The icy blast of the 2008 financial crisis, a high-cost base, fierce competition from new capacity in the Middle East and Asia, downward demand trends because of stagnant population growth and greater engine efficiency, perverse tax regimes, and the rolling thunder of environmental legislation. To survive as a refiner in Europe requires constant vigilance and frequent reinvention.
The icy blast of the 2008 financial crisis, a high-cost base, fierce competition from new capacity in the Middle East and Asia, downward demand trends because of stagnant population growth and greater engine efficiency, perverse tax regimes, and the rolling thunder of environmental legislation. To survive as a refiner in Europe requires constant vigilance and frequent reinvention.
Take Greek refiner Hellenic, for example. The financial crisis nudged the Greek economy off a cliff. Domestic demand for transport fuels plunged by 40pc. For Hellenic, already struggling with poor margins, the impact of the fall in demand was dramatic — product exports doubled to 60pc of production from 30pc. Although Greek demand has stabilised somewhat, Hellenic still exported 57pc of its output in October, marking a fundamental shift in its refining strategy.
And few are as directly exposed to the challenges of new, overseas capacity as Hellenic. It is competing directly with north African and Middle Eastern refiners not subject to stringent EU regulations on carbon emissions and renewables obligations, and with the added advantages of lower energy and labour costs and ready access to cheap crude.
But if Hellenic is in the eye of the storm, its peers are taking a pounding too. Greece’s fall in product demand was particularly sharp but the overarching trend is visible in Europe as a whole. The IEA’s latest World Energy Outlook report shows a 2.2mn b/d fall in OECD European oil demand between 2000 and 2015, with further drops modelled over the coming decades. At this week’s ERTC conference in Lisbon, speakers repeatedly called for a more level regulatory playing field. Essar UK former chief executive Volker Schultz proposed a global carbon price across all industry sectors.
The latest piece of environmental legislation to hit refiners is global. From 2020, the sulphur content of bunker fuels will be capped at 0.5pc, following an October ruling from the International Maritime Organisation. With fuel oil margins widely expected to drop as a result, simple hydroskimming plants — those without coking or cracking upgrading capacity — are most at risk, although stronger middle distillate margins could provide some respite.
Few doubt that there will be further refinery rationalisation in Europe. Portuguese Galp’s chief executive, Carlos Gomes da Silva, told the conference that close to 500,000 b/d of European capacity is at risk of closure. And Schultz said he expects 1.5mn-2mn b/d of European capacity to disappear within the next 5-10 years. BP, Total, and Germany’s Evonik had all expressed similar sentiments at a separate industry event in late September.
But it was not all doom and gloom in Lisbon. While the new IMO legislation might hurt Europe’s simpler refineries, those with more sophisticated upgrading equipment — particularly coking capacity — stand to benefit from stronger margins as middle distillate cracks improve and sour crude feedstocks cheapen relative to sweeter grades. Nordic refiners Neste and Preem continue to invest in biofuels, achieving some impressive results. And Hungary’s Mol is working towards cutting transport fuel output by 20pc and investing further in petrochemicals as part of a new long-term business strategy. Speaking on the sidelines of the ERTC conference, Mol production, technology and development senior vice-president David Pullan said that other European refiners are thinking about petrochemical investment and “will probably move as well”, before going on to list the threats to transport fuel demand in Europe — electric vehicles, hybrids, rising fuel efficiency and car sharing. The IEA estimates that just 1.3mn b/d of oil demand will be displaced by electric vehicles by 2040, although the impact within some countries will be much greater. In Denmark, Finland, Iceland, Norway and Sweden, electric vehicles will make up 16pc of the total fleet, with sales supported by high taxes on fuels and conventional cars and CO2 reduction commitments.
For its part, Hellenic is updating its strategy, getting ready to reinvent itself – again. It is not overly worried about the IMO regulation. Less than 10pc of the output from its three Greek refineries is fuel oil with a sulphur content of more than 0.5pc, and it is not planning to invest in any further desulphurisation capacity. What little fuel oil it does produce, it expects to be able to offload into power generation through gasification.
But more broadly, having previously expanded into downstream retail in the Balkans and Cyprus, and then adjusted to producing primarily for export markets, Hellenic is now focusing on investing in power generation. But at the same time, it is keeping a firm foothold in petroleum, and is involved in potentially lucrative crude exploration in the Ionian Sea. Whether it will find any oil in an area with no proven reserves is anyone’s guess. But it has a direction of travel, and that’s what many of its peers are still looking for.