Europe's refining sector threatened by potential of carbon leakage

Gasoline leakage

08 January 2010 00:00  [Source: ICB]

The European refining industry must contend with the implications of carbon leakage as Copenhagen yields no firm commitments from developing nations

A FRESH start and a new decade provide little cause for optimism among Europe's refiners. The sector has been particularly exposed to the harsh new climate created in the aftermath of last year's global economic meltdown.


 Rex Features/Chris Eyles

Margins have been not so much squeezed as crushed, and conditions prompted a slew of attempted asset sales and economically induced shutdowns throughout 2009.

There also lurks the continuing worry that traditional export routes to Asia will come under pressure from refining capacity coming on stream in the Middle East. By 2020, there will be, among others, the gargantuan 615,000 bbl/day Al Zour refinery in Kuwait and the 415,000 bbl/day Al Jubail refinery in Saudi Arabia.

All of which have Europe's refining sector casting anxious glances at the continuing rounds of UN Climate Change talks and developments arising from them - chiefly, the threat posed by carbon leakage.

The talks held in December in Copenhagen ended with a non-legally binding accord between the US, China, Brazil, India and South Africa that ultimately did little to build on the Kyoto Protocol from 1997.

However, a deadline was set to conclude a treaty by the end of 2010, with the next round of talks due to take place in Mexico in November. The issue of carbon leakage still looms large.

Carbon leakage involves having an increase in carbon dioxide (CO2) emissions in one country as a result of emissions reductions by another country with a strict climate policy. In Europe's refining sector, it amounts to self-inflicted anti-competitiveness, as countries without emissions reduction responsibilities reap all the profit.

The EU has had in place an Emission Trading System since 2005 in a bid to reduce CO2 emissions across the region by 20% come 2020 from 1990 levels.

The system stipulates that refineries buy CO2 emissions allowances if they produce more than a specified benchmark allowance. Refineries were at least removed from the list of sectors that require full auctioning for carbon allowances from 2013 onwards.

However, the gradual shrinking of the size of allowances granted by the European Commission going towards 2020 means there is no escaping the eventual cost.

"It's very difficult for refineries to achieve the 20% reduction [in carbon emissions]. The bottom line is that most refiners accept that they will have to buy parts of their allowances," says Chris Beddoes, spokesman for the European Petroleum Industry Association (Europia).

"If you start to put pressure on refineries during what is a low cycle anyway, you are going to drive some refineries under.

"As a sector, we have to recognize the political will to tackle climate change. But don't throw the baby out with the bath water," he adds.

Europia has been working with the Commission to form a benchmark that does not discriminate against complex refineries, which consume more energy and produce more emissions in the process of making cleaner fuels than their simpler counterparts.

"What we don't want to do is end up favoring simple refineries that don't actually produce the products that people really need," says Beddoes.

Both the decision to make refineries exempt from full auctioning and the attempt to create a fair benchmarking system are steps in the right direction. However, the central tenet that Europe's refiners could still be at a competitive disadvantage remains.

When approached by ICIS, Barbara Helfferich, environment spokesperson at the Commission, issued this response: "In answer to your question regarding the competitiveness/carbon leakage concerns, the issue is rather general across all industry sectors. Therefore, it's difficult to say much more on refineries in particular."

While it does not seem that the refining sector is at the forefront of the Commission's considerations, Ronec Dusan, health, safety and environment specialist with the Hungarian-based oil and gas firm MOL Group, believes that this is an example of careful politics from the Commission.

"If there isn't a firm commitment from China and the US, then nothing will be changed in the assessments. The refining sector will deliver the 20% reduction. There is no need to push them further [after 2013]," says Dusan.

"Ultimately, I don't think the Commission will punish its own industry, just due to its own commitments. It would not do that because of the risk to all of the jobs. This would be very politically sensitive," he adds.

Alex Davis is a markets reporter for ICIS pricing, covering European refineries, petrochemical feedstocks and middle and heavy oil distillates. He studied journalism at City University, London, UK.

By: Alex Davis
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