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Michel Bénézit, President, EUROPIA European Refining Markets 2013

MICHEL BÉNÉZIT President, EUROPIA

The Current State of European Refining

European Refining Markets



Agenda

1) About EUROPIA/CONCAWE

2) Factors impairing EU refining’s competitiveness

a) Shifting demand

b) Impact on EU Refining

c) Energy prices

d) EU policies and legislation

e) Significant capex requirements

3) Future of refining industry in the EU

4) Conclusion

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7

SINGLE BOARD SINGLE PRESIDENT

SINGLE DIRECTOR-GENERAL

Advocacy Science

CONCAWE, basing on its 50 years old expertise, carries out research on environmental, health and safety issues relevant to the oil industry

EUROPIA representing the European Petroleum industry, contributes in a constructive and pro-active way to the development of EU policies and legislation

3



CONCAWE/EUROPIA 43 Member Companies

represent ≈ 100% of EU Refining

4



Shifting demand

Impact on EU Refining

Energy prices

EU policies and legislation

Significant capex requirements

Factors impairing EU refining’s competitiveness

5



Demand for oil refined products has declined

steeply in the EU between 2007 and 2012

6



Dieselisation of EU demand creates significant trade

imbalances

EU demand

295

EU demand

102

7



US outlet is shrinking:

US imports as % of European gasoline surplus

Source: IEA

8

US gasoline pull from the EU is weakening

Europe is finding it increasingly difficult to find other gasoline export outlets



Shifting demand


Energy prices




9



EU refining capacity will need to adapt to

demand decrease

10

Figure: Capacity and utilisation rate of European refineries



EU refining industry under severe pressure

Source: IEA

According to estimates the closure of 1 refinery could lead to

a loss of ~4500 jobs with overall GDP reductions of $2.2Bn*

15 refineries shut-down 2008-2013 8% capacity decline

11

kb/d



Shifting demand


Energy prices




12



US industry’s competitive energy prices (1)

13



$17

$9

$3 0

10

20

Purchased Gas Price1

1. 2012 average prices from NYMEX, ICE, JLNG CIF

Asia Pacific Europe N. America

US industry’s competitive energy prices (2)

For comparison: in 2012, energy costs

in Eastern US Refineries were 28 - 30%

of total operating costs

EU refineries energy costs as a percentage of total

cash operating costs

14



Shifting demand


Energy prices




15



EU ambitions to reduce GHG by 80-95% by 2050:

Are refined products still wanted in the EU?

Will they be judged on their merits?

GHG reductions compared to 1990 2005 2030 2050

Total -7% -40 to -44% -79 to -82%

Sectors

Power (CO2) -7% -54 to -68% -93 to -99%

Industry (CO2) -20% -34 to -40% -83 to -87%

Transport (incl. CO2 aviation, excl. maritime)

+30% +20 to -9% -54 to -67%

Residential and services (CO2) -12% -37 to -53% -88 to-91%

Agriculture (non-CO2) -20% -36 to -37% -42 to -49%

Other non-CO2 emissions -30% -72 to -73% -70 to -78%

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Current and impending legislation will create

additional burden for EU Refining/Downstream

EU Emission Trading System: As a result of the decision by the

Commission to apply (retroactively as per 1/1/2013) a Cross Sectoral

Correction Factor of 5.7% refiners will buy on average 37% of their allowances

which could represent an additional ETS cost for the sector of about 1.5G€ (at

15€/t CO2)

Fuel Quality Directive Art 7A: could limit EU access to many heavy

crudes; impact EU refining competitiveness

Industrial Emissions Directive: compulsory application of best

practices could cost €10-25 B investment;

Sulphur in marine fuels Directive: EU goes beyond IMO sulphur

reductions by 2020 – requires additional middle distillates capacity;

Infrastructure mandates for alternative fuels: draft proposals to

force development of LNG, CNG, H2 and electric refueling networks.

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Shifting demand


Energy prices




18



To cope with shifting market demand and environmental

legislation the EU refineries increased their complexity which

led to increased energy usage

Figure: EU energy consumption and efficiency trends relative to 1992

Source: Solomon Associates

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0 10 20 30 40 50 60

Demand 2008-2010

FQD PAH 8%

SECA bunker 1.0%

Demand 2010-2015

Inland Marine Gasoil 10 ppm

Non-road Diesel 10 ppm S

SECA bunker 0.1%, switch to distillate

Demand 2015-2020

Ferry bunker 0.1% , switch to distillate

IMO general bunker 0.5%

Announced projects 2009-2015

G$ (2011)

In spite 30G$ investments announced for 2010-2015, an

additional 21G$ capex is required by 2020

Additional 21 G$ of investment required above the estimated 30 G$ for announced investment projects by 2020= 51 G$

51 G$ represents about 1 $/bbl of crude processed, compared to typical EU Refining margin of 1-5 $/bbl

But, declining demand post-2020 would lead to under-utilisation of new-build capacity - doubt on investment decisions prior to 2020?

Source: CONCAWE

20



21

EU policy and legislation, changes in demand and

international developments add to the competitive

pressure

US gasoline demand reduction

Unequal

environmental

policies

Competition from subsidized national

companies refineries

Export refining capacity in the Middle

East Source: Purvin & Gertz Global Petroleum Market Outlook

China, Russia, India & Brazil are growing

their refined product exports

Competitive impact of US tight oil/shale

gas

21



Progress in environmental performance

The oil refining industry has contributed actively to improve EU air and water quality

through investments in reducing their emissions and in developing cleaner products

Reduction in Sulphur emissions from refineries in relation to refinery output 1979 -2010

Reduction of NOx & particulate matter

22



Future perspectives for EU refining industry

Oil products: Indispensable now, essential in the future

Political awareness is growing

Finding the right balance

23



Beyond 2030: oil will remain the main energy source for

transport in 2050 even in the most ambitious IEA scenario

Estimating the future transport energy mix in Europe gives

very different results depending upon the assumptions made

24



Oil derivates in everyday life

Replacing oil products is not technologically easy

nor economically sustainable yet in our society



There are physical constraints for the replacement

of liquid fuels by other energy sources

Liquid fuels are superior in their energy density

26



A domestic refining industry has substantial

economic benefits across EU and MS economy

Continually innovating and introducing

new technologies in its operations and

products; Investing on average

€5billion a year in Refining, R&D,

transport and distribution

Setting worldwide standards for fuels

and engines with the automotive industry.

The EU Refining Industry is a

major provider of highly skilled jobs

and scientific and engineering expertise.

Providing employment for 140.000

people in refineries and 500.000 in

marketing and logistics, and 778.000

in the petrochemical sector which

represents €241 billion in annual sales.

A robust domestic Refining industry

underpins growth and competitiveness

in the EU.

Facilitating the mobility of EU citizens

and goods is therefore playing an

important role in EU growth

Major contributor to states revenues

& EU economy with €270 billion/year

duties & taxes collected by the EU

refining and distribution, and an estimated

gross value added (GVA) of 18 Billion €

on average for 2008, 2009 & 2010

€ Slide nr 10 27







28



Commission led Round Table (May 2012) and Conference (Nov 2012)

on: “ The future of refining in the EU: safeguarding competitiveness” .

Refining Forum created as platform to discuss refining concerns with

stakeholders.

• First Refining Forum on the 12th of April 2013, to discuss state of refining in the EU with presence of Member States, Industry and other key stakeholders.

• Fitness check to examine the impacts on competitiveness of EU legislation on refining industry

Commission Joint Research Centre: Round Table on

« Scientific support to EU Refining Capacity » Oct 2012. Next scheduled for December 2013

Growing awareness of EU Commission and Member States of

the risks faced by the refining industry in Europe and the

negative implications of its decline

29



Industrial policy as part of EU energy and

climate policy – a question of balance

Industrial Policy Communication

EU should reverse the declining role of industry in Europe from its current level of

around 16% of GDP to as much as 20% by 2020 (to be driven by recovery in investment

levels, expansion of trade in goods in the Internal market and significant increase in the

number of SMEs exporting to 3rd countries).

Fitness check

‘The Commission will carry out pilot horizontal sectorial fitness checks. The first two of

these will look at petroleum refining and the aluminum sectors perceived as critical for

the EU’s industrial value chain, but urgently require new investment to be made in the

face of strong international competition. The fitness checks will focus on the implementation

and interaction of those policies that are most important for the competitiveness of these

sectors.

Investment perspectives

– Coherent EU legislative framework with clear and demonstrated benefits for

sustainability and competitiveness is needed to create a clear investment environment

over time.

– Enable introduction of new technologies in Europe, without undermining the level-

playing field between technologies.

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The Refining Fitness check should be completed

before any key implementing measure are adopted

Fitness Check aims at the “Evaluation of impacts of legislative acts and initiatives on

performance of EU refining”:

Fitness Check scope comprises all legislation of “significant relevance for the sector”.

However Implementing measures (e.g. FQD and BREF) allegedly to be included only

if costs are supported by clear evidence.

Fitness Check is expected to be finalised by Q3 2014 in a “Policy recommendations

& Staff Working Document”.

EUROPIA urges the Commission to:

– Include implementing measures of overwhelming importance currently under

finalisation (FQD 7A, REF BREF)

– Postpone the adoption of implementing measures or new legislation until the

Fitness Check is completed.

31







32



The EU should adopt a single, transparent, cost effective,

long-term trajectory for carbon abatement, which should be

shared economy-wide and accepted by society

EUROPIA believes that the following conditions are needed

for setting a 2030 binding economy-wide target for GHG

reduction, going beyond the 2020 target:

Its impact on the industry and the EU economy as a whole must

be evaluated through a thorough impact assessment;

It must take into account the differing pace of commitments

taken by non-EU countries.

Protection against carbon leakage, including for Refining, must

continue after 2020;

All sectors of the economy must take a share of the effort;

Implementing Policies must be technology-neutral;

Slide nr 17 33



EU Energy and Climate Policy: a balanced approach

EU Energy &Climate

Policy

Climate Change -

Sustainability

Security of Supply Competitiveness

Future policy choices should ensure that equal weight is given

to all three objectives:

Trade-offs among these objectives should be openly addressed.

Slide nr 16 34



Oil products will still be needed in EU economy for many years:

– Technical merits and economics hinder their replacement.

Refining plays important role in the EU:

– Value added to the economy, security of supply, maintain industrial infrastructure.

EU Refining industry under strong pressure:

– Production – demand imbalance, global competitive pressures and EU legislative burden.

Despite vast investments imposed in recent years by EU legislation, EU

Refining industry faces further massive investment requirements

– Required investments enforced by EU legislation only allow to ‘stay in business’ but do

not generate returns. Planned legislation increase further operating costs thus reducing

returns in already extremely tough market(e.g. IED –which require an estimated 300 M

euro on av. per EU refinery in next 10 years)

Industrial Policy Communication: way to restore balance between policies:

– Greater emphasis on industrial competitiveness in energy, climate and environmental

policy.

Conclusions

35



Thank you for your attention

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