The European Oil and Gas Industry - Market Assessment

This Key Note Market Assessment report describes and analyses the European upstream oil and gas industry. As well as covering the exploration and production of oil and gas within the EU, it also provides an account of sources of imports. An analysis of the oil and gas industry is given for each of the EU-25 member states. Downstream gas activities in the EU are analysed in a separate Market Assessment report, The European Gas Industry (published February 2005).

Although the EU does have an upstream oil and gas industry, this is focused heavily in the UK sector of the North Sea. Crude oil production is dominated by the UK, followed a long way behind by Denmark, which accounts for less than a fifth of UK production. The only other countries with any significant crude oil production are Italy, Germany and the Netherlands, and ten of the EU-25 member states have no oil production at all. The main consumer of crude oil and petroleum products is Germany, followed by France, Italy, the UK and Spain. Only Denmark and the UK record higher production levels of crude oil than their consumption rates of crude oil and petroleum products.

As for natural gas, the main producer is the UK, followed by the Netherlands, with just under 60% of the UK's output. The only other countries with any significant gas production are Germany, Italy and, to a lesser extent, Denmark. Only Denmark, the Netherlands and the UK produce more gas than they consume, and ten EU countries have no gas production at all.

Although the EU has an important oil and gas industry, which is mainly centred in the UK sector, its reserves are very small in a global context. As far as individual EU countries are concerned, reserves are very small indeed in global terms, with all EU countries having less than 0.5% of global oil and gas reserves. Geographically, the EU's oil and gas fields in the North Sea are adjacent to those in the Norwegian sector which, although not an EU member state, has close connections with the EU for oil and gas production.

Oil and gas production in the EU (and Norway) is beginning to decline. As such, in future, an increasing amount of the EU's oil and gas requirements will have to be supplied by imports. (Exploration for new reserves is taking place in the EU, but there is little evidence that new discoveries are likely to be made that will replace the current and mature fields.)

The EU faces important issues for oil and gas supplies. In the existing oil and gas fields, intensive efforts are being made to extend the life of mature fields and develop economic methods of establishing production from the more recently discovered smaller and technologically challenging fields.

Future supplies of oil and gas are being sourced from a wide variety of regions, including Russia, the Middle East, Africa and Malaysia. Many of these countries have political regimes and cultures that are quite different from EU countries. Some of the EU's supplies will be delivered through extended pipelines, often passing over territories that are politically unstable. This raises the possibility of disruption to oil/gas supplies. There will be an increase of liquified natural gas (LNG) deliveries to the EU, which will eliminate the need for gas to travel through lengthy pipelines. Russia is an important supplier of gas to the EU, particularly the new eastern-border EU member states. There is some concern regarding the political position of Russia in relation to the involvement of foreign companies in its oil and gas industry. It appears that Russian leaders are adopting a more centrally controlled form of government and this policy is extending to energy resources.

In terms of the future, the EU will generally become more reliant on Middle Eastern sources for fossil fuels. The EU will also have to compete in the international market, in which rapidly growing economies such as China are making increasing demands on the world's energy resources. Gas, in particular, will be in great demand as a result of its use for power generation. Future EU demand for gas will depend, to a certain extent, on two factors - the use of nuclear power for electricity generation and the success in implementing a strong renewable energy sector. In the longer term, and at a more fundamental level, Europe will have to make greater efforts in energy efficiency measures.