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The changing game

Hydrocarbon Engineering,

The full version of this article is available to subscribers in the December 2011 issue of Hydrocarbon Engineering.

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Hydrocarbon and petrochemical refining represent a major sector of the EU economy, accounting for as much as 1.5% of the EU GDP (US$ 16 trillion total, approximately 26% of the world economy). In round numbers, approximately 100 EU crude oil refiners (including those in Switzerland and Norway) produce 90% of transport energy fuel for the EU and 77% of the feedstock for petrochemical processing. This represents nearly 715 million tpy of refining capacity. EU hydrocarbon processors contribute approximately 18% of global capacity and import 82% of their crude, nearly half of this from the Middle East.

As to the industry’s impact on European jobs, consider that EU refiners directly employ more than 100 000 people; with over 50 000 people employed in ‘indirect’ jobs in the industry, and perhaps 500 000 people working in associated industries in areas such as technical, logistics, sales and marketing. Furthermore, as is the case with most industries, crude oil refining also supports jobs that provide services and equipment such as engineering, production and capital equipment, building, and other infrastructures. Oil refining and distribution in the EU provide approximately € 240 billion /y in duties and taxes from fuel sales alone.

Now, after years of growth, the three or four dozen organisations that operate these refineries face a paradigm shift looking forward, with many new challenges in uncharted territory. There are many reasons for this, some of which were predictable and some not. For example, public and government attitudes in most industrialised nations with regard to energy reduction in general, and consumption of fossil fuels in particular, will ultimately have a negative impact on the EU refining industry. Looking ahead, many EU refiners will get squeezed by over capacity, under utilisation and increasing costs that will cut deeply into margins and profits. This trend actually began a few years ago and is expected to continue for the foreseeable future. In fact, based on current trends, it is widely believed that demand for many hydrocarbon based refined products could drop as much as 20% in the next two decades (compared to 2006).

Europe’s energy stability

With the current global geopolitical instability, maintaining EU refiners’ ability to meet domestic demand for refined oil products has vital security, economic, industrial and environmental implications. The region’s independent refining system must be capable of ensuring a reliable supply of hydrocarbon and petroleum based products both to EU refineries and other industries dependent upon them. The following recent production statistics offer a useful background on the issue.

EU refineries’ total production includes over 50% diesel fuel, which in turn includes transport fuel (vehicles and vessels), as well as heating and industrial fuels. They also produce 22% gasoline. Approximately 15% of fuel utilised for power generation is produced by EU refineries, with smaller portions of lubricants, naphtha, kerosene, LPG, aromatics, sulfur (for fertiliser) and miscellaneous byproducts.

The EU refining industry also provides feedstock materials for  the European petrochemical sector, representing approximately € 241 billion /y and supporting employment for over 780 000 people. Crude oil refining is closely integrated with petrochemicals, which contribute to a major and broad based European economy.

The impact of a global economic downturn has affected EU refineries with regards to the continuing trend of declining usage of hydrocarbon and petrochemical products in most industrialised nations. A number of factors could potentially influence the future of EU refining.


In addition to global geopolitical and economic instability, other future challenges facing EU refiners include imposition of stricter emission standards, unstable foreign oil producing governments, competition from Middle East and Indian refiners, terrorism threats, and rising costs that result in lower margins and lower profits.

Dealing with decreased profitability

While there’s nothing new about global competition in the oil business, as costs for oil rise, and logistics of moving crude and its byproducts become more complex and more expensive, EU refineries may also be faced with new, aggressive competition.

During the mid 1990s, EU refineries’ margins were above historical average; however, profitability has started to decline based on foreign demand from other sources. Capacity utilisation dropped by more than 8% compared to recent years and by 6% in 2009 from the year before. Even with a stronger economy and a significant industrial rebound, margins are likely to remain under pressure, thus profitability during the next 10 years will be a challenge. Also, North Sea crude production, which represents 30% of EU refineries’ supply, is expected to drop to approximately 15% of the EU’s crude imports by 2020.

Legislative outcomes

Another issue to consider is compliance with future EU regulations for new specifications and new biofuels, which will require considerable long term investments and commitments along with the financial capacities to support these investments. To that end, EU refiners must work closely with lawmakers in order to develop practical economic solutions for the years ahead. It is likely that this will require many new and uniform laws throughout the EU community.

Meeting these challenges

Looking forward, there will always be strong demand for EU crude oil products, whether from the discovery of new uses for its refined products, ‘turnabout’ growth in demand from existing users, or new markets in emerging nations. Additionally, there is always the possibility of market expansion caused by global supply instability from major producers in the Middle East, Africa and Latin America.

The full version of this article is available to subscribers in the December 2011 issue of Hydrocarbon Engineering.

Subscribe here to read the full article, existing Subscribers can login here to read the December issue.

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