timeframe, meaning that in the interim, companies must continue to monitor and evaluate their energy supply chains to ensure that production lines remain running, premises operational and critical technology switched on.

James Appleyard is an Analyst at Verisk Maplecroft, a Natural Gas Europe Partner