INSIGHT: Competitive or Green? Europe's refining dilemma

13 September 2012 15:53  [Source: ICIS news]

By Jo Pitches

LONDON (ICIS)--Survival of the fittest. That’s the situation Europe’s struggling refineries are currently facing. Those not profitable enough, flexible enough or sophisticated enough to withstand increasingly challenging conditions fall by the wayside to be shut down, sold or converted.

It is thought that, of 98 refineries operating in Europe in 2009, 25% have fallen prey to at least one of the aforementioned fates. Arguably the most high profile case has been the recent bankruptcy of Petroplus, Europe’s largest independent refiner.

So what’s causing this seemingly slow demise of the industry?

There are several factors. High crude oil prices; decreasing demand for refined products; the eurozone crisis; ageing refineries, many built in the 1970s at a time when supply and demand fundamentals were very different. All have squeezed European refining margins during recent years, and all are taking their toll.

Of further concern is the growing threat posed by newer, more sophisticated refineries, especially those in Asia and the Middle East. Crucially, in the eyes of European refiners, they are not compromised by the environmental legislation European refineries are.

With the European Commission determined to push ahead with its goal of a ‘low carbon economy’, and European refiners concerned that this could further damage the competitiveness of their industry, what should take priority during this strenuous period - a green approach or a 'competitive business' approach?

So what is a ‘low carbon economy’ and what is the Commission’s argument for it?

While unable to answer questions directly, Stephanie Rhomberg, press officer for Climate Action, draws attention to sections of the Commision's website. The key driver for this transition to a low carbon economy – an economy that has a minimal output of carbon dioxide - is to save energy.

“By 2050, the energy sector, households and business could reduce their energy consumption by around 30% compared to 2005, while enjoying more and better energy services at the same time,” the Commission's website explains.

The aim, it says, is to use more locally-produced renewable energy, making the EU less dependent on expensive imports of oil and gas from outside Europe. It would also make Europe less vulnerable to increasing oil prices. The Commission estimates that on average, the EU could save €175bn-320bn ($224bn-410bn) annually on fuel costs over the next 40 years.

However, while such ambitions are commendable, the practicalities of forging ahead with them have raised concerns among Europe’s struggling refiners.

Isabelle Muller, secretary general of EUROPIA (European Petroleum Industry Association), which represents around 80% of Europe’s oil refining capacity, explains: “We constantly highlighted that, despite a competitive advantage in energy efficiency, a competitive disadvantage is created by the cumulative and twofold impact of EU legislation.”

Legislation such as the Fuel Quality Directive Art. 7a or Reach (Registration, Evaluation, Authorisation and Restriction of Chemicals), increases the operating costs of refining in Europe, Muller says.

She points out that the EU Emission Trading Schemefor example, would result in EU refining sites paying for approximately 30% of their carbon dioxide emissions. This would result in an average 13% rise in operating costs – something that non-EU refineries don’t have to contend with.

Muller adds: “… legislation such as the Industrial Emission Directive (IED) imposes massive investments and capital costs with no return on those investments. For example, the current BREF [best available techniques reference documents] requirements of IED could cost between €10-30bn over the next 10 years, or €100-200m per refinery just to continue operations, and not to improve profitability.”

The Commission does not deny that making the transition to a low carbon economy would require considerable investment.

According to the Commision's website: “The EU would need to invest an additional €270bn or 1.5% of its GDP annually, on average, over the next four decades.”

However, it adds that the extra investments would bring Europe back to investment levels from before the economic crisis, and spur growth within a wide range of manufacturing sectors and environmental services in Europe.

Nevertheless, Muller stresses that “… such operating and capital costs [resulting from environmental legislation] considerably damage the competitiveness of EU refiners compared to non-EU competitors.”

Domokos Szollar, head of International Communications at MOL Group in Hungary agrees. “European refineries consider European climate and environmental legislation outstripping global developments as one of the factors which reduces competitiveness vis-a-vis non-European market players.”

Regarding the Fuel Quality Directive, a particular cause for concern among European refiners, Szollar continues; “MOL Group believes that European [environmental] measures should attempt not to introduce undue distortion of competition between refiners within and outside Europe.”

Muller warns that the situation EU refiners face could be a slippery slope. “As a result [of the legislation], the EU refining industry has a competitive disadvantage with both imports on the domestic market, and with the export market to replace declining EU demand, for example to export its surplus of gasoline. This accentuates the pressure within the EU and could lead to a vicious circle of decline."

What might be the cost of such a decline?

In terms of European employment, the demise of Europe’s refining industry would have serious consequences. Refiners point out that their industry is integral to the transport industry, petrochemical sector and various other industries, providing many skilled jobs.

Szollar says: “… refining is an integral part of the entire European industrial fabric: its contraction would impact the output of a range of other industries. Further to this, refining is a major contributor to economic output itself, as well as a major employer both directly and indirectly through the network of its suppliers.

"Refinery products are also a prime vehicle for tax collection, as excise tax revenues form a substantial part of treasuries’ income,” he adds.

The good news is that communication and understanding between Commission policymakers and European refiners appears to be improving. Szollar adds that even the most ambitious projections agree that fossil fuels will still play a crucial role in EU transport during the next 15 years at least.

Muller adds that both the Commission, in its Energy 2020 strategy, and the European Parliament, in its Resolution of 5 July 2011 on energy infrastructure priorities for 2020 and beyond, recognise the importance of the refining industry.

She quotes the Commission's 'Energy Roadmap 2050', published in December 2011; “… keeping a EU presence in domestic refining – though one that is able to adapt capacity levels to the economic realities of a mature market – is important to the EU economy, to sectors that depend on refined products as feedstocks, such as the petrochemical industry, and for security of supply.”

It seems the aforementioned bankruptcy of Petroplus was the key factor that really drove home the severity of the situation Europe’s refiners are facing.

"It was only when Petroplus, Europe’s largest independent refiner, announced that it had to stop its five refineries in Europe due to critical financial difficulties at the end of December 2011 that the general media became aware of the increasingly difficult situation of the EU refining industry,” Muller says. “[Then] the EU considered actions to address these difficulties resulting from EU-specific conditions.”

This resulted in the Commissioner for Energy, Gunther Oettinger, organising a 'Roundtable' on EU refining in May 2012, with member states and other stakeholders present.

“The roundtable discussed the main issues around the competitiveness of the European refining industry, and committed to the assessment of these problems, including the burden that European legislation poses on its competitiveness,” Szollar explains.

While this recognition is welcome news, Szollar continues: “If we want these fuels to be produced in Europe, the protection or enhancement of competitiveness of the European refining industry should be better considered when concrete measures aiming to achieve climate objectives are set.”

Muller also issues a warning. She says that this recognition has not yet led to any change of the EU political agenda or legislative proposals: “The critical nature of the situation has indeed not been concretely assessed by the EU, as the policy scenarios derived from the Low Carbon Economy Roadmap call for a drastic and costly reduction of oil in transport. If realised, [these] could shape the end of the refining business as we know it today.”

It is clear that there is no easy answer regarding which approach should take priority.

Perhaps the solution lies in some form of compromise.

Szollar emphasises that environmental objectives are important, and that the MOL Group does not want Europe to waive its environmental ambition, or delay or downsize its goals.

"On the other hand," he says, "goals can be achieved in multiple ways. In concrete environmental and climate legislation, costs and implications on competitiveness should be better taken into account."

He adds that, in MOL Group’s opinion, "the EU should put even more emphasis on concluding a global [environmental] agreement, in order not to harm the short- and mid-term competitiveness of its own industry."

Muller says: "For economic benefits, including jobs and security of supplies, the EU refining sector requires a coherent and competitive legislative framework that allows refining, as other EU manufacturing industries, to compete on international markets.

"The compromise to be reached by the EU is to reach the right balance between competitiveness, security of supply and sustainability. EUROPIA believes that the EU must ensure profitability of industrial assets and investments in Europe to underpin EU growth, secure jobs and limit EU’s dependence on third countries.”

A second roundtable meeting is planned for November 2012. Perhaps this will aid both sides in moving closer to an agreement.

($1 = €0.78)

By: Jo Pitches
+44 208 652 3214

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