The UK’s emergency petroleum stocks will more than halve in the event of a no-deal exit from the EU, reducing the buffer of strategic reserves available in the event of severe global supply disruption.
The government would no longer require industry to hold the EU-mandated levels in the event of a hard Brexit, defaulting instead to much lower reserves stipulated by the International Energy Agency, the UK’s energy department said.
The Department for Business, Energy and Industrial Strategy told the Financial Times that EU rules require each member state to hold 61 days’ worth of consumption in reserve, which for the UK is equivalent to 11m tonnes or roughly 85m barrels. Under IEA rules, which are based on net imports, the government said the level of stocks held in reserve would drop to 4.5m tonnes or 35m barrels.
The sharp reduction in emergency petroleum reserves, which were established in the 1970s following the oil embargo by Arab members of Opec, would come against a backdrop of tensions in the Gulf, which have raised the risk of supply cuts globally to the highest level in decades. The oil industry has warned that tensions between the US, UK and Iran pose a threat to shipments from the Middle East.
The decision by the government to cut the size of the reserve follows lobbying by UK refiners and large fuel retailers, which fund the emergency stockpiles and will face lower costs as a result.
Energy analysts said that reducing the amount of oil held in emergency reserves would leave the country more vulnerable to a prolonged supply disruption, potentially creating shortages of certain fuel-types where the country is reliant on imports, such as diesel.
Amrita Sen, of Energy Aspects, said reducing emergency stockpiles at a time when tensions with Iran are high carried significant risk given the threat to supplies through the Strait of Hormuz, the world’s most important oil chokepoint where roughly a fifth of global oil supplies pass every day. US sanctions have also cut exports from Iran and Venezuela, leaving oil supplies relatively tight globally.
“You’re essentially reducing your security of supply at a time when geopolitical risks are at their highest in at least a decade,” Ms Sen said.
Niall Trimble, of the Energy Contract Company, warned that reducing the government-controlled buffer of emergency stocks could cause problems in the future.
“Given we have a high interdependency with the EU and the rest of the world for oil supplies there would be an increased risk. We might manage, but it could get pretty close to the bone,” he said.
But the government said the new, lower level of reserves were “more than sufficient to ensure security of supply”, adding “major disruptions to oil supplies are extremely rate.”
The energy department told the FT there were no plans to pass legislation to adopt EU rules on strategic reserves, something the government has done in other areas. It added that in the event of a negotiated Brexit the UK could still switch to the IEA obligations, depending on the final agreement.
The UK’s emergency petroleum supplies are held in the form of refined fuels such as petrol and diesel, unlike the US, which has the world’s largest government-controlled stockpiles, largely made up of hundreds of millions of barrels of crude.
Refiners and other large fuel suppliers in the UK are required by the government to hold enough stocks in reserve to meet the EU rules.
Some of the UK’s emergency stocks are held by companies in storage in other EU countries, in particular the large refining and fuel tank hub stretching from Amsterdam to Antwerp.
The UK Petroleum Industry Association, which represents the country’s refiners, said industry had “sought and received reassurances” from the UK government that there are bilateral arrangements in place to ensure continued access to those reserves in the event the UK crashes out of the EU without a deal on October 31.
The International Energy Agency has co-ordinated three major releases of emergency oil stocks among members since its formation in 1974, in response to the first Gulf war, after hurricanes hit the US refining hub on the Gulf coast in 2005, and during the disruption to Libyan oil exports in 2011.
This year countries in central Europe, including Poland, tapped their emergency oil stocks after a major disruption on Russia’s main crude oil export pipeline reduced supplies to refineries in the region.