The energy transition in Europe

Author Chris Judge, VP Europe gasoline, diesel, biofuels

Argus' leading market experts gathered in London at the Argus Crude and Refined Products Forum to share insights into the rapidly changing and expanding refined products markets. This is a summary of one presentation on 25 February.

The transition from petroleum fueled cars – primarily gasoline – to electric vehicles will deal a fresh blow to the beleaguered European refining sector, which has been struggling to break even for a decade. Refiners are increasingly struggling to find homes for surplus product, and the increased use of ethanol in gasoline is weighing on demand.

For instance, the UK has brought forward a ban on diesel, gasoline and hybrid vehicles to 2035 from 2040 as part of its legally binding strategy to reduce net greenhouse gas (GHG) emissions to zero by 2050. The ambition of these plans needs to be put into context. Emissions have been reduced by just 3pc in the past 30 years, while huge investment will be needed to develop the infrastructure capable of supporting the charging of electric vehicles, which currently comprise just 2pc of the national fleet.

On the supply side, we should consider international trade patterns. Europe’s traditional gasoline exports are facing stiff competition owing to new supply developments in their formerly reliable export markets. The Middle East and southeast Asia have increased refining capacity over the past five years, making them far less reliant on European supplies. Moreover, higher demand in west Africa and Latin America has attracted interest from US Gulf coast refiners, who are further eroding European market share. But as competition ramps up globally, exports to the northeast US should continue as normal as US Gulf coast refiners mainly concentrate on exporting their refined products.

Domestically, in the meantime, Europe is steadily increasing the ethanol content of its gasoline in an attempt to adhere to mandates designed to increase the level of decarbonisation for its transport fuels.

The introduction of E-10 gasoline, which contains 10pc ethanol, is increasingly mandated in Europe and is leading to a two-tiered barge market, with the more traditional E-5 grades co-existing with the newly minted E-10 grade. The Netherlands switched to E-10 gasoline in October, which means that all countries along the Amsterdam-Rotterdam-Antwerp (ARA) refining hub will be using the higher ethanol blend. As a result, the volume for E-10 barges has climbed and supported the robustness of the price assessments for these qualities. Interestingly, volumes on the more mainstream E-5 quality — which underpin heavy trade for financial derivatives — have also increased.

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For middle distillates, the structural length in gasoline looks as if it will be mirrored — particularly with diesel.

Developing regions, such as Latin America and west Africa, will be responsible for increased diesel use through to 2023. While overall demand could jump by 400,000 b/d in this time, supply is continuing to make gains at a faster rate as refinery expansions in Asia have focused heavily on diesel production. Furthermore, this trend will be exaggerated by the increased use of biofuels in diesel as Europe gears up for decarbonisation.

While many European countries have grand ambitions around biodiesel, there is a distinct lack of a common approach in EU countries to legislate in favour of increased biodiesel use.

The strategy is somewhat splintered, with some countries setting up biofuel use through volume mandates, some through energy type, and some by measuring GHG savings. This uncoordinated effort has confused the issue and jeopardised the ability of EU countries to achieve decarbonisation targets. Additionally, some concern exists over the use of biofuels derived from waste products that count double towards targets, therefore incentivising fraud through false certification.

It is clear that issues remain around regulatory measures and the ability to find viable export markets, but if European governments and refiners can begin to harmonise their energies, a much brighter future lies ahead.

Increasing trade volumes on the ARA spot biofuels market, through the Argus Open Markets (AOM) price discovery platform, is mirroring the increased use of biofuels in Europe. Three highly standardised benchmarks — RME, Fame 0 and used cooking oil methyl ester (UCOME) — have emerged, bringing about increased trade that has encouraged the use of derivatives to manage risk. Argus has principally observed an uptick in trade of the high GHG-saving product, UCOME, in the past three months.

Finally, to round out these paramount topics, Argus explores the regulatory nature that will drive many of the pricing, production, and environmental decisions in Europe for years to come.

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