Dec-2021

Getting European refining fit for 55 (ERTC)

European refining has recovered from the doldrums of last year’s pandemic. Despite demand still being 500 kbd less than 2019 levels, European refinery utilisation is within touching distance of the historical five-year average.

ALAN GELDER Downstream Global SME
Wood mackenzie

Article Summary

A combination of capacity rationalisation, high export flows to West Africa and the United States have provided support, particularly for gasoline-oriented configurations. As mobility restrictions ease further, 2022 European refinery gross margins are expected to  strengthen.

Fit for 55 signals further downside for European oil demand
In our recent outlook to 2050, European demand peaks in 2022 before it starts an inexorable decline of 150 kbd per year to 2030. European refiners become increasingly reliant on export markets. This is particularly the case in north-west Europe, as demand is projected to fall fastest there because of electrification in transport.

The EU’s Fit for 55 proposals require materially faster EV adoption than this outlook post-2030, with all the EU’s new passenger car sales required to be battery electric by 2035. The proposals, if adopted, would increase the rate of European oil demand decline. Despite the continued need to supply demand for the dwindling stock of ICE passenger cars, commercial vehicles, the marine and aviation sectors, the EU’s proposals require refiners to re-think their business models.

Carbon pricing and renewables create risks and opportunity
Carbon pricing remains central to the EU’s plans to decarbonise, with free allowances being phased out and the Emissions Trading Scheme (ETS) potentially extended to other transport sectors. The cost of carbon is already a major drag on European refinery earnings. EU ETS prices are now in the range of €50—60 per ton, which is 10 times higher than the lows of 2016. Despite free allowances, the cost of carbon emissions can range from US$0.5 to 1.0/bbl of crude processed, which can largely eradicate the free cash flow of less competitive assets. Carbon costs appear to be a one-way bet under the latest proposals. Refining will not, at least initially, be protected by a Carbon Border Adjustment Mechanism (CBAM), so the high costs of carbon emissions will disadvantage European players relative to their international competitors. It does, however, provide a strong incentive to decarbonise existing operations.

The Fit for 55 package also proposes to raise the share of renewables in Europe’s transport sector to achieve a 13% carbon emissions reduction by 2030. The main change versus the existing renewable fuels legislation is an emphasis on the growing use of renewable fuels of non-biological origin, which creates opportunities for refiners to diversify their businesses to the provision of low carbon fuels.

Refiners will need to adapt to survive
Adaption is key, as the outlook for petrochemicals remains robust and refiners can re-tool to play a pivotal role in the circular economy, through chemical recycling of petrochemical wastes, liquid biofuels (for petrochemicals, sustainable aviation fuel and stationary uses) along with efuels (synthetic fuels produced from combining green hydrogen and captured CO2). These factors play to the strengths of large, coastal highly competitive integrated refining and petrochemical sites.

It is critical for refiners to clearly understand their current competitive position and what they need to do to secure a future top quartile position to ensure longevity and free cash flow from their core business so they can invest to adapt for the future. Such sites also need to secure the offtake of their liquid products in hard-to-decarbonise sectors whilst they make progress on decarbonising both their operations and their products.

As James Cameron in his search for the Titanic said “Hope is not a strategy” so doing nothing is not an option. Prepare to be “Fit for 55” and the potential upside to regional oil demand if it arrives late.

For more infomation contact alan.gelder@woodmac.com

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This short article originally appeared in the 2021 ERTC Newspapers, produced by PTQ / DigitalRefining.

You can view the Day 1 Newspaper HERE
You can view the Day 2 Newspaper HERE