Dec-2011

New game for EU hydrocarbon refiners

How under utilisation and over capacity as well as profit pressures are presenting new challenges and opportunities to European refiners

Richard J DeSantis
Sabin Metal Corporation

Article Summary

As to the industry’s impact on European jobs, consider that EU refiners directly employ more than 100 000 people; with over 50 000 people employed in “indirect” jobs in the industry and perhaps 500 000 people working in associated industries in areas such as technical, logistics, sales and marketing.3 Furthermore, as is the case with most industries, crude oil refining also supports jobs that provide services and equipment such as engineering, production and capital equipment, building and other infrastructures.

Oil refining and distribution in the EU provide approximately €240 billion/y in duties and taxes from fuel sales alone. Now, after years of growth, the three or four dozen organisations that operate these refineries face a paradigm shift looking forward, with many new challenges in uncharted territory. There are many reasons for this, some of which were predictable and some not. For example, public and government attitudes in most industrialised nations with regard to energy reduction in general, and consumption of fossil fuels in particular, will ultimately have a negative impact on the EU refining industry. Looking ahead, many EU refiners will get squeezed by over capacity, under utilisation and increasing costs that will cut deeply into margins and profits. This trend actually began a few years ago and is expected to continue for the foreseeable future.2 In fact, based on current trends, it is widely believed that demand for many hydrocarbon-based refined products could drop as much as 20% in the next two decades (compared to 2006)2 (Figure 1).

Europe’s energy stability
With the current global geopolitical instability, maintaining EU refiners’ ability to meet 
domestic demand for refined oil products has vital security, economic, industrial and environmental implications. The region’s independent refining system must be capable of ensuring a reliable supply of hydrocarbon- and petroleum- based products both to EU refineries and other industries dependent upon them. The following recent production statistics offer a useful background on the issue. EU refineries’ total production includes over 50% diesel fuel, which in turn includes transport fuel (vehicles and vessels), as well as heating and industrial fuels. They also produce 22% gasoline. Approximately 15% of fuel utilised for power generation is produced by EU refineries, with smaller portions of lubricants, naphtha, kerosene, LPG, aromatics, sulphur (for fertiliser) and miscellaneous byproducts. The EU refining industry also provides feedstock materials for the European petrochemical sector, representing approximately €241 billion/y and supporting employment for over 780 000 people.4 Crude oil refining is closely integrated with petrochemicals, which contribute to a major and broad based European economy.

The impact of a global economic downturn has affected EU refineries with regards to the continuing trend of declining usage of hydrocarbon and petrochemical products in most industrialised nations. A number of factors could potentially influence the future of EU refining.

Challenges
In addition to global geopolitical and economic instability, other future challenges facing EU refiners include imposition of stricter emission standards, unstable foreign oil-producing governments, competition from Middle East and Indian refiners, terrorism threats, and rising costs that result in lower margins and lower profits.

Environmental regulations
With regard to refinery emissions standards, new and more stringent environmental regulations are also adding downward pressure on EU refiners’ profitability. Even now, stricter emissions standards have forced many EU refiners to invest significant funds for compliance. As much as US$ 18 billion will be spent in this decade to comply with the new and/or proposed EU standards.² This, on top of the fact that European refiners have already invested significant resources in order to meet some of the world’s most stringent air/water quality and soil protection rules. One positive result: the amount of sulphur emitted by EU refineries has been cut in half since 1998, according to PFC Energy and the EU.

The EU refining industry is directly affected by many EU policies towards reducing emissions of various pollutants and greenhouse gases, reducing overall energy consumption, supporting energy security, and boosting renewable energy sources and technologies. None of these factors is particularly optimistic for the industry.

With regards to the aforementioned “paradigm shift”, it is worth noting that, based on current trends and predictions, demand for various types of refined products might drop by as much as 20% by 2030 compared to 2006._² Currently, EU refiners export their gasoline mainly to the US; however, by 2030, the US market may not be able to absorb as much of this gasoline.³

Also, for the balance of this decade, the combined EU demand for diesel and heating oil is forecast to remain flat, while gasoline demand could fall by 2–3%/y. As a result, European refiners must seek other export markets to replace the US market to absorb a probable gasoline surplus.

There is also the trend towards reducing fossil fuel consumption with renewable energy projects for transport; no doubt this will worsen Europe’s existing gasoline over capacity as well. The US, the EU and many other countries have been  promoting use of biofuels for transport. Biofuel consumption is expected to more than double by 2030.³ Many countries have also slowed oil consumption through increased use of ethanol in gasoline; this trend is further impacting the structural imbalance of the EU market for refined oil products. Another factor that may have a negative impact on EU refiners’ volume includes new fuel efficiency standards, which have been (or soon will be) introduced in many industrialised nations.