FRENCH REFINERS GRAPPLING WITH NEW OCTANE SPECS, ENVIRONMENTAL RULES

After emerging from the doldrums of the 1980s, France's refining industry faces new challenges to meet tightening gasoline and diesel specifications and greater environmental pressures.

A three stage investment program is under way to adapt the pared down and restructured plant network to satisfy a changing products market.

Current outlays, involving the first stage of investments, are geared to the rapidly developing unleaded gasoline market to meet quantity and quality requirements.

During 1985-93, French refiners will have spent almost 6 billion francs ($1.077 billion) in this area.

And in 1993-96, French refiners will need to spend as much again to supply more middle distillates with lower sulfur content to meet more stringent quality requirements expected from the European Community.

Tougher specifications for gas oil also will bring to a head the need to phase in deep or semideep conversion units to reduce the share of heavy fuel oil in refinery runs and increase the share of middle distillates.

For French refiners the debate over gas oil specifications is critical because France is by far the largest EC market for diesel fuel. One in two vehicles in France runs on diesel, compared with the EC average of one in six.

French taxes on diesel are particularly low with a spread of 1.83 francs/l. ($1.24/gal) between leaded gasoline and diesel.

Last year sales of diesel at 17.5 million metric tons (about 131.25 million bbl) practically equaled sales of gasoline at 18.2 million metric tons (about 136.5 million bbl). In the first half of this year diesel sales increased by 6%, and gasoline sales fell by a similar percentage.

Because of the structure of its refining industry and its products market, France is a net products importer. Last year 7.3 million tons of middle distillates were imported, along with 3 million tons of naphtha and 1.5 million tons of gasoline. Refinery runs were geared to produce as little heavy fuel oil as possible, but there remained a surplus of 2.7 million tons to export in 1990.

INDUSTRY PERFORMANCE

The French industry is posting positive refining margins for the third straight year following the 40 billion franc ($7.18 billion) in losses accumulated in 1978-88.

But the six companies that operate refineries in France-Total, Ste. Nationale Elf Aquitaine, and units of the Royal Dutch Shell Group, Exxon Corp., British Petroleum Co. plc, and Mobil Corp.-consider profits too low to ensure a proper return on capital.

In 1990 they spent 2.2 billion francs ($395 million) in refining, up from 1.3 billion francs ($233 million) in 1989.

They all point out that pretax product prices in France are still the lowest in Europe, except for heating oil.

That's because of severe competition in gasoline and diesel fuel markets from French supermarket chains that account for about 40% of total sales. Oil companies are now focusing on product quality and unleaded gasoline as a means to battle the supermarket competition.

France was not in the vanguard of European countries making the switch to unleaded gasoline. But now that the fuel has been made widely available, sales are good.

Production of unleaded gasoline last year rose to nearly 4 million metric tons of which half was superunleaded 98/88 octane. Gasoline consumption was 2.6 million metric tons, and 90% of that was superunleaded. Unleaded's market penetration rose from 19% in 1990 to 25% last summer. French refiners still have a surplus of unleaded, most shipped to the U.S.

HIGH OCTANE FOCUS

French refiners have been focusing on production of high octane unleaded gasoline because half of France's vehicle pool can use this grade without engine modifications.

Motorists are encouraged to buy unleaded by a 0.41 franc/l. (28/gal) tax break.

Companies are improving quality by boosting catalytic reformer performance and fractionating cat cracker gasolines.

To boost octane content of superunleaded, French refiners are building isomerization or alkylation units. They reckon it costs an extra 0.1 franc/l. (7/gal) to produce high octane unleaded, compared with leaded gasoline with a lead content of 0.15 g/l.

In addition, every refiner is making a point to provide its own brand of additives to achieve high quality products. Additive specifications are worked out with automobile manufacturers who require engines, valves, and injectors to be kept clean.

Commenting on the trend, Shell Francaise Pres. Henri Pradier said, "Gasoline Is bound to become a performance product, to be refined, stored in, and carried from the oil company's own installations. Like vintage wine, the producer's reputation will be at stake if quality is not up to standard.

"This will be the price to pay to meet technological and ecological requirements. The indirect consequence will be a further reduction of a refinery's (profitability)."

Accordingly, companies will have spent 5.8 billion francs ($1.041 billion) by the end of 1992 to provide facilities to meet these new policy aims.

Those facilities include a 400,000 ton/year isomerization unit at BP France's Lavera refinery due on stream in 1992.

BP also is modernizing the refinery.

On the same site, Elf will bring on stream a 320,000 ton/year alkylation unit. The companies will exchange products.

By 1995 Elf also will place on stream at its Grandpuits refinery in northern France a 230,000 ton/year isomerization and hydrotreating unit. On its Feyzin site, near Lyon, a 145,000 ton/year alkylation unit has just gone on stream.

Total France also recently commissioned a 533,000 ton/year isomerization unit at its Gonfreville refinery in Normandy. A second unit with the same capacity is due on stream at its La Mede refinery in southern France in 1993. The company also is building two fractionating units at the Mardyck refinery in northern France and in La Mede.

Esso SAF has just announced the building of a 200,000 ton/year alkylation unit on a site adjoining its Port Jerome refinery in Normandy, where it is building an isomerization unit. In addition, a deparaffination/desulfurization unit for middle distillates is being built at the Esso complex.

OCTANE SEARCH

French refiners' search for octanes in unleaded fuels has boosted use of oxygenates, mainly methyl tertiary butyl ether. Last year about 340,000 tons of MTBE were used, supplied mainly from Elf's Feyzin plant and AB-CO's plant at Fos-sur-Mer. French MTBE production capacity has risen to 550,000 tons/year from 420,000 tons/year in 1990.

Under French regulations MTBE use in gasoline is limited to 10% by volume but discussions are under way to push this to 15%, the percentage authorized under EC rules.

And because the EC tends to follow U.S. environmental regulations sooner or later, increasing the percentage of oxygenates in gasoline for environmental reasons could require more MTBE units.

Some in industry believe it would make better sense to build them in gas producing countries.

Total is on the verge of participating in an MTBE unit in Algeria and is looking at another proposed project in Qatar.

MORE CONVERSION

Last year, the French refining industry's conversion capacity reached its highest level, estimated at 420,000 b/d compared with distillation capacity of 1.692 million b/d, a ratio of 23%. Although improved, this is still lower than Germany's 35% or the U.K.'s 29%.

The structure of France's refining industry is geared to gasoline production. In its annual report, the French government's Hydrocarbons Directorate notes past investments have focused on the cat cracker option.

There are no deep or semideep conversion units capable of processing heavy fuel oil into lighter products nor are there significant volumes of hydrocracked feedstocks to produce quality gas oil.

French refining is generally short on middle distillates and naphtha and long on heavy fuel oil, where there is an exportable surplus. This is because very little fuel oil is required for power generation in a country where most electricity comes from nuclear power. Heavy fuel oil is also being backed out of industrial use by natural gas.

AGAINST THE TIDE

Falling gasoline sales and increased motor diesel consumption have prompted one industry official to comment that the 5.8 billion franc investments in the gasoline market "are running against the tide."

He also contends the next wave of investments, to reduce sulfur content of gas oil, will run counter to future market trends for the sale of diesel fueled vehicles.

The government's Hydrocarbons Directorate reckons desulfurization will cost industry as much as the 5.8 billion franc outlays for unleaded gasoline and improving gasoline quality.

The risk to industry is a narrowing of the generous differential between taxes for diesel and gasoline as part of harmonizing tax levels in the wake of creating a single market in the European Community after 1993. In this situation the enthusiasm of French drivers for diesel might start to wane.

The fear seems well founded in light of the French government's 1992 budget calling for a 2.9% increase in the tax on diesel while increasing the tax on premium gasoline by only 1.5%. The purpose is to "stabilize" the tax advantage favoring diesel.

Gilbert Portal, secretary general of the European Petroleum Industry Association (Europia), expressed concerns for the diesel market at WEFA Group's conference on European refining strategies and economics in the 1990s, held in Florence, Italy, last summer.

He voiced concern the very low sulfur levels limits for gas oil the EC plans "would have very serious consequences for the refining industry."

The current level of 0.3% is scheduled to fall to 0.2% in 1994 for all gas oils and then fall to 0.05% for motor diesel in 1996 and to 0.1% for all other gas oil in 1999.

If finally adopted, said Portal, "Not only will huge investments be necessary, but these limits will for instance restrict the production of fuel oil and bunker fuel to low sulfur crudes."

Accordingly, oil companies in France have cooperated with the French government in submitting a proposal to the EC aimed at reducing sulfur dioxide emissions significantly while avoiding competitive distortions within the European refining industry.

Instead of reducing sulfur emissions sector by sector, a policy would be devised for the entire EC covering the whole oil industry, responsible for half the 15 million tons/year of sulfur emissions.

Oil markets in Europe vary greatly. For example, SO2 emissions are very high from Italy's power plants, which are substantial users of heavy fuel oil. France with its massive nuclear program does not contribute to the sulfur problem from power stations. The Netherlands is a major supplier of bunker fuels while its power plants run on gas.

The French proposals, which have been well received by the EC, aim to pass on to the consumer the cost of desulfurization. Product would become more expensive, but no sector of industry would be affected more than another.

Whatever emerges from the EC, the refiners have little choice but to conform to the regulations. As Maurice Passot, a member of Elf's refining management pointed out, "A company that cannot keep up with these investments will not be able to stay in business."

Some companies will need to invest more than others. Esso and Shell say they have sufficient desulfurization facilities for the time being at their Fos-sur-Mer and Berre site in southern France. Elf has included some desulfurization plans in its 2.5 billion franc ($449 million), 3 year refinery investment program.

Claude Dupuy, a Shell vice-president, is optimistic France will continue to be a major diesel oil market in Europe and that tax harmonization will not significantly reduce the gap between gasoline and gas oil even with the sulfur content reduced to 0.05%.

BP also is optimistic, with one official saying, "The virtue of reduced sulfur content regulations is that they enable companies to work in a more sophisticated manner with added value."

In any case, the BP official said, such large investments are undertaken in a European context and not on a specifically French basis.

This applies to the international groups in France. Total and Elf are increasingly viewing their refining base in a Europewide context. "Our Fiessingen hydrocracker in Holland already produces a 0.05% sulfur gas oil," said Jean-Claude Vettier, Total director general of refining.

The wider view of European refining will most likely come into play when decisions on building deep conversion units need to be taken. To reduce the share of heavy fuel oil in refineries, increase gas oil runs, and provide low sulfur fuels to meet EC regulations, the industry will have to decide sooner than later whether to build deep or semideep conversion units.

"The choice will most likely be hydrogen technology," believes Fabrice Dambrine, deputy director of the Hydrocarbons Directorate. "Better products with a lower sulfur content are produced through hydrotreating than through coking units," he said.

Total might well be the first French refiner to take a step in this direction. Vettier said the company was almost at the end of its deliberations on this subject. The best refinery site for a deep conversion unit and the optimum time to begin spending plans have yet to be determined.

Gonfreville in Normandy has already been mentioned by Total. But Dambrine believes Total's Flessingen refinery may be the final choice. He estimates the cost of a deep conversion unit at 5 billion francs ($897 million) for a 20,000 b/d unit.

"Profitability would be achieved when the differential between heavy fuel oil and light products is $100/metric ton. Currently the differential is $70/ton," Dambrine said.

Timing such investments will be tricky, given the 3 year lead time. If completed when heavy oil prices are too low, it will take years to become profitable. If it is too late, the unit could be undercut by a competitor that moved more quickly.

"Timing will also depend on how fast and how far European SO2 specifications for heavy fuel oil go," said Vettier. He also pointed out that low sulfur specifications would close the European market to imports of lower grade product.

Total and Elf, which will probably take the first decisions on deep conversion, are likely to seek partners for the venture.

TURNING POINT

The French refining industry sees itself at a turning point.

"There is certainly a closer relationship between refining and petrochemicals," Dambrine said. "It is a revolution of sorts, With its high quality specifications, gasoline has practically become a chemical product. And lower sulfur gas oil will emphasize the trend."

Vettier said refiners will be competing with petrochemical producers for the C4 Cuts from fluid catalytic crackers for isobutylene and MTBE as substitutes needed to provide octanes or used to replace aromatics in unleaded. "This is the point of the swap agreement between Elf and BP on the Lavera site," he added. Extracting aromatics from the gasoline pool will, on the other hand, benefit the petrochemicals industry.

The great question, said Vettier, "Is what about naphtha?'

"This is the main feedstock for the petrochemicals industry in France. But isomerization is a great naphtha consumer. Refiners will increasingly be needing their own production. It is clear that the evolution of our refining tool will affect the petrochemicals industry and vice versa."

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