Essar UK looks to future-proof Stanlow
London, 27 September (Argus) — Essar Oil UK is taking steps to position itself for a future in which rising fuel efficiencies and the uptake of electric and hybrid vehicles prompt a drop in demand for its key products.
The company, which operates the 194,500 b/d Stanlow refinery on England's northwest coast, is the latest in a string of European refiners seeking to diversify away from fossil road fuels.
"We are already trying to see how we can convert gasoline maybe to petrochemicals", Essar UK chief executive S. Thangapandian told Argus. "Also diesel to other value added products — can we move from diesel to more jet?"
The issue was made all the more poignant for Essar UK by the government's recently proposed ban on sales of gasoline and diesel cars from 2040.
"We do not know how many years away we are from pressure on these products… our output is around 55pc middle distillate, 35pc gasoline, with the balance made up by petrochemicals and other products," said Thangapandian.
Essar is not the only European refiner considering diversifying its fossil road fuel output. Hungarian refiner Mol — operator of four plants with a combined capacity of 423,000 b/d — last year announced a strategic shift away from motor fuels towards petrochemical production, including $4.5bn of spending on new projects by 2030. Finland's Neste has invested heavily in renewable diesel production, and Total and [Eni are focusing on biofuels.
In the shorter term, Thangapandian said he sees opportunities in gasoline demand as drivers turn away from diesel cars. Jet fuel is another growth opportunity, Thangapandian said. Stanlow supplies Manchester, Liverpool, Birmingham and Leeds airports, and produces around 34,500 b/d.
Europe's refiners are in a buoyant mood. Strong margins, solid demand growth and weaker run rates in the developing world have all helped to boost confidence — a marked change in tone to 2016 when the widespread fear of further plant closures was the chief subject of conversation.
But the good times cannot last forever. New capacity coming online in the developing world continues to threaten western markets, and the long term outlook for fossil fuel based road fuel demand in Europe is far from rosy. The International Maritime Organisation's (IMO) global sulphur cap on marine fuels, coming into force in 2020, also looms in the background.
As a coastal refiner — potentially vulnerable to product imports — in a country committed to cutting fossil fuel consumption, Stanlow's position embodies the difficulties faced by many European operators.
"Now we are in sunny days. Margins are good...the next six months look robust," he told Argus.
"But we are very aware and clear that this cannot continue for long," he said. "It is one of the main reasons we are trying to make some investments, to make sure when the difficult days come our nose is above the water level."
Investment in Europe's refining sector has been lacklustre in recent years, with the majority of capital allocated towards projects in the developing world. Just 0.2mn b/d of distillation capacity will be added in Europe during 2016-21, compared with 1.7mn b/d in the Middle East, 1.8mn b/d in China and a further 1.5mn b/d elsewhere in Asia-Pacific, according to Opec's 2016 World Oil Outlook.
But while major new investment — barring Azerbaijan's state-controlled Socar's new 200,000 b/d Star refinery in western Turkey — is off the cards, European refiners are adapting their facilities. New upgrading units, debottlenecking programmes, improving crude slate flexibility and an increasing focus on trading are among the most popular strategies.
Essar UK is among those making relatively small but still significant investments. The firm aims to complete its 'Tiger Cub' project by the end of June next year — a debottlenecking programme that will be completed alongside a general maintenance costing around $250mn in total, will add around $1/bl to the plant's refining margin and will increase throughput by around 19,000 b/d. The debottlenecking will focus on the plant's 76,000 b/d residual fluid catalytic cracker (FCC) unit, allowing more feedstocks to be processed, reducing VGO left in the system and pushing the plant´s petrochemical yield up to around 10pc. It will also allow Essar to further diversify its crude basket, adding to the 39 new crudes it has taken on since buying the refinery from Shell in 2011.
"We were one of the first refineries in the region to try the tight crudes. We regularly buy Eagle Ford," said Thangapandian. "We are looking further at tight oils from the US side and then also at some of these crudes with a little extra sulphur."
Thangapandian is unconcerned about the threat from fresh refining capacity coming online in other regions. Stanlow meets around 85pc of oil demand in the UK's northwest, a region that is logistically challenging for competitors to sell into because of the difficult port and need for local infrastructure, he said. Stanlow's only real competitor is US independent refiner Valero, which has a 210,000 b/d plant in Pembroke on the Welsh coast, and to a lesser extent, US refiner Phillips 66, which owns the 230,000 b/d Killingholme plant on England's northeast coast.
On the shipping sulphur cap, Stanlow is "almost IMO ready", Thangapandian said. The refinery almost eliminated its fuel oil production in 2014 when it mothballed the smaller of its two crude distillation units. It now produces a "very negligible" quantity of slurry, leaving it largely unexposed to any potential drop in high-sulphur fuel oil prices and able to profit from any future spike in distillate demand from bunker sellers looking to reduce sulphur content in marine fuels.