European Refining and the EU ETS

Chris BEDDOES

Executive Officer, EUROPIA

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

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i 8

8

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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

Refining is exposed to International

Trade: dependent on Russia for diesel

10

EU Refining Openness to Trade: at 22%,

very similar to other sectors in the ETS.

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.

12

Freight costs for importing Refined products are

similar to ETS costs

BACK UP

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

Direct and indirect cost impacts on manufacturing sub-sectors in

Germany (assuming 20EUR/tCO2 carbon price, and

corresponding 19EUR/Mwh electricity price increase), 2004

data. (Oko Institute)