The Future Of The European Downstream Sector

What is very clear from the different types of scenarios is that fossil-based energy will very much remain in the game. Fossil-based energy will keep playing an important role in the current and future energy demand, but just not in the same way as it used to do. The energy mix is expected to change drastically, but it will be a matter of years until it will be possible to switch to entirely renewable feedstock.?

Today, to ensure strong market positions, EU refiners are having to plan their operations both for the short and longer term. An important aspect for producers to keep in mind is the understanding of the local markets in terms of supply and demand and where they can stay competitive, as these markets differ quite considerably. Identifying the requirements and specificities of local markets is the key, which each producer has to define when building and implementing their production strategy since there is no perfect solution. Because of the location, some refiners are more fortunate than others and certain factors are purely geographic i.e., is the refinery landlocked or does it have direct access to seaports, or if it is connected via pipeline networks for import/export purposes??

Identifying the requirements and specificities of local markets is the key

Looking at the liquid fuels outlook for 2022-2023, the market is expected to recover, but demand is going to drop longer term. The expected decline is evaluated to reach 200 000 barrels per day, year on year, which amounts to an average European refinery. This clearly highlights the need for certain assets to transition towards petrochemical production or to be retrofitted into other types of plants e.g. Bio-refineries, Plastic Recycling complexes, etc.??

Remaining competitive in the market is becoming more complicated. Refinery closures need to be minimized to avoid the social impact these have on communities. Such a concerning outlook proved once again that the future refiner must be as flexible as possible and adapt to market demand. Operators must have a deep understanding of what their refinery is capable to achieve and produce.??

UNFORESEEN INDUSTRY DISRUPTORS?

There are obviously unforeseen disruptors that arise and impact the downstream sector. We have seen this with the Covid-19 pandemic and more recently with the major conflict in Ukraine. In Europe, with record-high gas prices due to the Russia-Ukraine conflict, refineries have a renewed focus on energy efficiency and in particular, looking at furnace operations. Producers are actively looking at means to reduce the consumption of natural gas while ensuring production remains not impacted.?

The European Union ban on Russian refined products is due to come into effect in early 2023. This development, coupled with the autumn heavy oil turnaround season in Europe, means diesel prices are set to be pushed higher and that there will be a tightening of supplies.

As of October 2022, approximately 1,5 million bpd of crude refining capacity is expected to be offline in Europe for both planned and unplanned maintenance. As a comparison, there was an estimated 1,1 million BPD offline in September. These figures are above the average seen during the same period in past years. The reason being, the impact of the Covid-19 pandemic on many scheduled maintenance programs. During the pandemic, there were many restrictions in place and it is likely that maintenance was kept to the essential and that not many extensive works were carried out.?

As of November 2022, several European refineries are expected to be performing maintenance in including ENI's Sannazzaro refinery (Italy), Repsol's Tarragona refinery (Spain), and Galp Energia's Sines refinery (Portugal).?

To help meet the demand Europe has also upped diesel imports from the Middle East and Asia. The arrivals in September amounting to 1.6 million barrels per day were the highest recorded in the past 3 years. (Ref: Oil Analytics firm Vortexa).

These higher imports should help to ease the pressure on diesel markets but unplanned and unforeseen outages are nullifying the benefits. The widespread refinery outages in France due to strike action are one such example of unforeseen disruptors and these could tighten supplies once again. The strike action is overpaid and unplanned maintenance – these walkouts have resulted in the temporary shutdown of four of France's six oil refineries. In terms of capacity, this effectively means that over 60% of France’s total capacity has been offline (740,000 bpd).?

These shutdowns are expected to further tighten refined product supply if they continue. Driven by the strikes at the French refineries, the Benchmark European diesel profit margins are currently around the $50 a barrel mark.

These outages in France’s refining sector are creating a level of uncertainty in the refined oil trade amid a heavy oil refinery turnaround season in Europe this autumn and the Russia/Ukraine conflict. Come early 2023 Europe stands to lose around 500,000-600,000 bpd of Russian diesel due to sanctions. This will most certainly mean prices to really spike by early 2023, or late 2022.??

STAY CONVENTIONAL, TRANSFORM, INTEGRATE, & DIGITALISE?

Amid all these disruptors and uncertainty the European downstream industry continues to transform itself driven by the energy transition and the need to decarbonise. Oil majors will look to continue to invest in their conventional refinery assets to meet demand and at the same time look to tackle their carbon footprints. Such investments are still feasible and mainly center on increased energy efficiency programs – looking at more efficient static and rotating equipment, while keeping existing assets in good process health for a longer period.??

Other investment drivers are focused on the flexibility of the production facilities, which in the downstream world means deeper integration between liquid transportation fuels and petrochemical block production, not forgetting niche products too. Last but not least, the digital transformation and digitalisation enablers, which handle all refinery data are also high on the agenda.?

It is often mentioned that integration with petrochemical block production is just the first step to ensuring a brighter future for an existing refinery facility. However, it is important to look at this type of integration case by case. To fire up a typical Naphta cracker, the amount of energy required for the operation is very important, so in parallel with the technology switch, the downstream producers must think about how they will supply their crackers with the required process heat.?

SURVIVING IN STRINGENT REGULATIONS

When discussing the future of the European Downstream sector it is important to cover pricing and look at the formulation for final product pricing. It is not only the production cost that the consumers have to cover when they purchase fuels, but also important to mention the additional taxes, adapted and applied by the local and regional policymakers. One such cost is the excise tax that each country sets by itself, while a more common one is the Carbon emission tax, which is getting more stringent with the introduction of the Renewable Energy Directives (RED).?

Implementing a regulatory framework is definitely needed, however, it’s important to analyse further to see whether the objectives from previous editions (such as RED I & II) have been 100% achieved before looking to introduce the next one (RED III). Presently, the concern that each fuel producer has is the lack of flexibility, or in other words the limitation in the ability to regulate the final product price, which the consumer will have to pay. Today, in the short term, the policymakers are heavily subsidizing the electrification of personal mobility, which is another hurdle that the producers have to overcome and compete with and at the same time continue to generate profitable refining margins. It is a sensitive issue since a slight increase in the final product price can sometimes have big repercussions and lead to social unrest. We have seen this in France with the Yellow Vest movement.??

Presently, the concern that each fuel producer has is the lack of flexibility, or in other words the limitation in the ability to regulate the final product price, which the consumer will have to pay

THE FUTURE REFINERY SCENARIOS?

Looking further ahead it is expected that technologies such as Carbon Capture Storage and Utilisation (CCUS), e-Fuels, green hydrogen, sustainable renewable diesel, and jet fuel will be seen more often in future refinery scenarios.

There are some European refiners, who have taken the decision to invest directly in on-site green hydrogen production using renewable energy, with a limited few using nuclear energy (SMR’s). For others, there is no direct investment, but they encourage a 3rd party to build their hydrogen production facility adjacent to the refinery. This 3rd party sells their hydrogen to the refinery, but also to other neighbouring industries.?

The main obstacles for a lot of these new technologies remain cost and industry scale up - However, billions of funds have been publicly announced for future energy and downstream R&D, therefore at some point we will witness improvements in these technologies and in the way they consume and produce energy and then their successful scale-up and commercial implementation.?

?SUCCESSFUL TRANSITION ROADMAP?

In all discussions relating to the energy transition and decarbonisation, there is one point on which everyone agrees – that is that there is no ‘silver bullet’ that can solve all refinery issues. Therefore defining a clear transition roadmap is a must if assets are to remain competitive.?

Such roadmaps should include the key enablers that will allow the refinery to develop profitably. Nowadays, refineries are more complex, so the use of digital & technology tools that can help achieve emissions targets is very high on the portfolio wish list. These new ideas and innovations may come from established companies or may come start-ups. In this case, it will be important that the potential in such companies is identified and financially supported by the venture capital of bigger companies.

There is no ‘silver bullet’ that can solve all refinery issues

The European Downstream has the knowledge, and the skills to develop and implement the solutions. It will require substantial R&D in terms of technology, catalysts, equipment, and software. It will require new partnerships; it will require clear and coherent legislation and constructive collaborations with governments and regulatory bodies.?

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