European refiners facing large investment to meet low sulfur rules

By the OGJ Online Staff

MADRID, Nov. 13 -- Europe's refining industry faces the prospect of investing up to $10 billion over the next 5 years to meet both the demand for European Commission-legislated cleaner fuels and the "dieselization" of the market.

The European Refining Technology Conference (ERTC) now meeting in Madrid was also told that many Russian and East European refineries in Poland, the Czech Republic, and Slovakia are already capable of meeting European specifications and are also in a position to provide exports of diesel fuel.

Mike Wilcox of the UK analysts Wood Mackenzie said large investment programs to be undertaken over the next 5 years mean that refiners will be able to meet the 50-ppm sulfur content requirement for both gasoline and diesel by the 2005 deadline. Most will be in a position to meet the 2010 specification of 10 ppm by 2005. Because of progress being made in upgrading refineries, the EC is expected to bring forward the 2010 deadline to 2008.

Present regulations demand a 250-ppm sulfur content, but most suppliers are already producing fuels at the 50-ppm level.

However, he said that the market would see diesel increase its share from the present 17% to 24% by 2010. This may create a shortfall in middle distillate output from Western Europe refineries, which may require more investment if they are to meet demand.

This shortfall could be met by production from Eastern European refineries already configured to meet most EC specifications. Wilcox said that Russian refineries are now supplying heating oil into the Swedish domestic market, which has a specification far in excess of that required by legislation. He said many companies will chose to meet market demand with imports from Russia and Eastern Europe rather than making further large investments in refinery equipment.

His comments on the efficiency of East European refiners will be welcomed by the Czech government, which is preparing to privatize its petrochemical and refinery holding company Unipetrol by putting its 62.99% stake in the company on the market for around $450 million.

A consortium of Conoco Inc., Eni SPA through its refining subsidiary Agip SPA, and Royal Dutch/Shell Group already holds a 49% stake in Ceska Rafinerska AS, Unipetrol's refinery, and the group's main earner. This consortium is expected to make a bid for the entire company.

Members of refinery management are in Madrid for the ERTC and have been having informal discussions with potential bidders.

Other expected bidders are Austria's OMV AG in a consortium with the Czech agrochemical conglomerate Agrofert Holding AS, Hungary's MOL Rt., and Britain's Rotch Energy Ltd.

A spokesman for the company said that the Czech government's privatization agency has confirmed that the privatization steering committee has shortlisted an unspecified number of investors to participate in the tender and hopes to complete the privatization process by early next year. However it is understood that such good progress has been made in recent days that its is possible an agreement will be finalized by the end of next month.

The ERTC was also told that fears within the industry that Europe's refineries would have to start using more sour crudes during the next decade could be unfounded. At present, half of crudes passing through European refineries are sweet North Sea blends, while the other half are comparatively sour Middle Eastern oil.

It has been expected that North Sea supplies will shortly start falling towards 40%, and some refiners had already started planning reconfiguration work.

However, the Wood Mackenzie analysis of the industry now suggests that increased sweet crude imports from Algeria, Libya, and Nigeria will maintain the present crude slate for the next 20 years.

The topic of diesel market growth was also raised by Marcel van Poecke, cofounder and managing director of Petroplus International BV, which bought the former Phillips Petroleum Co. refinery on Teeside, UK, and the former Shell refinery at Cressier in Switzerland. He said that the growth of the diesel market, especially in Spain and Italy, was affecting Petroplus's acquisitions policy. Its Teeside refinery is already the largest low-sulfur diesel producer in the UK with a 17% market share.

He said, "When we are closely looking at acquisitions, it is the EC legislation and its effects which is a major driver."