07 December 2012 10:31 [Source: ICB]
Greater vehicle efficiency plus regulatory moves pushing increased use of renewables could leave petrochemical producers with a transformed feedstock landscape
The European refining sector is facing big challenges
In the past, diesel-use increases have compensated somewhat for the drop in gasoline. In fact, through the increased use of diesel in the European car fleet, diesel road use has increased at an average growth rate of 2.9%/year from 2000 to 2011 against a decline of gasoline by about 3.1%. While recent estimates indicate a constant decline, an optimistic scenario shows a slight rebound in 2013.
In particular, while the biggest consumers (France, Germany, Italy and UK) show a drop in oil requirements, eastern Europe and the Mediterranean countries, Turkey and Poland primarily, contribute the most to oil demand. Petrochemical feedstocks and diesel use are the main driving forces of future oil growth. But, freight transport would sustain the projected demand growth more than private use because of the increased efficiency of cars and shorter trips.
Yet the implementation of the EU's 20-20-20 policy (20% cut in greenhouse gas emissions from 1990 base; raising use of renewables to 20%; and a 20% boost to energy efficiency) plus the development of its Energy Roadmap 2050 show the push for on the one hand, decarbonisation and, on the other hand, ensuring security of energy supply and competitiveness. The general outlook in the EU is a move towards a "green" energy matrix, with a progressive decrease in oil product consumption.
The malaise of the European refinery sector has been going on for many years, as witnessed by the constant decrease of operational plants albeit, until 2005 the total refining capacity increased in line with oil consumption. There was rationalisation of refineries with closures of less competitive sites and this kept capacity utilisation at around 82%. This was the golden age of European refining.
With decreasing oil demand due also to rising crude oil prices, refining capacity started to shrink. Recently, both strong international competition and the economic slowdown have had a further negative impact on refining capacity. Between 2009-2011, these factors caused the closure of another five refineries with a total capacity of about 700m bbl/day. In 2012 four additional plants stopped refining in France, Germany, Italy and the UK.
In addition, changes of ownership in the refining industry with the entering of exploration and production majors and trading companies could mean more flexibility and opportunity for the supply market.
A few Italian refineries are still under pressure. Eni's Gela refinery in Sicily has run partially since April, while api's Falconara refinery will close for one year (2013) and the Porto Marghera site in Venice will be converted into a "green refinery" for the production of biodiesel from 2014. Apart from the coming on stream of the Socar/Turcas Energy refinery in Turkey in 2017, for the time being the players are no longer interested in investing in the refining sector because of the weaker outlook.
Notably, current low utilisation rates of European refineries also reflect a reduction in gasoline exports, in particular to the US. Reduced local demand, but also increased use of ethanol are the key factors there.
Notwithstanding, Europe must, to some extent, keep its refining structure to guarantee security of supply and feedstocks for the petrochemical industry. The restructuring process should continue by shutting down less-profitable refineries and matching supply with domestic demand profiles.
In fact, the output of most refineries is not aligned with demand and produces gasoline in overcapacity. The major players need to invest in upgrading their existing assets to change their product slate in favour of middle distillates and remain in a competitve position. The EU could play an important role supporting, eventually, the necessary rationalisation of domestic refinery capacities.
In Europe most of the existing steam crackers are integrated with refineries. In terms of petrochemical feedstock, volumes of naphtha are constantly drawn from the gasoline pool to the petrochemical industry. In fact, the drop in gasoline demand has hit naphtha consumption for refinery uses. This has declined by about 2%/year from 2000-2011.
Ethylene requirements, after a drop both in 2008 and 2009, is increasing at an annual average growth rate of less than 1%, although it remains slightly below the peak of consumption recorded in 2007.
This growth depends principally on the Petkim investment in petrochemicals in Turkey around 2017. Regarding the outlook for feedstocks, naphtha and liquefied petroleum gas (LPG) show the major contribution in volume terms, while demand for the remaining feedstocks should not change significantly. The growth in LPG is limited both by logistical infrastructure and availability of flexible-feed liquid crackers. In addition, as LPG supply both from NGL plants and refineries is expected to remain roughly flat, the outlook foresees progressively growing imports to cater for domestic demand.
In particular, the LPG deficit is expected to rise from almost 5.0m tonnes in 2011 to about 8.0m tonnes by 2020. The Middle East, firstly, is a potential candidate to supply incremental LPG over the next few years following an impressive projected development of NGL recovery plants.
However increases in naphtha requirements are projected to have a minor impact on naphtha imports because of major amounts of material released from domestic refineries. Aromatics demand follows a similar pattern to that of ethylene with an average growth rate projected to be about 1.5%/year between 2011-2020. Among feedstocks, reformate should overtake the contribution of pygas.
Paolo Scafetta is a chemical engineer and joined Parpinelli TECNON (now ICIS Consulting) in 2001. He is engaged in annual multi-client reports, as well as single-client studies. Contact firstname.lastname@example.org
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