Last week the Department of Energy and Climate Change (DECC) launched a consultation on the UK’s compulsory stock obligation (CSO). Views are sought on whether the current obligation, requiring individual suppliers to hold stocks, is the most efficient model or whether an alternative system, involving a centralised stocking entity (CSE), would be more appropriate. The CSE approach is used in many other EU Member States, and the consultation is designed to assess the resilience and cost-benefit of the contrasting models.

The UK is required to hold emergency oil stocks as a member of the International Energy Agency (IEA) and under EU Directive 2009/119/EC. The IEA and EU stock obligations are calculated differently but the obligations can be met with the same stocks. The Government discharges its obligation by exercising its power under Section 6 of the Energy Act 1976, which allows the Secretary of State for Energy and Climate Change to give directions to businesses producing, supplying or using petroleum products within the UK market, requiring them to hold minimum levels of oil stocks..

The 2009 Directive should have been implemented by Member States by the end of 2012. In January 2013, DECC published new guidance on the measures adopted to meet the UK’s international CSO. At a high level, the UK’s approach to meeting its CSO has not changed, though DECC’s consultation indicates that alternative means of compliance are now being seriously considered.

Currently, the UK is in a minority of EU states by obligating significant suppliers to hold emergency stocks, an approach primarily attributed to the historic supply of oil from the North Sea. Individual suppliers therefore bear the cost of meeting the stock obligation, which is in turn passed onto consumers via product prices. There is a certain amount of flexibility in how suppliers meet their stock requirements, with up to a third of the UK’s CSO being met through “tickets” for oil stocks located in other Member States.

Adopting the more centralised industry-owned, industry-operated CSE approach (noting that a state-owned solution is not currently mooted) may help relieve individual suppliers’ burden of maintaining stocks to help meet the UK’s CSO. Views are sought on whether this will address key concerns of a lack of incentive to invest in physical storage in the UK, and that optimal economies of scale for storage are unlikely to be achieved by individual suppliers. DECC’s guiding principles for stockholding policy include that a greater proportion of the UK’s stocks should be held in a number of different locations in the UK to increase supply resilience. These issues are becoming more pressing as the UK’s CSO increases on the back of declining UK crude oil production.

DECC’s consultation closes on 7 June 2013. You can view the consultation in full by clicking here. If you would like to discuss any of the points raised or would like further information on oil and gas generally, please contact us. Our contact details can be found in the sidebar.