Special Report: European refiners challenged during declining gasoline, diesel markets

June 15, 2009
The past year has been a challenging one for the European refining industry, particularly because of the drastic fluctuations of world oil prices.

The past year has been a challenging one for the European refining industry, particularly because of the drastic fluctuations of world oil prices. After peaking at nearly $150/bbl in July 2008, oil prices have fallen to a current level of $60-70/bbl. Refiners had very good margins where capacity and balances for gasoline and diesel were rather tight at particular points last year. Now falling margins for fuel producers, high operating costs, falling demand, and a supply glut in new capacity are major problems. A string of upgrades and conversion projects have been postponed or canceled in light of the global recession and the tightening of credit availability (Fig. 1).

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The global slowdown has impacted European oil product demand, which contracted by 0.3% year-on-year in March, according to the International Energy Agency’s Oil Market Report published in May.

Speaking June 8 at an industry conference in Kuala Lumpur, Jeroen van der Veer, chief executive officer of Royal Dutch Shell PLC, said he believes that the Western gasoline and diesel markets are stabilizing after the slump late last year. “In the US and Europe, the gasoline and diesel markets collapsed in the fourth quarter. We see signs of stabilization but it’s [still in the] very early days. It could be due to seasonal factors or destocking; we hope that we see the signs correctly, it would be good news if it stays like that.”

Depressed outlook

European refiners have been subdued in presenting their recent financial results as well as their forecasts for 2009. OMV AG, with refineries in central and southeast Europe, identified its challenges as being lower oil prices, weakening refining margins, and depressed demand.

Matti Lievonen, president and chief executive officer of Neste Oil Corp., which has refineries in Finland, said, “We have seen the largest drop in demand in the diesel market, which is very much tied to industrial activity and logistics.”

Neste Oil has postponed construction of an isomerization unit at its Porvoo, Finland, refinery because of weaker demand for petroleum products. Instead, Neste Oil will concentrate on building NExBTL renewable diesel capacity in Singapore and Rotterdam and a base oil plant in Bahrain. The planned €80 million isom unit, first announced in 2008 and due for completion in 2011, was to have the capacity to process 600,000 tonnes/year of existing gasoline fractions into premium gasoline and increase the refinery’s total gasoline output by 200,000 tonnes/year.

Thomas D. O’Malley, Petroplus Holding AG’s chairman, stated, “We expect gasoline to be under the greatest downward pressure during this period. The middle distillate crack spread has maintained its strength, but depending on the length and severity of the global recession, it could come under pressure.” O’Malley also views this downturn as a potential opportunity to pick up cheap refineries.

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While presenting Total SA’s yearend 2008 results, Chief Executive Officer Christophe de Margerie said the refining market faced the continuing gasoline-diesel imbalance in the Atlantic markets. The fall in US gasoline demand would impact Europe’s gasoline exports, and there is a great need to reduce refinery capacity to balance product supply with consumer demand (OGJ Online, Feb. 13, 2009) (Fig. 2).

Mike Wilcox, head of global downstream oil consulting at Wood Mackenzie Ltd., told OGJ, “The recession coincided with a surge of capacity on the market. So, with demand falling, we believe that there were will be a global mismatch of around 7 million b/d of demand and refining capacity over the next 2-3 years, and how the market will react will vary by region. In Europe, we expect margins this year to be significantly lower than 2007 and 2008. The last downturn was in 2002, and the fundamentals look worse now than then; oil prices, however, are higher this time round than in that period.”

Energy efficiency

Despite these pressures on refiners, ExxonMobil Corp. has continued to invest in energy efficiency, taking a long-term view of the cyclical nature of the industry, said Darren Woods, ExxonMobil head of refineries in Europe, the Middle East, and Africa. Speaking at the inauguration of the company’s 125-Mw cogeneration plant at its 305,000 b/d refinery in Antwerp, Belgium, he said, “We always work on the basis that there will be periods when margins are low. We make sure that we capture falling costs through our the procurement process.”

The company’s Antwerp facility, which is Europe’s second-largest refinery, will be 12% more efficient because of this investment. ExxonMobil has specifically adapted the cogeneration plant for its needs: As well as generating steam, the plant uses a heat-recovery system to utilize heat created in the gas-turbine exhaust to warm crude oil. With this 4-year project that cost more than €100 million, ExxonMobil had to construct the heat-recovery unit on top of the gas turbine to which it is connected rather than next to it because space is so tight at the site.

Although the cogeneration unit produces enough power to satisfy the refinery’s requirements, ExxonMobil still imports power for the refinery from the national grid. The company said the expected reliability of a single-gas turbine is less than that of the national grid. The cogen plant also will reduce Belgium’s carbon dioxide emissions by about 200,000 tpy, equivalent to removing roughly 90,000 cars from Europe’s roads.

“Energy efficiency is one of the most effective tools available for reducing greenhouse gas emissions,” said Sherman Glass, ExxonMobil president of refining and supply. “Since 2004, ExxonMobil has invested in over 1,500 Mw of cogeneration capacity in five countries,” he said.

With energy costs comprising as much as half of a refinery’s costs, the need for energy efficiency is imperative, said Richard Henderson, technical, director at the Antwerp refinery. Net operating costs also will fall because of the cogeneration unit starting up, Henderson said. “The cogeneration plant is a long-term investment that will last for a minimum of 20-25 years. It will provide Antwerp with a competitive advantage well into the future relative to alternate configurations. This is very efficient compared with a conventional stand-alone power station to run the refinery,” he said.

Gilbert Asselman, manager of the Antwerp refinery, said, “With the latest technology, cogeneration is significantly more efficient than traditional methods of producing steam and power separately.”

According to the company’s analysis, oil products growth will average 1%/year during 2005-30 with diesel demand driving most of this growth. Gasoline demand will slow due to the increase of biofuels, the company said. “ExxonMobil wants to grow its diesel pool, and we’re working on tuning our operations to do this,” said ExxonMobil’s Woods.

In 2010, ExxonMobil also plans to start up its high-pressure hydrotreater at Antwerp, which will help increase the refinery’s output of low-sulfur diesel, a large amount of which will be exported.

Tighter fuel standards

According to Europia, the trade association representing European refiners, more than $8 billion/year is invested in their operations. The cost of investing over the long term is rising because of the legislation to cut sulfur levels in refined products—particularly in gasoline and diesel—as governments and policymakers are increasingly concerned about the environment.

Producing fuels from lower-quality crude is another issue that refiners are grappling with. If oil prices rise in the next few years, as they did in 2008, refiners are more likely to process less-expensive, higher-sulfur content crudes.

Neste Oil, for example, has turned its attention to developing a €670 million renewable diesel plant in the Port of Rotterdam, which will have production capacity of 800,000 tpy and start operations in 2011. “This would be a major step forward to reaching the [European Union’s] 10% renewable fuels target in transport. NExBTL, Neste Oil’s proprietary technology, is the innovation behind the world’s cleanest and most advanced renewable diesel,” Neste Oil said.

The Fuel Quality Directive Review (FQDR), which stated that road fuels must reduce greenhouse gas emissions by 10%, was meant to be implemented in 2005. However, FQDR has been delayed due to a number of revisions, including the respecification of fuel-quality parameters on health and environmental grounds to include GHG-affecting climate change. There also is contention regarding how FQDR would interact with existing or planned legislation that addresses carbon dioxide emission reductions, as well as boosting the use of biofuels and other renewables.

Europia said, “This concept was not part of the stakeholder consultation process and, as a result, suffered from the absence of necessary data and tools to assess its viability.” It has rejected the figure as unrealistic as it doesn’t believe that 16% (on energy basis) of biofuels needed to meet the GHG emissions reduction targets is attainable. Europia wants to see a methodology for GHG emissions calculation as well as a biofuels sustainability certification scheme. Furthermore, the double regulation of European refineries and oil platforms with respect to the EU Emissions Trading Scheme has not been considered.

Refineries for sale

Other companies would prefer to sell their refineries during this downturn, but they face a dilemma in doing so. Daunting questions remain: Do they embark on the expensive program of shutting down their refineries or do they run them at a loss, while faced with steep environmental clean-up costs?

In February, Italy’s Eni SPA said it would seek buyers for its 84,000 b/d Livorno refinery on the Tuscan coast of northern Italy because of diminishing global oil demand, increasing energy efficiency, and the growth of biofuels (OGJ Online, Feb. 16, 2009). Twelve bids have been submitted so far and Eni is expected to reach a decision by the end of June.

Petroplus Holdings AG would like to dispose of its 117,000 b/d Teesside, UK, refinery, or perhaps convert it by yearend into an import terminal, which it may then sell. Petroplus has already shut the facility that processes Ekofisk crude and supplies about 17% of the UK’s diesel.

Shell wants to divest its 93,000 b/d Hamburg and 83,000 b/d Heide refineries in Germany as part of its portfolio management. A spokesman declined to comment on the update of this sales process.

WoodMac’s Wilcox said the deals will likely be completed for the better of the refinery assets now on offer. The valuation of refineries in 2007-08 compared with the pre-boom in 2003-04 has gone up by a factor of 3, he said.

Wilcox said the market turmoil means difficult times for refiners. “European refiners need to focus on their local position as much as possible to make the best of them because the international market is going to be very difficult, particularly given the need to ‘push’ gasoline into North America,” he said.

“For the long-term outlook, there is overcapacity in the European refining industry. We expect middle distillates and diesel to grow and become tight again. We expect there to be more crude refining capacity than crude runnings and so utilization rates will be lower,” he said, adding, “Refiners need to find a way of competing.”

Snapshot of Europe’s refinery upgrades, modernization plans

Below are some operators’ plans to upgrade or expand their refining operations in Europe in 2009-12. This is not intended to be a comprehensive list.

Total SA

As the largest refiner in western Europe, Total operates 11 refineries and also holds interests in the Schwedt, refinery in Germany and in four refineries in Spain. It has dedicated nearly €1.6 billion/year during 2009-13 to address the diesel shortage in Europe, tighter fuel specifications, and a rise in supplying high-sulfur crudes. In 2015, diesel production by Total’s European refineries will be up 13 million tonnes over 2005, representing a 50% increase.

Work at Total’s 200,000-b/d Lindsay, UK, refinery includes:

• Installation by yearend of a 1 million tonne/year hydrodesulfurization unit (HDS) and a steam methane reformer to increase the processing of high-sulfur crudes to 70% from 10% and boost low-sulfur diesel production. Both the HDS unit and steam methane reformer will cost €300 million.

Work was suspended in February for more than a week following a strike by employees because the subcontractor, Irem SPA, had employed foreign labor for jobs instead of locals (OGJ Online, Feb. 2, 2009). Another sympathy strike happened last month in support of laggers at the Milford Haven LNG terminal who complained that they had lost out to foreign contractors for an insulation project (OGJ Online, May 21, 2009).

Work at Total’s 229,834-b/d Leuna, Germany, refinery includes:

• The installation of a 1 million tpy hydrodesulfurization unit, which will produce ultralow-sulfur heating oil, at a cost of €120 million. Work on the HDS is set to finish in the summer, with the facility due to come on stream in the fall, a Total spokesman told OGJ. The unit will be capable of producing kerosine with a sulfur content of 1 ppm and light diesel with a sulfur content of 5 ppm.

Leuna is one of the most efficient refineries in Europe and can process sour crude oil without producing heavy fuel oil.

Meanwhile, Total will invest €770 million during 2009-12 for the reconfiguation of its 339,000-b/d Normandy, France refinery following consultation with employee representatives. About 249 jobs will be shed by 2013, Total said, adding that it will focus on internal placement. “The employee consultation should be over by the end of June,” a Total spokesman said.

Capacity at its Normandy refinery will be cut to 12 million tpy from 16 million tpy. Annual average diesel production will increase by 10% and surplus gasoline output will drop by 60%.

Hellenic Petroleum SA

Work at Hellenic Petroleum SA’s 66,500-b/d Thessaloniki, Greece, refinery includes:

  • An upgrade, by 2010, with the addition of a new 15,000-b/sd continuous catalytic reformer, the modification of the existing atmospheric distillation unit, and the revamp of the existing naphtha hydrofiner.
  • The upgrade of a crude light ends processing unit to process 26,000 b/sd.

Foster Wheeler Ltd. was awarded engineering, procurement, and construction management contracts in 2008 for the work. A company spokeswoman told OGJ, “Progress achieved is around 60% and activities are still on track to complete the work by end 2010.”

Petrom SA

Work on Petrom SA’s 69,280-b/d Petrobrazi, Romania, refinery includes:

  • A modernization program that has been delayed to 2012 from 2010 because of the challenging economic environment.
  • The spending of €1.5 billion to boost capacity to 6 million tpy from 4.5 million tpy.
  • Commissioning in April of a €90 million, 700,000 tpy FCC gasoline post-treater that will produce EUR V gasoline.

There were difficulties revamping this refinery and the nearby Arpechim refinery because they were in worse condition than expected, demanded complicated programs, and suffered a tight market for supplies.