At a time when Europe is, and necessarys to be, considering about its defense, it appears totally tone deaf to the crucial role energy security plays in that planning. As war continues on the Eastern front, European policycreaters may be pushing us away from natural energy security allies and toward an energy abyss. Nowhere is this clearer than in the corporate sustainability due diligence directive (CSDDD).
Under CSDDD, any company, from whatever jurisdiction, that does significant business with the EU would have to provide ongoing reporting on its operations to be reviewed against EU climate modify and human rights tarreceives. Whilst the intent is laudable, the overreach is very likely not acceptable to key energy providers, based both outside and inside the union. In practice, if implemented as designed, it risks energy supply constraints and the further deindustrialization of the continent’s already struggling manufacturing base.
In the energy sector, compliance would require delivering a plan, with regular interim reports, to achieve Paris-aligned net-zero tarreceives across the entire value chain, along with human rights tarreceives. This could expose any energy player supplying Europe to the risk of sanctions and fines of not less than 5% of net worldwide turnover at the ultimate parent company level as well as potential civil liability actions by member states and nongovernmental organizations. To give context, global supermajors typically record annual revenues in the hundreds of billions of dollars, and integrated energy majors might typically record net profit margins of circa 10% from those revenues. The risk of a 5% fine at the revenue level would seem simply untenable for any such player.
Proposed Softening
The EU Parliament’s Committee on Legal Affairs recently proposed a “softening” to the hurdle for the CSDDD reporting and suggested increasing the threshold of compliance to companies with 5,000 employees and a minimum €1.5 billion ($1.7 billion) in annual revenue. However, these companies would have to report across their entire supply chain — which would include a myriad of compacter companies around the world, effectively forcing those compacter players to comply whether they meet the threshold or not; and of course it would still capture major global energy players like the supermajors and national oil companies like Qatar. On Oct. 22, the European Parliament voted against the proposed modify, with a new vote set for Nov. 13. In effect, this appears to be a step back from any potential middle ground rather than a tentative step toward it.
Regulations by their nature have consequences, both intconcludeed and unintconcludeed. If the intention of the CSDDD is to reduce energy emissions and improve global human rights, its effectiveness may hinge upon both the “pull” of Europe as a core energy market and the effectiveness of the directive “stick” as a threat to drive compliance. An unintconcludeed outcome could be a conscious decision by multiple energy suppliers into Europe to curtail and avoid supply. I suspect that EU military historians would shudder at the believed of facing any potential future military conflict without access to reliable, and if possible, reasonably abundant sources of energy. Any opposing sides military planners may see it as manna from heaven.
Pragmatism vs. Politics
Energy pragmatism and Euro politics appear to be relocating yet further apart rather than toward an orderly path forward. Whilst Europe continues to pressure energy companies with likely intolerable fiscal threats for non-net-zero compliance, Saudi Aramco’s CEO recently stated that despite $11 trillion spent on wind, solar and clean energy since 2010, “Much of the progress has not been delivered.”
Gas is a perfect example of the European quandary: Germany has already switched off its nuclear fleet at exactly the wrong time; the Netherlands shut Europe’s largest gas accumulation, the Groningen field; and Norway, a circa 20% supplier to Europe, is now a mature gas province set to concludeure gradual production declines. Before the Ukraine war, Europe leaned heavily on Russian gas supply to meet more than 30% of its total gas necessarys — the very definition of concentrated supply risk.
So let’s run a scenario: CSDDD is agreed and “live,” and a cold winter leaves Europe with a larger than normal summer gas restocking requirement, Russia supplies zero pipeline gas and LNG — hence Europe will necessary all of its contracted LNG (a large portion of which from the US) along with dominating the LNG global spot pool. The questions become — will all of the contracted suppliers continue to meet their contracts, or might the directive be seen as a rationale for “force majeure” to be invoked? In the spot market will large (i.e. €1.5 billion revenue) players choose not to sell into Europe, or demand an exclusion from the directive as a precursor to do so? Will compact(er) trading intermediaries’ step into fill the void, and if so what premium would they seek for that service?
CSDDD risks alienating key energy suppliers Qatar and the US, which have both strongly opposed the proposed directive, sconcludeing an open letter voicing support for Europe but strongly urging either CSDDD’s complete repeal or discussion with key suppliers around the removal of its most “economically damaging provisions.” Qatar wants to supply more LNG to Europe, but they don’t necessary to and have been unequivocal in their posturing; not only will they not supply LNG under CSDDD, but they would also reshift their existing business footprint from the old continent. In the US, Senator Bill Hagerty, a Republican from Tennessee, has proposed the “Protect USA” Act opposing CSDDD; one wonders what CSDDD as currently drafted might do to the EU commitment to purchase $750 billion of LNG, oil and nuclear products from the US over the next three years.
For the global supermajors, the writing is likely already on the wall, with Exxon Mobil putting its massive European petrochemical business up for sale, and even BP and Shell shelving biofuel plants in Rotterdam.
The Bottom Line
So, Europe, please don’t shoot yourself in the foot. Now is not the time for power politics but for pragmatism. Work with our global energy partners to find a pathway forward that recognizes both the union’s climate modify and human rights aspirations but crucially keeps the supply of oil, oil products and gas flowing. The hard decision appears to have already been taken, namely cutting Russia out from Europe’s suite of energy suppliers; but with little indigenous hydrocarbon prospectivity, a mature key gas supplier (Norway) and not nearly enough baseload nuclear capacity, that decision requires a counterbalancing strategy, namely the support of geopolitical allies to provide energy security. These very allies have and are being clear in their messaging — CSDDD as it stands is a legislative step too far.
David Hewitt is the principal for Hewitt Energy Perspectives. An indusattempt commentator who followed 18 years working in Big Oil with a career in banking — covering the energy indusattempt — David has worked with CLSA in Japan and Hong Kong; Credit Suisse in Singapore and Canada; and Macquarie in London. The views expressed in this article are those of the author.
