Doris Leblond
OGJ Correspondent
PARIS, Mar. 13 -- The refining industry is already feeling the impact of the falling growth in global oil demand, with North America and Europe the hardest hit by the downturn, said participants at the European Fuels Conference in Paris Mar. 11-12. The conference was organized by London-based World Refining Association together with Energy Exchange Co.
Globally, refinery yields are reflecting greater destruction of fuel oil demand and increased production of middle distillates. Indeed middle distillates remain the key market driver (along with naphtha for petrochemicals), according to Jonathan Leitch, senior products analyst at Wood Mackenzie.
Refiners in North America and Europe, he said, will be forced to cut runs more than other regions, but even after utilization is reduced, the global gasoline surplus will continue to grow well into the next decade.
However, European refiners will cut runs slightly less due to the regional diesel deficit, and their gasoline surplus capacities will continue to be pushed into the US where demand is also on the wane.
At the same time, US refiners will maximize diesel production, which will be drawn into Europe.
Atlantic Basin market
Johannes Benigni, managing director of Vienna-based JBC Energy GMBH, who foresees 4.9 million b/d of US-European refining capacity at risk, described the Atlantic Basin market as "the main battlefield" because demand in that area is expected to decline by 3 million b/d by 2020.
He suggested, nonetheless, that refining capacity might grow by 1.4 million b/d but with biofuels replacing about 1 million b/d of refinery fuels by 2020.
Pointing out that the only support for demand in 2008 came from gas oil-diesel, resulting in a 600,000 b/d gasoline surplus, Benigni said the full impact of the economic slowdown will be felt this year, with the difference between gasoline and gas oil expected to be 50,000 b/d. European refining capacity is more endangered in northwestern Europe than in Europ's eastern, central, or Mediterranean areas.
In the US, Benigni expects refinery-based gasoline demand to drop to 6.78 million b/d in 2020 from 8.91 million b/d in 2007. Gasoline production is being replaced by middle distillates "where the money is," noted Benigni as he pointed to "the sudden export of these products." He noted that "the US is quickening the pace of change from what used to be several years now happening in months" with exports to Latin America, the Mediterranean—including France—and Northwest Europe.
As matters now stand, the middle distillates market is becoming "very crowded" because gas oil exports to Europe currently are the highest since October 2008 due to a particularly weak Asian market, he added.
International pressure
More globally, Benigni saw Organization of Economic Cooperation and Development countries under strong pressure, with refinery shutdowns already planned in Japan and being considered by various European companies. The Middle East could be a "key relief" in coming years if refinery projects continue to be delayed, subsidies remain, and oil prices rise.
While Asia as a whole is unlikely to provide an outlet—it has its own refining investments and surplus barrels from OECD Europe—the Mediterranean could emerge as a new trading hub as it already has volume exchanges with all world regions.
Speaking for the European Petroleum Industry Association, Europia, Secy. Gen. Isabella Muller expressed concern that Europe's "major diesel-gasoline supply-demand imbalance" will continue to grow as the investments needed in conversion capacity are being hindered by challenges accumulating in the European Union.
"Refining is a long-cycle industry," she told the conference. "To maintain investments in the EU, the industry needs a long-term, predictable policy framework." The challenges the industry has to face regarding sustainability include the cumulative effect of climate change and renewable policies, upward pressure on CO2 emissions from refineries due to stringent product specifications, and continuous demand changes with the gasoline-diesel imbalance.
Energy efficiency improvements, she said, cannot offset this upward pressure as continuing diesel demand growth and specifications would raise the diesel CO2 footprint and require more imports.
"The refining sector in the EU," Muller insisted, "is uniquely affected by three EU legislations: air quality, climate policy, and fuel quality-renewables."
Accordingly, EU-only CO2 costs, in the absence of similar constraints elsewhere, would make investments in the EU less attractive, increase incentives for importers to the EU, and provide advantages to non-EU competition in export markets—all of which would jeopardize supply security.
Total reconfigurations
Total SA, which has no plans to close any refineries in Europe, is planning to consolidate its refining and petrochemicals operations in France and restructure its refining base to reduce the gasoline-diesel imbalance. To this end it will reconfigure and downsize the world-scale, 16.4 million tonnes/year Normandy Gonfreville refinery in northwestern France by reducing its capacity to 12 million tonnes/year at a cost of some €770 million.
Gasoline production will be reduced by 60%. At the same time, the distillate hydrocracker commissioned in 2006, will be upsized to produce 500,000 tonnes/year more diesel—a 10% increase. The reconfiguration also will reduce carbon emissions from the refinery by about 25%, or 1 million tonnes/year, the company said.
The move, which is to take place over 3 years to 2013, is timed to take advantage of the refinery's 5-year turnaround scheduled for 2011. It will involve the loss of 249 jobs with no layoffs planned but internal replacements, retirements, early retirements, and the introduction of a furlough system planned.
Unrelated to the refining restructuring, Total is introducing, over the same period, the upgrading and consolidation of its petrochemicals in France. Part of the project will involve some €230 million to improve the energy efficiency and competitive strength of the steamcracker and high-density polyethylene unit at Gonfreville and to consolidate the polystyrene production at the Carling facility in eastern France.
The program will lead to the closure of loss-making units: a low density polyethylene line and a polystyrene line in Gonfreville. The project will streamline production facility organization, concentrate customer technical support at the Feluy complex in Belgium —currently provided in part by the Mont facility in southwestern France, and rescale Paris headquarters operations to the company's new scope.
The Lacq research unit in southwestern France will be expanded to focus on state-of-the-art activities for all Total's businesses. In addition, Total Petrochemicals France will close the Notre-Dame-de-Gravenchon facility in Normandy, which produced secondary butyl alcohol for one remaining customer, Arkema, which has terminated its supply contract.
There will be no layoffs for the 306 jobs that will be lost through 2012 but personnel will be reassigned through internal replacement and retirements.
Sugaring the pill, which was badly received by the trade unions as well as the government, Total said it would be investing over €1 billion euros in its refining and petrochemicals in France and in solar energy. With GDF Suez, it will invest €70 million to build a plant to manufacture silicon wafers for the photovoltaic industry in the Carling region of eastern France. That will employ some 100 people.