European Refining Industry in Stormy Waters

Transcription

1 1 European Refining Industry in Stormy Waters Market study June 2014

2 A. Overview of trends in the European refinery industry and their implications 2

3 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 Challenges on the supply side 1 Declining demand 5 Capacity expansions in Middle East and Asia 2 Changes in the product mix 6 Competitive disadvantage through US shale gas & tight oil 3 Economic crisis particularly in Southern Europe 7 Lacking advantage from Brent/Urals price differential 4 Decrease of exports to North America 8 Higher energy costs, unequal regulation A Shrinking refining margins B Lower utilization leading to refinery closures Source: Roland Berger, Europia

4 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 p Total demand ,000 4,500 4,000 12,300 11,900-14% 11,400 10,600 3,500 3,000 2,500 2,000 1,500 1, p LPG and ethane Naphtha Gasoline Jet A1 / Kerosene Diesel Heating oil Heavy fuel oil Source: OECD, IEA 2013 Other products 4

5 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 million t 756 million t Others 23% 29% Diesel (50/10 ppm) Others 24% 39% Diesel (50/10 ppm) Jet/ Kerosene 8% Jet/ Kerosene 9% Heavy fuel oil 12% 13% Gasoil 13% Gasoline 9% Heavy fuel oil 10% Gasoil 9% Gasoline Source: Europia 2013, UKPIA, HIS Purvin and Gertz 5

6 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 Lasting EU gasoline excess ['000 bbl/d] US imports as % of EU gasoline excess Supply Demand % 68% 56% % % % 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 > US demand pull for EU gasoline is further decreasing > It is getting more dificult for Europe to sell the excess at the global market 6

7 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, Iraq Kuwait: > Al Zour, 615 kbd, 2018 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 Saudi Arabia Kuwait Qatar United Arab Emirates Oman Yemen Qatar: > Laffan Refinery 2, 146 kbd, 2016 UAE: > Ruwais, 417 kbd, 2014 > Fujairah, 200 kbd, 2016 Oman: > Duqm, 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

8 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 Europe/Eurasia Africa Middle East Asia/Pacific North America Middle- and Latin America Total Planned projects Planned annual capacity [Mio. t] Regional distribution [%] Details > 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 Source: Dena

9 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 > Gas price advantage [EUR/MWh] Low crude oil costs > Even today, price advantage for WTI againts Brent due to the increasing US crude oil extraction of tight oil USD/bbl 1) >60% ,1 1,0 0,9 0,8 Q1/08 Q2/09 Q1/10 Q1/11 Q1/12 Q1/ , 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 9

10 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, , [USD/bbl] Jul 12 Okt 12 Jan 13 NWE Brent (Cracking) NWE Urals (Cracking) Apr 13 Source: IEA Oil market reports, JP Morgan, RBC Capital Markets, IDMSA, press research, Roland Berger Jul 13 Med Es Sider (Cracking) Med Urals (Cracking) Okt Brent Urals (Neutral scenario) Brent-Ural price difference Urals (Bandwidth pessimistic / optimistic scenario) 10

11 Gross margin Total costs Net margin 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 Depreciation Indirect costs Production and maintance costs Energy costs Crude oil price Source: Ifo Institute, Statista, Bundesnetzagentur 11

12 USD/ barrel 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 EUROPEAN LEGISLATION A > EU Emission Trading System: refiners will buy 25% of their allowances ESTIMATED COST IMPACT OF LEGISLATIVE REQUIREMENT ON UK REFINERIES VS. PROJECTED MARGIN 1) B > Industrial Emissions Directive (IED): compulsory application of best practices could cost G EUR investment C > Sulphur in marine fuels directive: EU goes beyond IMO sulphur reductions by 2020 D E > Infrastructure mandates for alternative fuels: draft proposals to force development of LNG, CNG, H2 and electric refueling networks > Fuel Quality Directive Art 7A: could limit EU access to many heavy crudes "..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 " IHS Purvin and Gertz, 2013 Source: Europia 2013, UKPIA, HIS Purvin and Gertz 12

13 Dec 11 Jul 12 Dez 12 Jul 12 Dez 13 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, [USD/b] > From the end of 2011 till September 2012, refinery margins have been constantly increasing due to: > High crude oil prices in H > 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 > 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 WTI (US Gulf) LLS (US Gulf) Arab Heavy (US Gulf) Brent (Rotterdam) Dubai (Singapore) Source: OPEC oil market reports 13

14 Jan 12 Jul 12 Jan 13 Jul 13 Dez 13 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, , [%] % > Due to intensive maintenances and capacity cutbacks from low margins, the throughput of European refineries decreased within recent months > Compared to other regions, Europe and Japan are characterized by the lowest utilization rates for the last two years > In October 2013, the European refinery industry's average utilization rates was below 70% - A reduction to below 10mb/d of throughput 60 US EU-16 Japan Singapur Source: OPEC oil market reports 14

15 B. Possibilities for European Refineries 15

16 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 $ > 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 B Better product mix Naphtha LSFO HSFO $ Kerosene Diesel Gasoline > 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 C Efficient refineries % % > Cost cutting helps, however this will not improve the overall situation > Improving utilization can only be achieved by capacity reduction 16

17 A CHEAPER FEEDSTOCK Local crude oil production declines and Europe will become more dependent on oil import European oil supply Regions Oil supply, from domestic production and net import [mb/d, %] OECD Europe (including Israel) 12 30% 12 28% 11 25% 10 24% 10 22% 10 21% 70% 72% 75% 76% 78% 79% Domestic production Net import Source: IEA 17

18 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 origin 1) [kb/d] Total oil import Crude oil import Oil product import Russia / CIS 3,502 4, % 2,775 3, % % Middle East 2,544 3,158 2,295 2, Africa 2,081 2,650 1,868 2, Non-OECD Europe North America Other regions ) Excluding intraregional trade Source: IEA 18

19 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] 8 14 > OECD Europe will increase its oil imports > Based on the rebound in its domestic oil (and gas) production coming from its light tight oil supplies, North America 1) will further reduce its oil imports, and become a net exporter of oil around 2030 Import Export 11 '30 11 '30 1) North America including Chile Source: BP statistical review; IEA 19

20 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 20

21 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 [%] Kerosene MOST VALUABLE Naphtha $ Diesel Gasoline LSFO HSFO LEAST VALUABLE Naphta Gasoline Kerosine Diesel LSFO HSFO Source: IEA Energy Prices and Taxes - Quarterly Statistics Q

22 C EFFICIENT REFINERIES By lowering costs, some savings can be realised Refining margin April 2013 USD per barrel Revenues 115 Feedstock costs 106 Fixed costs 3 Variable costs 2 Areas of improvement Looking at the costs, a few euros per barrel may be identified in items such as: > Energy consumption > Maintenance plan > Turnarounds > Labour intensity > Project management > Time management Operating margin 4 Source: Muse, Stancil & Co 22

23 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 [ ] Shut-down or capacity reduction [kb/d] Wilhelmshaven Coryton Petit Couronne Flandres Murphy Milford Haven Teesside Berre - l Etang Cremona Roma Gonfreville / Normandy Reichstett Porto Maguera Pitesti , Source: Total; Platts 23

24 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 per day > 2.6 million barrels is 18% of total EU refining capacity > This equals nearly the capacity additions scheduled in China between (2.9 million barrels) % Source: IEA mid term outlook, Roland Berger 24

25 C. Countries at risk for capacity reduction 25

26 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) European refining capacity by country 2011 [%] DRIVERS ADVANTAGEOUS DISADVANTAGEOUS 1 Crude costs 2 Energy costs 3 Configuration 4 Location 5 Labor > Low crude import costs > Low freight and insurance costs > Low energy costs > Top quartile configuration, high Nelson complexity index > Large scale > Captive market, IOC retail, small imbalances, petrochemical integration, favorable output mix, government support > Low labor costs > High crude import costs > High freight and insurance costs > High energy costs > Simple configuration, e.g. topping-only > Small scale > Abundance market, hypermarket retail, large imbalances, unfavorable output mix > High labor costs Other Germany 16,0% 13,6% Sweden Greece Italy 3,2% 2,7% 13,6% Turkey 3,4% Poland 3,6% 4,7% 11,4% Belgium 8,2% UK NL 9,6% 9,9% France Spain PEER GROUP: 7 COUNTRIES, 70% CAPACITY 1) Based on Wood Mackenzie's refining margin drivers Source: Wood Mackenzie, Eurostat, IEA, Roland Berger analysis 26

27 Spanish, Dutch and Belgium refineries are well positioned to survive the upcoming capacity reduction Refinery competitiveness by country, Drivers 1 Crude 2 Energy 3 Configuration 4 Location 5 Labour [USD/barrel] [% crude consumed] Complexity [Nelson] Scale [Ø CDU] Various indicators 1) [EUR/h] Germany Italy UK Spain France Netherlands Belgium Best performer within category > Main competitiveness driver > UK at a disadvantage; Spain at advantage > Very important driver if crude prices are high > Netherlands has the advantage > Indicates secondary refinery capacity > No country is in a clear advantageous position > 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 1) Including demand structure, revenues, petrochem integration, economic sustainability of fuel output, state aid > Labor is one of the main drivers of OPEX (e.g. maintenance) Source: IEA, Eurostat, O&G Journal, Wood Mackenzie, RBSE 27

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