IEA Refinery Rationalisation Implications for Security of Supply Clingendael International Energy Programme The Hague 4 April 20122 Toril Bosoni, International Energy Agency
Background Since the economic recession of 2008/2009, more than 3.0 mb/d of crude distillation capacity has closed or is scheduled to close in the OECD, with more at risk OECD demand is contracting, while growth is still strong in non-oecd countries Significant refinery expansions are taking place in the non-oecd, outpacing expected demand growth Pressure on OECD refiners, particularly European operators, will therefore continue, with margins remaining weak and further closures likely As a result, trade flows of crude and products will shift in favour of product imports, with implications for stocks holdings and security of supply
The Refinery Business is Still a Challenging One $/bbl 15 10 5 0 Refinery Cracking Margins $/bbl European H'skimming Margins 6 4 2 0-2 -4-6 -8 Source: Purvin & Gertz Inc. Source: Purvin & Gertz Inc. -10-5 2002 2005 2008 2011 2002 2005 2008 2011 Urals H'sk NWE Brent H'sk NWE Med Urals NWE Urals Es Sider H'sk MED Urals H'sk MED NWE Brent USGC Mars Singapore Dubai Refinery margins have deteriorated sharply since 2008 Simple margins in Europe remain firmly negative, forcing several plants to close or reduce runs due to weak economics In 2011/2012, product prices failed to keep up with rising i crude prices Surplus global refinery capacity persists, as refinery shutdowns not enough to offset new-built capacity and weak demand
Demand Growth and Refinery Rebound Slows But two distinct trends emerge in the OECD and the non-oecd mb/d 35 3.5 2.5 1.5 0.5-0.5 Global Throughputs vs. Demand Annual growth mb/d 42.0 40.0 38.0 36.0 OECD vs. Non-OECD Crude Runs -1.5 34.0-2.5-3.5 32.0 1Q08 1Q09 1Q10 1Q11 1Q12 30.0 Crude Runs Oil Product Demand 1Q2004 1Q2006 1Q2008 1Q2010 1Q2012 OECD Non-OECD Two distinct trends emerging however, with non-oecd posting robust growth and mature OECD markets continue to contract Non-OECD overtakes OECD in terms of refinery throughputs in 4Q09, and there to stay
OECD Consolidation is Picking up Speed kb/d 1,500 1,250 1,000 750 500 250 0 OECD Refinery Closures 2008 2009 2010 2011 2012 2013 2014 2015 2016 North America Europe Pacific Petroplus Hovensa Petroplus and Hovensa not included in Dec 2011 Update kb/d 3,500 3,000 2500 2,500 2,000 1,500 1,000 500 0 Cumulative OECD Refinery Closures 2008 2010 2012 2014 2016 North America Pacific Europe Total refinery capacity reductions in the OECD now amount to more than 3.0 mb/d since 2008 North America and Europe shut 1.3 mb/d and 1.1 1 mb/d, respectively. Pacific 0.6 mb/d scheduled so far This does not include recently bankrupt Petroplus 5 European refineries, as future is still uncertain, nor Valero s Aruba plant which is being idled due to poor economics, but currently idle and for sale US East Coast plants (Trainer and Marcus Hook) OECD Europe is the focus, since refiners here have missed out on favorable feedstock economics (N. America) and stronger demand (Asia) evident elsewhere in the OECD
European Downstream Changes Gain Pace 1.1 mb/d of capacity already shed Including all five Petroplus plants (665 kb/d), closures could amount to 1.7 mb/d since 2008 In addition, lot of ownership changes, with Russian, Chinese, Indian players entering the market
European Refinery Runs Decline Primarily on Falling Demand mb/d European Oil Demand 16 14 12 10 8 6 4 2 0 1984 1989 1994 1999 2004 2009 2014 LPG and Ethane Naphtha Motor Gasoline Jet and Kerosene Gas/Diesel Oil Residual Fuels kb/d 100 50 - (50) (100) (150) OECD Europe: Oil Demand Growth by Product Gasoline LPG & Naphtha Other Other Distillates Fuel Oil Diesel 2011 2012 2013 2014 2015 2016 European oil demand declined from 15.7 mb/d in 2006 to 14.3 mb/d in 2011 (1.4 mb/d, or 280 kb/d per annum) Forecast to shed another 0.7 mb/d by 2016 to reach 13.6 mb/d In contrast, diesel continues to grow. 0.2 mb/d diesel growth expected from 2011-2016 (c.f. 0.5 mb/d 2006-2016)
In Contrast, Non-OECD Refinery Expansions Boom mb/d 2.0 Crude Distillation Additions mb/d 8.0 Cumulative CDU Expansions 1.0 60 6.0 4.0 0.0 2.0 0.0-1.0 2011 2012 2013 2014 2015 2016 OECD China Other Asia Middle East Latin America Other Non-OECD -2.0 2011 2012 2013 2014 2015 2016 OECD China Other Asia Middle East Latin America Other Non OECD More than 8.3 mb/d of crude distillation capacity is scheduled to be added globally by 2016 All of the additions comes from the non-oecd, with OECD contracting by a net 0.7 mb/d Non-OECD Asia accounts for more than half of expansions, (China 3.0 mb/d Other Asia 1.4 mb/d), while the Middle East and Latin America also see large expansions (2.1 mb/d and 1.1 mb/d respectively)
Capacity Additions Outpace Demand Growth And Increasing Share Met by Other Supplies mb/d 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5 CDU Additions vs. Oil Product Demand Growth 2009 2010 2011 2012 2013 2014 2015 2016 World Demand Capacity Additions 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 mb/d Cumulative Demand Growth and Sources of Supply 2011 2012 2013 2014 2015 2016 GTL/CTL NGL transfers Direct crude burn Biofuels Refinery Intake Processing Gains After a tightening of spare refining capacity over 2010-2011, global capacity expansions are again expected to outpace oil product demand growth from 2012 Furthermore, an increasing share of demand met by NGLs bypassing refinery system, biofuels, crude direct burn, processing gains and gas and coal-to-liquids
Utilisation Rates and Margins Remain Under Pressure More Closures to Come Mostly in OECD Refinery Utilisation Rates mb/d Global Spare Capacity at 83% 90% 7 Utilsation 85% 6 5 80% 4 3 75% 2 1 70% 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16 0-1 OECD Non-OECD World 2006 2008 2010 2012 2014 2016 OECD utilisation rates fall sharply during the recession and only pick up marginally as demand recovers Non-OECD rates fall less markedly as refiners in strong demand growth areas are able to sustain higher runs If a global utilisation rate of 83% were to be attained, the average rate during 2006-2008 when we last saw synchronous healthy margins, an additional 5.9 mb/d of crude distillation capacity would have to be closed or not built as planned by 2016. The bulk of the capacity reductions would likely come from mature OECD markets.
As a Result of Refinery Restructuring in Europe Crude Imports Fall on Lower Runs, Despite Declining Production mb/d 7.0 6.0 5.0 4.0 3.0 2.0 1.0 OECD Europe Oil Production 10.0 mb/d 8.0 6.0 Europrean Crude Oil Imports 00 0.0 0.0 1994 1998 2002 2006 2010 2014 1Q20061Q20081Q20101Q20121Q20141Q2016 European net crude imports already fell from more than 10 mb/d in 2006, to 9.6 mb/d in 2010, despite a 1.1 1 mb/d decline in regional production Towards 2016, net crude oil imports could fall towards 8.0 mb/d, on continued demand declines and increased competition from non-oecd refiners If that was to happen without further closures, utilisation rates would fall below 70% in 2016, from 80% in 2010/2011 For utilisation to be brought back to 83%, 2.3 mb/d additional capacity would have to be shut 4.0 2.0
European Product Imbalances Worsen mb/d European distillate imports could reach 1.5 mb/d in 2016, from 1.1 mb/d in 2010 08 0.8 Additional high quality volumes to come from Russia, Saudi Arabia, Brazil (after 2016). US retain export potential, Asian supplies to meet regional demand 1.6 1.4 1.2 1.0 0.6 0.4 0.2 0.0 European Oil Product Imbalances 2008 2010 2012 2014 2016 Gasoline Exports Jet/Gasoil Imports
European Gasoline Surplus Persist Export Markets Diminish k b/d 9,500 US 50: Motor Gasoline Demand Key European gasoline outlets t diminish, with increased self sufficiency in the US and increased light product output in Middle East, with NGL surge 9,000 8,500 8,000 7,500 2000 2004 2008 2012 2016 Gasoline Ethanol - energy content adjusted
Consequences of Refinery Rationalisation on Stock Holding Industry Stock Levels Refinery shutdowns reduce level of commercially held stocks Crude oil and unfinished product stocks will be reduced in proportion to refinery closures Reduction of finished product stocks is minimal However, location of refinery plays a very important role Composition Share of commercial crude oil stocks down and share of commercial product stocks up The higher the share of crude before refinery closure, the larger the shift in composition If lowered input fuel stocks are compensated by higher stocks of finished products, the shift is even larger
Impact on Stocks in Different Stockholding Systems Lower commercial inventories of crude oil and unfinished products result in reduction of overall stock levels Reduction of total stocks is less pronounced in countries with public stocks, and more pronounced in countries relying solely on an industry obligation
Impact on Stocks in Different Stockholding Systems Impact of a 20% Reduction in Refining Capacity Country Reduction in Commercial Stocks Reduction in Total Stocks Change in Oil Stock Levels in Days of Net Imports Countries with public stocks Belgium 6.0% 2.2% 2.8 Czech Republic 4.1% 1.0% 1.5 France 10.7% 3.7% 4.04 0 Germany 3.6% 1.0% 1.4 Netherlands 10.8% 9.2% 16.2 Poland 11.2% 9.8% 13.4 Spain 8.0% 4.9% 5.5 Countries reliant on industry stocks only Greece 6.2% 6.2% 6.9 Italy 4.8% 4.8% 6.4 Sweden 6.0% 6.0% 7.4 Turkey 11.6% 11.6% 13.0 United Kingdom 9.4% 9.4% 44.5
Change of Stockholding Regulations? Should stockholding regulations change to remain compliant with IEA and EU obligations? IEA obligation Countries with 90 days of public stocks remain compliant Rules for obligated industry stocks prevent most countries from becoming non-compliant Rebalancing: new or remaining operators have to fulfil a higher stockholding obligation Countries without stockholding regime in danger zone EU obligation New rules on accessibility and availability of emergency stocks Stockholding laws might not suffice to compensate for the reduction in emergency stocks Stockholding laws might have to be changed obliging companies to hold more stocks
Impact of Refinery Restructuring on Security of Supply How to define and measure security of supply? IEA is in process of developing a comprehensive approach to energy security of supply, and has constructed a Model of Short-term Energy Security (MOSES) MOSES looks at crude and oil products separately using a set of quantitative indicators of import and domestic risks as well for resilience capacities to deal with different disruptions. To look at impact of refinery closures, both crude and product security situation has to be evaluated Difficulty is to determine overall security or relative importance of the diverging trends
Impact on Security of Supply (2) While more work is needed to fully measure vulnerability, a preliminary conclusion of applying MOSES to the situation of refinery rationalisation in Europe would be that: The reduction of the number of refineries would likely result in an increase of product deficits, pointing to a worsening of the security of supply of oil products. While crude oil imports will decrease, the import dependency of crude oil will likely remain high and product stock levels and other indicators are not likely to change. Therefore, by becoming more and more dependent d on product imports, the region s security of supply worsens and Europe becomes more vulnerable to future supply crises affecting major product export hubs.
Conclusions With or without further refinery closures in Europe, runs are likely to fall in line with regional demand and as new capacity is starting up in the non-oecd Based on this crude allocation scenario, without further closures, utilisation rates in Europe could fall below 70% in 2016 To bring rates back to 83% as we had over 2006-2008 2008 (the last time we saw healthy margins) 2.3 mb/d of additional capacity would have to be shut in Europe, 5.9 mb/d globally. While the additional shutdowns would improve margins, this scenario already assumes that European refiners will not be able to compete with new refineries, and thus lower runs. Import requirements of crude could fall below 8 mb/d, from 9.8 mb/d in 2011 At the same time, distillate shortages would increase, potentially to more than 1.5 mb/d, from 1.1 mb/d in 2010 Stockholding laws might have to change to prevent non-compliance of IEA and EU obligations Security of supply situation of Europe will worsen with continued refinery rationalisation
Thank you Toril Bosoni, Senior Oil Market Analyst, Refining Oil Industry & Markets Division International Energy Agency toril.bosoni@iea.org