France Oil & Gas Report Q2 2014
Since the 2011 Fukushima Daiichi nuclear disaster and the 2012 presidential elections, French dependence on nuclear energy has been under the spotlight and has been set to be diluted in favour of renewables. While the country's current energy policy is unclear at the moment, President Francois Hollande's pledge to reduce the country's reliance on nuclear energy from 75% to 50% by 2025 could very well make room for greater gas-fired power generation in the coming years. Indeed, should a nuclear reduction occur (even in a smaller amount than targeted), the compensation for lost capacity would see an increase in renewable energy, gas and/or coal fired power generation. Given France's minimal domestic gas production and that shale gas exploration and production in unlikely within our forecast period, increased gas consumption would see rising gas imports. However, given the strong influence of the nuclear lobby in France, the future of energy growth is uncertain. The outlook for refiners and fuel distributors remains poor.
The main trends and developments in the French oil and gas sector are:
- Despite significant shale gas resources, President Hollande in July 2013 reiterated France's moratorium on hydraulic fracturing (fracking), which effectively bans exploration for shale oil and gas and dashed industry hopes that he might soften his stance. In October 2013, the ruling by the Constitutional Court that a ban against fracking is constitutional dealt another blow to the industry. However, given the government's plans for a nuclear reduction, macroeconomic realities and balancing energy security, realities with energy policy goals will likely means that the issue of indigenous shale gas resources back on the table in the not so distant future. The ruling of the Constitutional Council we believe puts the matter to bed for at least two or three years, at least until a new election campaign gets underway, which could re-surface the issue.
- Thanks to improved energy efficiency and efforts to reduce oil dependency, oil consumption in France has been falling in the past few years. We do not expect a significant increase in oil consumption in the power sector and the vehicle fleet in the country has stabilised in the past few years. In light of these factors, and with ever-increasing energy efficiency measures put in place, we forecast that oil consumption with fall progressively decrease, from an estimated 1.75mn barrels per day (b/d) in 2013 to 1.66mn b/d in 2018 and falling further to 1.58mn b/d in 2023.
- After a disappointing 2012-2013 drilling programme in French Guiana, Tullow and its partners have no planned drilling for 2014. Instead they plan to interpret 3D data in addition to exploration results in the hopes of identifying new targets. Tullow has said it would shift its focus from French Guiana to Suriname, with exploration director Angus McCross noting that the company's mid-term focus would be Suriname 'but we are not giving up on French Guiana... the prospectivity there is too rich, too strong, so we will be back.'
- A key aspect of Hollande's energy policy is his ambitions of reducing nuclear generation from 75% to 50% of the electricity mix. A reduction of nuclear power generation could very well make room for greater gas-fired power generation in the coming years. Indeed, should a nuclear reduction occur (even in a smaller amount than targeted), the compensation for lost capacity would see an increase in renewable energy, gas and/or coal fired power generation. We therefore expect gas consumption to rise in France within our forecast period, from an estimated 44.79bcm in 2013 to 50.43bcm in 2018, climbing further to 58.46bcm by 2023, subject to revisions in French energy policy. Domestic gas production being negligible, we see imports increasing from 44.36bcm in 2013 to 58.25bcm by 2023.On April 16 2013, the tribunal of Rouen rejected the offers made by Panama's NetOil and Libya's Murzuq Oil for the 161,800b/d Petit-Couronne refinery which used to be owned by now-insolvent Petroplus. These were the only remaining offers. With no positive denouement in sight, a social plan is currently being implemented for the plant's 448 employees and the facility will be converted into an oil storage terminal.
- Operations at LyondellBasel's Berre-l'Etang refinery were suspended in January 2012. The US firm initiated a programme to mothball the 105,000b/d facility in south-eastern France after announcing on May 31 2011 that it was looking for a buyer. The lack of offers will likely mean that the plant will remain mothballed.
- The closure of the above two plants have led us to downgrade France's refining capacity to 1.5mn b/d from 2013 onwards. With little prospect for a notable improvement in the country's downstream sector and with France's declining oil consumption, we believe that further refinery closures are likely in the medium term. In a 2013 interview, Christophe de Margerie, Total's CEO highlighted that future refinery closures were likely in France and in Europe more generally, due the unprofitable nature of the refining sector in Europe and highlighting that there is still too much refining capacity in the country.
- In May 2011, EDF and Total confirmed that they would proceed with the US$2.2bn Nord-Pas-de-Calais Liquefied Natural Gas (LNG) project at Dunkirk, which is expected to add 13bcm of import capacity when it comes on stream by end-2015.
We estimate oil imports cost about US$70.3bn in 2013, and we see this falling slightly to US$58.4bn by 2023 as oil consumption and oil prices fall. With virtually no domestic gas supply, we expect French gas imports to total US$23.9bn in 2018. At the time of writing, we assumed a decrease in OPEC basket oil prices from their average of US$105.9 per barrel (bbl) in 2013 to US$96.0/bbl in 2018.
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