EU Refining Sector Fitness Check Progress Update 22 May 2014 Robert Marschinski - European Commission, (jointly with D.Bakhtieva, L.Delgado, P.Eder, M.Mraz, U.Temurshoev)
Content Fitness Check: objective, approach, concepts Example 1: Renewable Energy Directive Example 2: int'l competitiveness of EU refining 02/04/2014 EU refinery sector Fitness check 2
Fitness Check - Petroleum Refining Sector Review of EU environmental and energy legislation affecting the European refining sector during the time period 2000-2012: 1. Assess economic impacts of legislation cost impact on EU refineries oil products market impact international competitiveness impacts 2. Identify policy inconsistency, redundancy, excessive burden 02/04/2014 EU refinery sector Fitness check 3
Conceptual Framework for 10 Directives 02/04/2014 EU refinery sector Fitness check 4
Benefits from legislation 02/04/2014 EU refinery sector Fitness check 5
Methodology: 3 Pillars DATA on EU refineries' investments and configuration (/EUROPIA CONCAWE/SOLOMON) DATA from specialized company on global prices, product trade and refining margins OURSE MODEL: Economic model of global refining market, 9 regions, of which 2 EU
Methodology: 3 Pillars Legislative cost impact e.g. investments in - desulphurisation units - refinery SO 2 abatement - energy efficiency Competitiveness impact e.g. in terms of EU refining's - net cash margins - utilization rates - return on investment DATA on EU refineries' investments and configuration (/EUROPIA CONCAWE/SOLOMON) DATA from specialized company on global prices, product trade and refining margins OURSE MODEL: Economic model of global refining market, 9 regions, of which 2 EU
Content Fitness Check: objective, approach, concepts Example 1: Renewable Energy Directive Example 2: int'l competitiveness of EU refining 02/04/2014 EU refinery sector Fitness check 8
million tons of oil equivalent Renewable Energy Directive 350 Biofuels in road transport in EU27 6% 300 5% 250 4% 200 3% 150 100 2% 50 1% 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 biofuels fossil road fuels share biofuels 0% 02/04/2014 EU refinery sector Fitness check 9
million tons oil equivalent Renewable Energy Directive 60 50 EU: diesel deficit & gasoline galore 40 30 20 Additional EU gasoline exports due to bio-gasoline 10-10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-20 -30-40 Reduction of EU diesel imports due to bio-diesel -50 EU diesel/gasoil imports biodiesel consumption EU gasoline exports biogasoline consumption 02/04/2014 EU refinery sector Fitness check 10
Renewable Energy Directive Effect of EU biofuel policy on petroleum sector ambiguous: Positive for Bio-Diesel reducing EU diesel deficit and dependence on imports in 2012, diesel imports would have had to be 79% higher without biodiesel Negative for Bio-Gasoline problem of EU gasoline excess capacity is reinforced in 2012, without bio-gasoline either (i) EU gasoline exports could have been lowered by 6%, or (ii) EU utilization rates could have been up to 3 percentage points higher Next: OURSE model for further quantification (and validation) However: impact of 3 Mtoe increase in bio-gasoline remains small compared to 52 Mtoe drop in fossil gasoline demand over 2000-12 02/04/2014 EU refinery sector Fitness check 11
Content Fitness Check: objective, approach, concepts Example 1: Renewable Energy Directive Example 2: int'l competitiveness of EU refining 02/04/2014 EU refinery sector Fitness check 12
[$/barrel] - indexed to EU28 in year 2000 Data source: Solomon Associates Int'l competitiveness of EU refining 350 Net cash margins: EU28 and competitor regions 300 250 200 150 100 50 0 2000 2002 2004 2006 2008 2010 2012-50 EU-28 INDIA Korea/ Singapore Middle East RUSSIA US Gulf Coast US East Coast 02/04/2014 EU refinery sector Fitness check 13
[$/barrel] - indexed to EU28 in year 2000 Int'l competitiveness of EU refining 350 Net cash margins: EU28 and competitor regions 300 250 200 150 100 2000 2012 Korea/ Singapore 34 159 Middle East 23 72 US Gulf Coast 113 251 US East Coast 116 244 Ø 72 181 50 EU28 100 143 0-50 2000 2002 2004 2006 2008 2010 2012 EU-28 INDIA Korea/ Singapore Middle East RUSSIA US Gulf Coast US East Coast EU28 vs. Ø +28-38 02/04/2014 EU refinery sector Fitness check 14 Data source: Solomon Associates
Int'l competitiveness of EU refining Net Cash Margin = Gross Margin Personnel Cost Energy Cost Other Cost Hence, the EU's backslide with respect to its competitors is the net effect resulting from backslides (or gains) in these four underlying components.
computation with Solomon Ass. data Int'l competitiveness of EU refining Net Cash Margin = Gross Margin Personnel Cost Energy Cost Other Cost +1-3 +28 Gross Margin Personnel net effect= -66-38 -63 Energy -1 Other 02/04/2014 EU refinery sector Fitness check 16
computation with Solomon Ass. data Int'l competitiveness of EU refining Net Cash Margin = Gross Margin Personnel Cost Energy Cost Other Cost +1-3 +28 Gross Margin Personnel net effect= -66-50 Energy cost deterioration vis-à-vis USA -38 Energy cost deterioration vis-à-vis KOR/SIN & MidEast -13-1 Energy Other 02/04/2014 EU refinery sector Fitness check 17
Int'l competitiveness of EU refining Net Cash Margin = Gross Margin Personnel Cost Energy Cost Other Cost +1-3 +28 Gross Margin Personnel net effect= -66-50 Energy cost deterioration vis-à-vis USA -38 Energy cost deterioration vis-à-vis KOR/SIN & MidEast -13-1 Energy Other The observed sharp drop of EU refining margins versus those of its competitors is to 74% (=50/68) attributable to the deterioration of EU energy costs vis-à-vis US energy costs.* 02/04/2014 EU refinery sector Fitness check 18 * Preliminary finding with caveats, e.g. strong data limitations
Int'l competitiveness of EU refining The observed sharp drop of EU refining margins versus those of its competitors is to 74% (=50/68) attributable to the deterioration of EU energy costs vis-à-vis US energy costs over the years 2008-2012.* 02/04/2014 EU refinery sector Fitness check 19 * Preliminary finding with caveats, e.g. strong data limitations
Int'l competitiveness of EU refining The observed sharp drop of EU refining margins versus those of its competitors is to 74% (=50/68) attributable to the deterioration of EU energy costs vis-à-vis US energy costs over the years 2008-2012.* 02/04/2014 EU refinery sector Fitness check 20 * Preliminary finding with caveats, e.g. strong data limitations Figure: Washington Post
Final remarks on EU competitiveness 1. Loss of EU competitiveness seems evident, but due to current data limitations no definite conclusions should be drawn 2. Energy costs play a very significant role, but how exactly do they propagate into markets and EU refining economics? 3. Net Cash Margin only one possible indicator of competitiveness (but perhaps the most important) 4. Need for further analysis, e.g.: if US energy cost effect is 74%, what are the other 26%? cost = price x quantity analyse relative role of energy prices vs. energy intensity 02/04/2014 EU refinery sector Fitness check 21
THANK YOU robert.marschinski@ec.europa.eu 02/04/2014 EU refinery sector Fitness check 22
BACK-UP SLIDES 02/04/2014 EU refinery sector Fitness check 23
Conceptual Framework for 10 Directives 02/04/2014 EU refinery sector Fitness check 24
3 methodological pillars: 1) Estimating cost impacts by using primary data on compliance costs from EU refineries (joint / CONCAWE / Solomon refinery questionnaire). 2) Statistical descriptive analysis of refinery sector and competitiveness impacts based on global time series data. The acquisition of such data from a third party is currently undertaken. 3) Modelling the legislative and market driven impacts on the refining sector, using the global OURSE model. 25
APPROACH SURVEY TO REFINERIES (detailed view) STATISTICAL ANALYSIS (intermediate) OURSE MODELLING (aggregate view) Review of literature Costs impact of legislation Direct (a) X Indirect (b) X X Competitiveness impacts of legislation (c) X X Benefits of legislation (x) (x) X 26
Questionnaire: Process Questionnaire developed by in consultation with CONCAWE Is data actually recorded by refinery? Is it relevant? Is it 'inaccessible' because commercially sensitive? 2-step approach chosen for reasons of efficiency Step 1: industry consultant SOLOMON extracts relevant data from its existing database (~¾ of all needed data) Step 2: facilitated by CONCAWE, all remaining data is requested directly from refinery via questionnaire 02/04/2014 EU refinery sector Fitness check 27
Questionnaire: Process / CCW empty Only consolidated + Aggregated data + trend data Solomon Solomon provide consent letter to refineries, and indicate what data to be collated. 02/04/2014 Refinery agrees that data can be used in study. Sign consent letter Refinery site EU refinery sector Fitness check 28
Questionnaire: Data Coverage Time horizon 1998 2012 (only even years) SOLOMON part: Organization and staff Capacity and production (inputs & outputs) Complexity and investments (desulphurisation units..) Cost structure (variable, fixed, energy costs ) Detailed energy in- & outputs, and energy efficiency Biofuel inputs Refinery part: Pollution (SOx, NOx..) and related investments Effects from strategic oil stocking obligations 02/04/2014 EU refinery sector Fitness check 29
Questionnaire: Data Coverage Data will be reported to in aggregated format: 9 geographical groups of 'peers' 5 types of refinery complexity Stand-alone refinery vs. refinery as part of petrochemical complex Data is anonymized Some data will only be reported in terms of its relative change with respect to the 1998 base year (i.e. as index) 02/04/2014 EU refinery sector Fitness check 30