Central Europe's rise in energy use seen as "Problematic Potential"

Mar 11, 1997 01:00 AM

Central European energy demand could rise 4 to almost 6 % annually until the year 2000 as deregulation and privatisation allow new markets to develop, a study by ING Barings Securities Ltd said.
The report, "Problematic Potential," on oil and gas in seven countries added demand for heavy oil products would fall as consumption patterns became more sophisticated. It said growth would be led mainly by increasing car ownership and use of road haulage. Per capita energy and oil consumption in the region was only 60 % and car ownership was less than half of the West European average, it noted. "The investment bet is that the region's emphasis on economic growth will see this gap closing rapidly," the study said.
The study estimated total energy demand would rise 3 % in Croatia, 4.9 % in the Czech Republic, 2.8 % in Hungary 5.6 % in Poland, 3.9 % in Romania, 5.4 % in Slovakia and 4.4 % in Slovenia. Short-term obstacles to development were poor refining assets, reluctance to deregulate and an often shaky legal basis for contracts, it said. "Longer-term problems are centred on inadequate infrastructure and a high -- but almost unavoidable -- dependence on Russia for primary energy needs," it said. In addition, international oil majors were competing against each other and former state monopolies for a limited number of retail sites, with the risk of overcompetition and collapsing profit margins.
The report cited as examples of international involvement British Petroleum, which has announced a $ 600 mm investment programme covering the former East Germany, Poland, the Czech Republic, Slovakia and Hungary. Shell is increasingly active in the region and has earmarked $ 60 mm for expansion of its Polish outlets alone.
The report said pipeline capacity and interruptions to supply were major constraints on growth for the landlocked region, a large net importer of Russian Urals crude through several Soviet-era "Friendship" pipelines.
"Capacity can be considerably reduced by poor management, but equally it can also be greatly increased by investment in better pumping equipment, control and maintenance," it said. Water levels in the Danube, the region's main waterway, are often too low to permit dependable crude shipments by barge, while cross border road transport was expensive.
The region does have alternatives to the Russian crude oil pipelines, including the Adria, linking the Adriatic ports to Hungary, and the recently opened IKL, connecting Germany and the Czech Republic. However as Russia intends to retain its market share by keeping its prices below its Middle East competitors, most of the crude actually flowing through the Adria is Russian, shipped in from the Black Sea oil terminal of Novorossiisk. Russia, again through the Friendship pipelines, is the only external supplier of natural gas to the region. The opening of the Yamal pipeline in 2000 linking Western Europe with Western Siberia will mean Russian gas will remain a cheaper option than imported crude for power generation and domestic heating, it said.
The availability of motorways is another factor in oil consumption, as motorways encourage longer journeys, increased road haulage and provide a conduit for international transit. But the region has only half the amount of motorway relative to the total road network compared to the Western European average of 1.2 %, although Slovakia and Croatia, both with 1.1 %, come close.
The region's Soviet-designed refineries, geared to production of heavy oil products for heavy industry and electricity generation, are under-equipped with conversion and desulphurisation facilities, the report said. They also rate particularly poorly for on the conversion ratio -- the ability of a refinery to convert heavy, low-value products into lighter fractions such as diesel and petrol. French, German and British average for conversion facilities is 36 % of primary distillation capacity against 15 % for Central Europe excluding Romania. "The upside of this picture is that, with properly targeted investment in new technology and better operational methods, it should be possible in some cases to achieve rapid and dramatic output improvements in both quantity and quality," the report said.

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