Refinery Q1 production points to higher emissions

Output from European refineries has been rising so far this year, suggesting higher carbon emissions, but this could change in the second part of 2015.

According to data from the International Energy Agency (IEA), in Q1 2015 refineries in European countries part of the Organisation for Economic Co-operation and Development (OECD) produced 12m barrels of refined products per day, which is 7.4% higher compared with Q1 2014.

“[Higher margins] provided an incentive to production, therefore we saw an increase of the crude volume going through European refineries,” Jonathan Leitch, research director of refining and oil product markets at consultancy Wood Mackenzie, told ICIS last week.

Profit margins for European refiners started to widen in summer last year as Brent crude prices plunged, while prices for refined products declined more slowly. Rating agency Fitch said in a recent note that in Q1 2015 margins at north-west European refineries averaged $7.6/bbl, up from $4.1/bbl in Q1 2014 and from $5.9/bbl in Q4 2014.

Margins were supported by demand exceeding market expectations, but temporary factors also weighed in, including opportunistic trading, Fitch said.

Short-term outlook

But this might change soon. Margins are likely to narrow in the second part of the year because buyers of refined products are building up stocks and demand will not be as strong, said Wood Mackenzie’s Leitch.

This would limit emissions going forward.

Fitch was on the same page. “Fundamental challenges such as overcapacity and strong competition remain and are likely to put pressure on European refining margins [in the second half the year],” it said.

The European refinery sector has been hit hard in recent years. Since 2008, 14 refineries have closed as a result of plunging profit margins and declining demand.

This resulted in lower carbon emissions. EU data shows that across phase II of the EU emissions trading system (ETS), European refineries emissions declined from a high of 157m in 2008 to a low of 141m in 2012.

Unlike most industrial sectors that have built up considerable length in phase II of the EU emissions trading system, the refinery sector came out of the trading period with a 44m allowance surplus, but this was almost finished up in 2013, when the sector was 37m EU allowances (EUAs) short. For 2014, provisional data point to an up to 28m EUAs shortage, but some plants appear to not have reported verified emissions yet, which could change the figure.

Further ahead

Consultancy McKinsey’s analysts said last year that throughput in Europe could decline by as much as 2.1 million barrels/day by 2020 to 10.6m, or the equivalent of 16 average-sized European refineries.

Some relief might come from the implementation of stricter sulphur standards for marine fuels. Under EU rules, the sulphur content of fuel used by vessels operating in designated areas including the Baltic Sea, the North Sea and the English Channel must be lower than 0.1% starting from January 2015, down from 1% previously. In EU waters outside these areas a 0.5% limit will apply from 2020, down from the current 3.5%. In the rest of the world, this limit could apply from 2020 or 2025.

McKinsey thought that they could increase throughput by up to 1.9 million barrel/day.

An industry group previously told ICIS that as a result of the new standards, emissions from EU refineries could increase by up to 13% from 2010 to 2020 in the worst case scenario (see EDCM 27 November 2015).

However, shippers can also comply with the new rules by using alternative fuels such as LNG and methanol, or equipping their vessels with abatement systems called seawater scrubbers, which would limit the emission increase. silvia.molteni@icis.com