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Security of supply in transition

Security of supply in transition
Pedro Miras, chairman of the Spanish Strategic Petroleum Reserves Corporation explains the importance of the strategic storage of petroleum products in the event of a crisis

For more than 40 years, security of supply has been a central topic in the energy debate among hydrocarbon importing countries. In 1974, in direct response to the oil crisis of 1973, which followed the interruption in supply declared by OPEC, the International Energy Agency (IEA) was created with the objective of ensuring the security of energy supply. Its member states actively commit to maintaining stocks of crude oil equivalent to 90 days' net imports, along with the implementation of joint action in the event of an interruption or scarcity of supply.

Over the course of its history, the IEA has activated its emergency procedures three times due to major interruptions in supply: during the first Gulf War in 1991, following the effects of Hurricanes Katrina and Rita in 2005 and during the 2011 civil conflict in Libya.

In 1991, in the wake of the Gulf War, the IEA implemented a contingency plan for 2.5 million barrels per day over 15 days, most of which came from a release of stocks.

The second intervention occurred in 2005, following the devastating effects of hurricanes Katrina and Rita, which destroyed practically the entire petroleum industry infrastructure around the Gulf of Mexico. The 26 IEA member states at the time combined to release the equivalent of 60 million barrels into the market (2 million barrels a day for 30 days), through a combination of emergency response measures involving the use of security reserves, increasing their own production and restricting demand.

The last release of emergency stocks took place in June 2011, when maximum seasonal demand coincided with the interruption of crude oil supply from Libya, which was in a civil war. On this occasion, 60 million barrels were released from the strategic reserves of eight member countries of the IEA, equivalent to 2 million barrels per day for a period of 30 days.

The issue of security of supply has relevance in Spain, given that the level of self-sufficiency in both oil and natural gas is below 1%. Spain has a combined security of supply system, in which responsibility for maintaining hydrocarbon stocks is shared between its Central Stockholding Entity, CORES (Corporación de Reservas Estratégicas de Productos Petrolíferos), and the oil and gas industry.

The combined system of dividing emergency reserves between an agency and the industry presents several advantages. On one hand it allows greater control of the reserves as they are mostly located within a single entity. On the other hand, it externalises industry debt - as the industry is not obliged to maintain all emergency stocks. This solution also reduces the financial costs, as the agency has greater access to credit, and provides improved flexibility when release for consumption becomes necessary.

CORES was established in 1995, as part of a process of liberalising the Spanish petroleum sector. Its principal mission is to constitute, maintain and manage strategic reserves of oil products and control the minimum security stocks held by the industry. Due to the information that all hydrocarbon sector entities are obliged to provide by law, CORES is also the leading statistics and official information source in the hydrocarbon sector in Spain.

CORES' main objective is to ensure the continued security of supply in Spain. The minimum level of petroleum stocks that must be maintained is 92 days of consumption: 50 are held by CORES and the remaining 42 days by the industry. In addition, the industry is obliged to maintain 20 days' consumption supplies of both LPG and natural gas. One of the main roles of CORES is to monitor stock reserve obligations by the industry.

In the event of a supply crisis, whether national or international, CORES will coordinate the release for consumption of the necessary stocks under the supervision of the Spanish Ministry for Ecological Transition. During the last IEA collective action in June 2011, CORES oversaw the release of 2.3 days of petroleum products reserves from the industry and recovered their obligation of 50 days' stocks within a year.

The level of strategic reserves depends on the national consumption of petroleum products. The peak oil demand in Spain was achieved in 2008, with 75 million tonnes. In 2018 demand has been less than 60 million tonnes, and it seems unlikely that Spain will achieve the maximum value once again. In the same way, the importance of petroleum in worldwide energy consumption has declined considerably over the last few years, from 46% of the total in 19801 to 34% in 20172.

Nevertheless, oil will remain important in the coming years. According to different forecasts, fossil fuels will continue as the energy base in the medium term, in almost all cases covering around three quarters. In this way, oil will continue to account between one quarter and one third of the worldwide energy consumption, from 23% in 2040 according to the sustainable development scenario of the IEA World Energy Outlook 2018, to 28% according to the OPEC World Oil Outlook 2018.

Oil demand will vary based on fluctuations in the economy, environmental policies and energy efficiency, and oil security of supply systems will vary accordingly. However, the future of this sector is exposed to many uncertainties: mobility models, environmental regulation, consumption mix, digital and new technologies, or new competitive dynamics in the industry, among others. The only certainty is the existence of a challenge to be faced.

In this future scenario, monitoring the demand evolution will be key to detect changes in market trends and in emergency reserves, as demand is the base of the security of supply systems in non-producing countries, such as Spain. Therefore, information is an important element of security, and it will be an essential tool to adapt to the changing environment.

Miras will be speaking more about the security of supply and the role of strategic storage during the FETSA conference on June 12 in Tarragona. For more information visit the event website.

References

11980 figures from the US Energy Department

2 2017 figures from the BP Statistical Review 2018



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