European Refining
Industry in Stormy Waters
Market study
June 2014
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A. Overview of trends
in the European
refinery industry and
their implications
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Over the coming few years, the EU refinery industry will continue to
face multiple challenges – Two key implications for all players
Forces shaping the European refining industry
Challenges on the demand side
1
2
3
4
Challenges on the supply side
Declining demand
55 Capacity expansions in
Changes in the product mix
66 Competitive disadvantage
Economic crisis
– particularly in Southern Europe
77 Lacking advantage from
Decrease of exports to North
America
88 Higher energy costs, unequal
A
Shrinking refining margins
Source: Roland Berger, Europia 2013
Middle East and Asia
through US shale gas & tight oil
Brent/Urals price differential
regulation
B
Lower utilization leading to refinery
closures
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1
Declining demand
The demand for all products, excluding Diesel, has been falling for
over 10 years – Total demand has decreased by ~15% since 2006
OECD European demand for refinery products ['000 bbl/d]
Petroleum products 2000-2013p
Total demand 2006-2012
5,000
-14%
12,300
4,500
11,900
4,000
11,400
10,600
3,500
3,000
2,500
2,000
1,500
1,000
500
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013p
LPG and ethane
Naphtha
Gasoline
Jet A1 / Kerosene
Diesel
Heating oil
Heavy fuel
oil
Other products
Source: OECD, IEA 2013
2006
2008
2010
2012
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2
Changes in the product mix
Demand side challenge: the demand mix will further change with
diesel expected to account for even a larger share by 2030
Total European product demand and product shares: 2011 and 2030
2011
2030
724 million t
756 million t
Diesel
(50/10 ppm)
Others
23%
24%
29%
Jet/
8%
Kerosene
Diesel
39% (50/10 ppm)
Jet/
9%
Kerosene
13%
12%
Heavy fuel oil
Others
Gasoline
13%
Gasoil
Source: Europia 2013, UKPIA, HIS Purvin and Gertz
9%
Heavy fuel oil
10%
Gasoil
9%
Gasoline
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4
Decrease of export opportunities to North America
It is getting harder for European refineries to find customers for their
excessive gasoline
EU gasoline excess and decreasing exports to North America
US imports as % of EU gasoline
excess
Lasting EU gasoline excess ['000 bbl/d]
4.000
Supply
3.500
Demand
70%
68%
56%
3.000
51%
50%
49%
2010
2011
2012
2.500
2.000
1.500
1.000
500
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
> Despite several refinery closures, European refineries are still confronted with excessive
gasoline
> Since European refineries have to cover the domestic Diesel demand, gasoline is
compulsory created as a by-product
Source: IEA 2013
2007
2008
2009
> US demand pull for EU gasoline is further
decreasing
> It is getting more dificult for Europe to sell
the excess at the global market
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5
Capacity extension in Middle East and Asia
Foreign refinery capacities are being greatly expanded and tuned
for export – Example Middle East with +20% till 2016
Refinery extension in Middle East, till 2016
Iraq:
> Different projects, total of 750
kbd, 2013+
Saudi Arabia:
> Jubail, 400 kbd, 2013
> Ras Tanura Expansion, +400
kbd, on hold
> Yanbu, 400 kbd, 2015
> Rabigh, phase 2, upgrade
work, 2016
> Jazan, 400 kbd, 2017
Kuwait:
> Al Zour, 615 kbd, 2018
Iraq
Qatar:
> Laffan Refinery 2, 146 kbd,
2016
Kuwait
Saudi Arabia
Qatar
United Arab Emirates
Oman
UAE:
> Ruwais, 417 kbd, 2014
> Fujairah, 200 kbd, 2016
Yemen
Oman:
> Duqm, 250-300 kbd, 2017
Some projects are joint ventures of European (e.g. Shell, Total, DOW) and Arabian companies – Example: Sadara
Chemical Complex in Jubail Industrial City II as a JV of DOW and Saudi Aramco
Source: PLATTS 2013
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5
Capacity extension in Middle East and Asia
Significant capacity expansions are also planned for Asia and Africa
– Contrary no increases in the European Union
Global planned newly and extended constructed refineries till 2016
Planned newly and extended constructions
Region
Planned
annual
Planned capacity
projects [Mio. t]
Details
Regional
distribution
[%]
7
56
12
Africa
13
99.5
22
Middle East
11
138.3
30
Asia/Pacific
9
63.5
14
North America
4
48.8
11
Middle- and Latin America
6
49.5
11
50
455.5
100
Europe/Eurasia
Total
Source: Dena 2011
> Within the next few years, new
construction and extensions with
a total of 455 mn tones annual
capacity are planned
> Especially Middle East, Africa
and the continuous strongly
growing Asian states are playing
major roles
> Within the European / Eurasian
region, capacity extension is
limited to Russia and Turkey
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6
Competitive disadvantage through US shale gas and tight oil
The fracking boom in the US will further decrease the
competitiveness of European refineries
US competitive advantages from shale gas and tight oil
Low energy costs
Low crude oil costs
>
>
Gas price advantage [EUR/MWh]
50
40
30
20
10
0
Q1/08
>60%
Q2/09
Q1/10
Q1/11
Q1/12
Q1/13
Even today, price advantage for WTI againts Brent due to the
increasing US crude oil extraction of tight oil
USD/bbl1)
120
1,1
100
1,0
80
0,9
60
0,8
40
0,7
2006 2007 2008 2009 2010 2011 2012 2013 2014
Platts Japan Korea Market (LGN Preis)
Net Connect Germany (NCG)
Henry Hub (US)
WTI
Brent
WTI/Brent
1) Prices taken from the beginning of each year
Source: EIA, OMV; CMAI; BP; Roland Berger
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7
Lacking advantage from Brent/Urals price differential
The Brent-Ural price difference as an advantage for middle and east
European refineries is decreasing and will soon be vanished
Development of Brent/Urals price difference
Refinery margins NWE (Brent, Urals) and MED (Es
Sider, Urals), Jul 12 – Okt 13, [USD/bbl]
Expected Brent-Ural price difference,
2012-2023, [USD/bbl]
14
130
12
125
10
120
8
115
6
110
4
2
105
0
100
Jul
12
Okt
12
Jan
13
Apr
13
Jul
13
Okt
13
Brent-Ural
price difference
-0.5 -0.3
-1.1 -1.0 -0.9
-1.8 -1.4 -1.3
2012
2015
2020
2023
Brent
NWE Brent (Cracking)
Med Es Sider (Cracking)
Urals (Neutral scenario)
NWE Urals (Cracking)
Med Urals (Cracking)
Urals (Bandwidth pessimistic / optimistic scenario)
Source: IEA Oil market reports, JP Morgan, RBC Capital Markets, IDMSA, press research, Roland Berger
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8
Higher energy costs, unequal regulation
Energy costs are by far the greatest cost factor for refineries
Impact of energy costs
Refinery cost structure
[%]
Crude oil price development
[USD(Brent)/bbl]
Produktpreis
Net
margin
160
140
Depreciation
Indirect costs
Total costs
Gross margin
146.1
Production and
maintance costs
Energy costs
125.9
120
106.5
100
80
60
40
36.6
20
Crude oil price
Source: Ifo Institute, Statista, Bundesnetzagentur
06
07
08
09
10
11
12
13
14
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8
Higher energy costs, unequal regulation
Current and impending legislation will create additional burden for
EU Refining and downstream
Example: Legislative challenges to EU refining
A
> EU Emission Trading System:
refiners will buy 25% of their
allowances
B
> Industrial Emissions Directive (IED):
compulsory application of best
practices could cost 10-30 G EUR
investment
C
D
> Sulphur in marine fuels directive:
EU goes beyond IMO sulphur
reductions by 2020
E
> Fuel Quality Directive Art 7A:
could limit EU access to many
heavy crudes
> Infrastructure mandates for
alternative fuels: draft proposals to
force development of LNG, CNG,
H2 and electric refueling networks
Source: Europia 2013, UKPIA, HIS Purvin and Gertz
ESTIMATED COST IMPACT OF LEGISLATIVE REQUIREMENT ON UK REFINERIES
VS. PROJECTED MARGIN1)
USD/ barrel
EUROPEAN LEGISLATION
"..the capital expenditure and
costs related to legislation would
largely eliminate the projected
refining margin in UK refineries in
the period to 2025"
UKPIA, 2013
"...in addition to investment required to upgrade
infrastructure and remain competitive, UK refineries
will need to invest £5.5 billion of capital to meet UK
and EU legislative measures in the period 2013-2020"
IHS Purvin and Gertz, 2013
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A Decreasing refinery margins
Consequences of the difficult market situation for EU refineries –
After the positive trend in 2012, margins are decreasing since 2013
Refinery margins, 2011-2013 [USD/b]
> From the end of 2011 till September
2012, refinery margins have been
constantly increasing due to:
40
35
30
25
20
15
10
5
0
> High crude oil prices in H1 2012
> Refinery closures at the US
eastcoast due to the hurricans
Isaac and Sandy
> At the end of 2012, the margin started to
decrease again due to the increase in
the crude oil price:
> Seasonal maintenances in the
North Sea
WTI (US Gulf)
Arab Heavy (US Gulf)
LLS (US Gulf)
Brent (Rotterdam)
Source: OPEC oil market reports
Dez 13
Jul 12
Dez 12
Jul 12
Dec 11
> Low exports from Russian Ural
> Export interferences in Iraq and
Lybia boost the Brent price
> Especially the WTI margin came under
pressure, EU Brent margin even tends to
zero
Dubai (Singapore)
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B Low utilizations lead to refinery closures
Also the refinery utilization decreases and reaches the minimum of
recent years in October 2013 with <70%
EU refinery utilizations, 2012-2013, [%]
%
> Due to intensive maintenances and
capacity cutbacks from low margins,
the throughput of European refineries
decreased within recent months
100
90
> Compared to other regions, Europe and
Japan are characterized by the lowest
utilization rates for the last two years
80
> In October 2013, the European refinery
industry's average utilization rates was
below 70% - A reduction to below
10mb/d of throughput
70
US
EU-16
Source: OPEC oil market reports
Japan
Dez 13
Jul 13
Jan 13
Jul 12
Jan 12
60
Singapur
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B. Possibilities for
European Refineries
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SUMMARY – OPTIONS
Further capacity reduction looks like one of the few feasible way to
increase utilization and thus margins
Options to boast refining margins
A
Low costs
feedstock
$
B
Kerosene
Diesel
Better
product
mix
$
LSFO
✗
> Stimulating the use of gasoline instead of diesel to balance
demand and output will not lead to a (timely) solution
> Investing to produce a more valuable product mix is unlikely
with current low margins
✓
> Cost cutting helps, however this will not improve the overall
situation
> Improving utilization can only be achieved by capacity
reduction
HSFO
%
%
C
Efficient
refineries
Gasoline
Naphtha
✗
> Local production drops, no European tight oil boom is
expected
> Due to Europe's growing dependency on crude import, it can't
benefit from any cheap feedstock
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A
CHEAPER FEEDSTOCK
Local crude oil production declines and Europe will become more
dependent on oil import
European oil supply
Regions
OECD Europe (including Israel)
Oil supply, from domestic production and net import [mb/d, %]
12
30%
12
28%
11
10
10
10
25%
24%
22%
21%
70%
72%
75%
76%
78%
79%
2011
2015
2020
2025
2030
2035
Domestic production
Net import
Source: IEA
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A
CHEAPER FEEDSTOCK
Europe's dependency on Russian oil has increased by 36%
between 2001 and 2011
OECD Europe total, crude oil, and oil product import by region of origin1) [kb/d]
Total oil import
4,775
Russia / CIS
3,502
2,295
2,966
1,868
2,650
2,284
911
536
32
0
632
423
Other regions
1) Excluding intraregional trade
Source: IEA
2,775
2,081
Africa
North America
3,840
+36%
2,544
3,158
Middle East
Non-OECD Europe
Crude oil import
164
185
927
236
914
399
2011
Oil product import
+38%
934
727
+28%
248
192
214
366
375
32
468
239
692
515
2001
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A
CHEAPER FEEDSTOCK
European refineries will have to compete with Asia for their supply of
crude
Net oil import/export per region [mb/d, 2011 vs 2030]
> OECD Europe will increase
its oil imports
8 14
0
-6
19 24
-10 -8
6
2
2
-6 -11
7
-4 -3
-9
-22
0 -2
Import
Export
’11 '30
’11 '30
> Based on the rebound in
its domestic oil (and gas)
production coming from its
light tight oil supplies,
North America1) will further
reduce its oil imports, and
become a net exporter of
oil around 2030
1) North America including Chile
Source: BP statistical review; IEA
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A
CHEAPER FEEDSTOCK
Discovery of tight oil in Europe would not make a difference for the
refining sector
Summary potential tight oil in Europe
Large scale development of tight oil in Europe would help to make Europe less
dependent on oil import
However, this is unlikely due to limited political support caused by dense population
and uncertainties of environmental effects
Moreover, Europe has a dense infrastructure network with pipelines and waterways,
which makes export of excessive local oil production easy (unlike in the US)
The main EU resources of tight oil are expected in Poland and the Ukraine, which
could cause local advantages for refineries in case it would cause feedstock prices to
drop in these countries
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B
BETTER PRODUCT MIX
Investing in hydrocracking would help to improve revenues, but is
not likely with current low margins
Spot prices oil products NWE vis a vis crude oil price [%]
1.5
Naphtha
$
Kerosene
1.4
Diesel
1.2
Gasoline
1.0
LSFO
HSFO
MOST
VALUABLE
1.3
1.1
1
0.9
0.8
0.7
LEAST
VALUABLE
0.6
0.5
1985
Naphta
Source: IEA Energy Prices and Taxes - Quarterly Statistics Q4 2012
1990
1995
Gasoline
2000
Kerosine
2005
Diesel
2010
LSFO
2015
HSFO
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C
EFFICIENT REFINERIES
By lowering costs, some savings can be realised
Refining margin – April 2013
Areas of improvement
USD per barrel
Looking at the costs, a few euros per barrel
may be identified in items such as:
Revenues
115
Feedstock costs
106
> Energy consumption
> Maintenance plan
> Turnarounds
Fixed costs
Variable costs
Operating margin
Source: Muse, Stancil & Co
3
> Labour intensity
> Project management
2
> Time management
4
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C
EFFICIENT REFINERIES
Further capacity reduction seems the most likely outcome, in the
past few years 1.6 million b/d refining capacity has been shut down
Recent refinery shut-downs and sales of European refineries [2009-2013]
Shut-down or capacity reduction [kb/d]
1 Wilhelmshaven
2 Coryton
3 Petit Couronne
4 Flandres
5 Murphy Milford Haven
6 Teesside
7 Berre - l’Etang
8 Cremona
9 Roma
10 Gonfreville / Normandy
11 Reichstett
12 Porto Maguera
13 Pitesti
Source: Total; Platts
260
160
160
160
130
120
105
90
86
86
80
70
70
∑
6
5
1
2
4
10 3
11
8 12
7
13
9
1,577
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C
EFFICIENT REFINERIES
An additional 2.6 mb/day of excessive refining capacity should be
divested in order to reach 80% utilization level
Duration to balance refining output
Increased refining utilization due to closure
Refineries at risk
[EU, %]
> 2.6 million barrels is 18% of total EU refining
capacity
> This equals nearly the capacity additions
scheduled in China between 2012 2017(2.9 million barrels)
90
~2.6 million barrels
per day
85
80
75
+18%
70
65
60
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Source: IEA mid term outlook, Roland Berger
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C. Countries at risk for
capacity reduction
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Roland Berger investigated the seven largest European refining
countries in terms of the five main drivers of refinery competitiveness
Methodology and scope of Roland Berger approach
Refinery competitiveness
DRIVERS
1 Crude costs
2 Energy costs
drivers1)
ADVANTAGEOUS
3 Configuration > Top quartile configuration, high
Nelson complexity index
> Large scale
4 Location
5 Labor
DISADVANTAGEOUS
> Low crude import costs
> High crude import costs
> Low freight and insurance costs > High freight and insurance costs
> Low energy costs
> High energy costs
> Simple configuration, e.g.
topping-only
> Small scale
> Captive market, IOC retail,
small imbalances,
petrochemical integration,
favorable output mix,
government support
> Abundance market,
hypermarket retail, large
imbalances, unfavorable output
mix
> Low labor costs
> High labor costs
1) Based on Wood Mackenzie's refining margin drivers
Source: Wood Mackenzie, Eurostat, IEA, Roland Berger analysis
European refining capacity by country
2011 [%]
Other
Germany
13,6%
16,0%
Sweden
Greece
Italy
3,2% 2,7%
13,6%
Turkey
3,4%
Poland 3,6%
4,7%
11,4%
Belgium
UK
8,2%
9,9%
NL
9,6%
Spain
France
PEER GROUP: 7
COUNTRIES, ∑ 70%
CAPACITY
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Spanish, Dutch and Belgium refineries are well positioned to survive
the upcoming capacity reduction
Refinery competitiveness by country, 2011-2012
Drivers
1 Crude
2 Energy
3 Configuration
[USD/barrel]
Germany
[% crude consumed]
6
113
Italy
Spain
France
112
Netherlands
112
Belgium
6
3
> Main competitiveness
driver
> UK at a disadvantage;
Spain at advantage
> Very important driver if
crude prices are high
> Netherlands has the
advantage
[EUR/h]
Labour
45
34
220
8
168
9
180
8
4
111
Best performer within category
10
7
110
Various
indicators1)
144
8
6
113
5
156
9
5
112
UK
Scale [Ø CDU]
Complexity
[Nelson]
4 Location
7
> Indicates secondary
refinery capacity
> No country is in a clear
advantageous position
31
26
40
220
40
226
39
> Indicates economies
of scale potential
> UK and Dutch
refineries can reap
biggest scale benefits
> Netherlands has the
advantage because of
petrochem proximity
> Spain has an advantage
because of revenues
> Labor is one of the
main drivers of OPEX
(e.g. maintenance)
1) Including demand structure, revenues, petrochem integration, economic sustainability of fuel output, state aid
Source: IEA, Eurostat, O&G Journal, Wood Mackenzie, RBSE
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