EUROPIA represents the majority of
downstream oil companies in Europe
BP
Cepsa
Chevron
ConocoPhilips
Eni
ExxonMobil
Hellenic Petroleum
MOL
Neste Oil
OMV
Galp Energia
PKN Orlen
RepsolYPF
Saras
Shell
Statoil
Total
5 2
2
92
13
111
4
6
17
15
21
4
2
4
10
1
8
4
1
6
1
2 FSU: 59
1
EU-27: 755 million tonnes/year
refining capacity in 116
Refineries (19% of global capacity)
Source : Oil & Gas Journal
EUROPIA members cover 80+% of the EU
refining capacity
4
Oil industry comprises three separate businesses.
1. Exploration and Production:
1. finds and extracts crude oil.
2. sells it to customers (Refiners, Traders).
3. Crude oil market and prices global (e.g. Brent, Wti)
2. Refining:
1. Buys crude on same global market.
2. transforms crude oil into products, such as gasoline, aviation fuel, diesel etc.
3. sells products at prices linked to the open wholesale product markets (e.g. Rotterdam)
3. Distribution and Marketing:
1. Buy products at wholesale market prices.
2. moves products and sells to the consumer.
A few Oil Companies have all 3 businesses, many have only 1 or 2; many “non oils” operate Distribution and Marketing.
Each business is judged on its own merits.
DownstreamDownstream--
Europia >80% Europia >80%
of EU Refiningof EU Refining
5
The fossil fuels challenge:
Well to wheels CO2
Combustion of
unit of energy
85% Refining
8 – 10 %
Crude Production
1 – 4 %
Well-to-Tank 15%(production)
Tank-to-Wheel 85%(consumption)
Distribution & retail
1%
Source: CONCAWE
FOSSIL FUELS
Production in Europe covered by ETS
EU Downstream 9-11%
6
Europia supports the ETS as the tool to
control GHG emissions from industry, but is
concerned at some of the elements
Auctioning should not be extended without a suitable international agreement:– It will significantly reduce competitiveness of EU industry.
– The reducing cap and high energy costs already creates a big incentive for improvement
– Free allowances should be granted, allocated by benchmarks.
Criteria set for exposure to Carbon Leakage are not sufficient and should better reflect effect on future international competitiveness:
– Effect on market share alone is not adequate measure of ability to pass on costs.
– Criteria must also look at future competitiveness of industries to compete for investments.
– Refining investments are big (6B€ p.a.) and long term and become less attractive with EU-only ETS.
New entrants definition should be adapted to include upgrading of existing sites:– Big investments needed are to upgrade existing sites and should qualify under new
entrants allowance.
The period of uncertainty should be reduced by advancing dates for identification of sectors exposed to carbon leakage.
Europe must remain competitive - a healthy EU Refining industry is vital for efficient and secure supplies to Europe
7
Refining is a "margin business“: ETS costs
could be 40% of this margin
7Source: EIA
10
20
30
40
50
60
70
80
90
No
v 8
7
Ma
i 8
8
No
v 8
8
Ma
i 8
9
No
v 8
9
Ma
i 9
0
No
v 9
0
Ma
i 9
1
No
v 9
1
Ma
i 9
2
No
v 9
2
Ma
i 9
3
No
v 9
3
Ma
i 9
4
No
v 9
4
Ma
i 9
5
No
v 9
5
Ma
i 9
6
No
v 9
6
Ma
i 9
7
No
v 9
7
Ma
i 9
8
No
v 9
8
Ma
i 9
9
No
v 9
9
Ma
i 0
0
No
v 0
0
Ma
i 0
1
No
v 0
1
Ma
i 0
2
No
v 0
2
Ma
i 0
3
No
v 0
3
Ma
i 0
4
No
v 0
4
Ma
i 0
5
No
v 0
5
Ma
i 0
6
No
v 0
6
Ma
i 0
7
No
v 0
7
[dollar/barrel]
Rotterdam Conventional Gasoline Regular Spot Price FOB (Dollars per Barrel)
Europe Brent Spot Price FOB (Dollars per Barrel)
Yellow: Refining margin
between 2 international, open
commodity markets for crude
oil and refined products
Refining is an energy intensive industry:
Energy is 60% of operating cost
Sources:
- Price: Platts
- Typical refinery yield: Concawe
$/bbl
2.0
6.0
4.0
8.0
Hydrocarbon
Margin
Refining
energy
cost
Other
operating costsCO2 cost
@ €30/Te
Net
Margin
Net Margin
less CO2
cost
Cru
de c
ost
Pro
du
ct
inco
me
0
20
40
60
80
100
$/bbl
Refinery operating cost 2007Crude cost and Income from products
Sources:
- Operating cost:
Concawe
11
A strong EU Refining sector needs continued
investment and provides security of supply
Refining investment is for long term; projects can take 5+ years.
EU CO2 cost (in the absence of International Agreement) would make:– investments in EU less attractive.
– Increase incentives for importers to EU
– Advantage non EU competition in export markets.
A strong EU Refining industry provide security of supply.– Refineries have flexibility in making the right products for the market from many
diverse crude supply sources.
– Product imports (diesel and jet fuel)currently come from Russia and Middle East.
Substitution of EU refined products by imports will relocate emissions, not reduce them, and increase our dependency on one or two suppliers.
Refining sector possible impact of EU Directive
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
2013 2014 2015 2016 2017 2018 2019 2020
Co
st
in B
illi
on
Eu
ro/y
r
0
20
40
60
80
100
120
140
160
180
Mto
nn
es/y
r
Cost at 20Eur/tonne Cost at 35Eur/tonne Cost at 50Eur/tonne
Emissions Cap Free allowances
At €35/Te CO2 cost for EU Refining could be
close to €6B pa.
Refining emissions rising due to clean fuels/more diesel, slightly offset by energy efficiency
Refining emissions CAP, assuming same share of EU Cap as 2005
Refining free allowances if in Box 2
Incentive to reach Cap, or cost if do not
Additional cost to sector which does not increase incentive
1515
Improvements in energy efficiency do not match the
increased energy required for more complex
refineries
-13 %
•EU refineries energy intensity and
•specific consumption
•78
•80
•82
•84
•86
•88
•90
•92
•94
•1990 •1992 •1994 •1996 •1998 •2000 •2002 •2004
•En
erg
y I
nte
ns
ity I
nd
ex
•5.4%
•5.6%
•5.8%
•6.0%
•6.2%
•6.4%
•Sp
ec
ific
en
erg
y c
on
su
mp
tio
n
•(%
of
fee
d)
•% of feed
•Energy Intensity index
•Source: Solomon Associates
More stringent product specifications and
growing diesel demand lead to higher CO2
emissions
100 120 140 160 180 200 220
Base case 2000
FQD: Auto Oil 1-2000
SLFD: Heating oil 0.2% S
Demand 2000-2005
SLFD: Inland HFO 1% S
FQD: Auto Oil 1-2005
Demand 2005-2010
SLFD: RMF 1.5% S SECA & Ferries
SLFD: Heating oil 0.1% S
FQD: Auto Oil-2
FQD: AGO PAH 8%, Non-road diesel 10 ppm S
Demand 2010-2015
FQD: Inland waterways GO 10 ppm S
Demand 2015-2020
Residual Marine Fuel 0.5% S
Marine Fuel to 0.5% S distillate
Ultra low AGO PAH
Heating Oil 50 ppm S
Mt/a
2000 Base Case Demand changes Specification changes Potential spec. changes
Source: CONCAWE
Evaluation of exposure to C leakage: Studies
McKinsey/Ecofys – 2006:
– Shows misunderstanding of Refining.
– “CO2 emissions correlate strongly with refinery capacity”- incorrect.
– “transport costs and logistics keep refining markets local” –incorrect.
– “ we assumed that 25-75% of additional cost can be passed on to customers” - does not state how assumption made?
– “refinery margins…..benefit from ETS if 95%...free allowances….and at least 25% cost passed through……At significantly lower levels of free allowances (ie below 80%) refinery margins might come under pressure”
CE Delft/IEA:
– Emphasise the impact of CO2 costs on product price – not the criterion which determines competitiveness.
– Rely on the McKinsey pass through impact assumption – without stating how it was developed.
Competitiveness impacts in a world of unequal
action are not macroeconomic, but sectoral for
a few specific cases