Brewing Up a Storm
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Key Capital Private, Investment Note #37
Brewing Up a Storm
The song with the same title by The Stunning achieved a highly respectable seventh place in Today FM’s recent Top 100 Irish songs. It contains the great lyric:
“The doors are open wide and the wind blows a bitter cold. Man holds a mystery, someone else holds the key.”
This feels a little like Europe’s current energy position - vulnerable and dependent on factors it doesn’t fully control. Energy, and more particularly complacency about the need for a consistent and reliable energy supply, is a theme we have often referenced in our investment notes. Back in April 2024, we stated that [Investment Note #12, Data Centre Efficiency]:
“Very slow transition away from fossil fuels colliding with a significant, long-term growth in energy demand. Absent new disruptive technologies that will provide abundant new sources of energy, it presents a real challenge.”
Firstly, for comparison purposes, let’s sketch out the situation in the US, which is significantly less vulnerable than Europe. US total energy imports peaked in 2007 and have declined nearly every year since. In 2016, it became a net energy exporter, i.e., exports exceeded imports. Indeed, in 2024, the US achieved a record-high net energy export, shipping out 9.2 quadrillion British thermal units (quads) of energy, more than it imported. This compares to 2004, when the US imported a net 29 quads (source: US Energy Information Administration). How was this achieved?
Talkin’ Bout a Revolution
The US shale revolution reflects the defining characteristic of US capitalism: a willingness to prioritise the experimental spirit of entrepreneurship, even if that leads to massive capital destruction in the short to medium term. Shale is arguably one of the most consequential and underappreciated technological contributions in any industry, but it was achieved at a high financial cost.
According to a Deloitte report (“the great compression: Implications of COVID 19 for the US shale industry”), in the 15 years to 2020, the US shale industry registered net negative free cash flows of $300 billion, impaired more than $450 billion of invested capital, and saw more than 190 bankruptcies. In 2019, Steve Schlotterbeck, former CEO of the largest US shale producer, told a roomful of conference attendees that the shale industry as a whole has been destroying capital since its inception. “The shale gas revolution has frankly been an unmitigated disaster for any buy-and-hold investor in the shale gas industry with very few limited exceptions”.
While the cost to investors has been high, shale's onshore accessibility and rapid scalability - allowing production to be ramped up or throttled down quickly has been transformational in allowing the US to become energy independent; it has largely insulated the region from the current shock in the global energy supply market and, in contrast, exposed Europe’s energy vulnerability.
Europe’s Current Position
In 2024, according to Eurostat, the EU’s energy import dependency rate was 57%. During the 2021-24 gas crisis, the EU paid an additional €930bn for fossil-fuel imports, per an Ember Energy report. Europe’s dependency on imports is even starker in the crude oil markets, with production accounting for just 5% of consumption (source: Enerdata).
While it’s true that Europe doesn’t have the same natural resources as the US, it is equally true that the US solution doesn't need to be the European one. However, imported fossil fuels as the constraining factor in Europe’s energy ecosystem seems like an unacceptable structural weakness.
This structural weakness has previously been laid bare.
Europe’s Previous Response
The crisis following the Yom Kippur War in 1973, when Arab members of OPEC cut production and imposed a fourfold rise in oil prices, had devastating consequences for the world economy. Events prompted Europe to swiftly re-evaluate the risks associated with relying heavily on imported oil. Leading to a multi-pronged response as the bloc moved to improve energy sovereignty.
In France, the Messmer Plan was launched in 1974 as a direct response to the 1973 oil crisis, and its objective was the buildout of a large-scale nuclear power program . Interestingly, the plan was met with significant opposition for safety reasons from the scientific community in France, with 400 scientists (later increasing to 4,000) signing a petition calling for it to be halted.
Undeterred, France built an unprecedented 56 nuclear reactors over a c. 20-year period, utilising a standard reactor design and a customised, purpose-built supply chain that maximised efficiency and speed. The program was combined with significant electrification of the economy. One criticism was that the rollout was overly ambitious, resulting in more energy-generating capacity than was needed. However, this has benefited its neighbours, with France now the world’s largest net exporter of electricity (source: World Nuclear Association).
Elsewhere, the North Sea Oil Rush started in 1973, the UK and Norway coordinated their efforts, resulting in production peaking at 4.5m barrels of oil/gas equivalent per day, falling to 1.5m by the end of 2020 (source: Policy Centre for the New South).
The then West Germany settled on an approach that involved increased efficiency, coal-to-gas switching, modest nuclear expansion and long-term diversification of supply – most significantly with the Soviets through pipeline investment, consistent with their Ostpolitik strategy.
Over time, the memories of the energy challenges of the 1970s faded, and as the measures implemented then began to lose impact (North Sea production drop-off, nuclear shutdown in Germany, inability to rely on Russia, etc.), the importance of energy sovereignty was also forgotten.
Conclusion
Although oil is still a significant part of the global energy complex, progress has been made to reduce its share of the world’s energy consumption, which peaked at c. 50% (ironically in 1973) to the current share of c. one-third (source: ENI). However, what has not changed is the risk of being dependent on others for your energy.
Europe’s solution may not be the US solution, and the solutions of the past may not be the solutions of the future, but Europe needs to recognise the structural energy challenge it faces and identify a roadmap to more energy independence. An ambitious plan that evaluates all elements of the energy matrix and harnesses some of the urgency deployed by previous generations is needed to take back the key.
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